How Amazon Air Freight Operations Will Save The Company Over $1B Annually

  • Amazon has confirmed leasing of 20 Boeing 767s to start its air freight operations.
  • The service is expected to take off on April 1st 2016.
  • Does it make sense for Amazon to set up the Air freight service from a cost-benefit perspective?

Amazon (NASDAQ:AMZN) is reportedly all set to launch its air cargo operations with 20 leased Boeing 767s. Jeff Bezos is often quoted as saying "Your Margin is my opportunity", which has often seen Amazon strive for greater control of its supply chain and delivery network. In an earlier post on amigobulls.com, author Brian Wu had pointed out that the capex in the form of leased delivery jets will only be a short term drag on Amazon's bottomline. However, the author failed to account for the savings in shipping costs, which have been growing at a far faster pace than Amazon topline.

With the move now being confirmed by the company, a few important questions need to be answered by Amazon investors. What will be the cost of the Jet leases and associated operating expenditures? How much of shipping costs will the company save on? What will be the impact on the already marginal profits Amazon makes?

Amazon's Shipping Costs Are Growing Rapidly

Amazon has seen its shipping costs grow at a significant pace over the last few years. Amazon shipping costs have grown from $884M in 2006 to more than $11.5B in 2015.

Statistic: Amazon's shipping revenue and outbound shipping costs from 2006 to 2015 (in million U.S. dollars) | Statista
Source: Statista

Amazon shipping costs have grown at anaverage annual rate of 33% between 2006-2015 while the topline has grown at an annual rate of 29%. In other words, Amazon's shipping costs now account for 10.8% of revenue, up from 8.3% in 2006. Keep in mind that revenue has increased 10X over this time frame. One thing is clear, Amazon's shipping costs are bludgeoning, and these could assume gigantic proportions if Amazon achieves its ambitions of being the largest global retailer.

An important question to address is How much of these shipping costs are attributable to Air Freight, which Amazon plans to minimise using its own delivery network? As per a recent post on Forbes, Amazon accounted for $1B of the total 2015 revenues of UPS. As per a post on the Motley Fool, It's estimated that UPS delivers around 30% of Amazon's total packages. The USPS (US Postal Service) accounts for 35% of the packages with FedEx delivering 17% and regional shippers carrying the remaining 17%. The payout's to the different carriers can be worked out as follows.

 in 2015 USPS UPS FedEx Others Total
Volume Carried 35% 30% 17% 18% 100%
Money Paid (in Millions of USD) 1166.7 1000.0 566.7 600.0 3333.3

Total payouts to UPS and FedEx, the target of Amazon's air freight operations exceeded $1.5B, and that will primarily be the cost saving Amazon will end up with by launching its delivery jets. However, another fact to remember is that these were expenses which were growing and will continue to grow with Amazon's top line.

The Cost Of Amazon Air Freight

Amazon plans to lease 20 used Boeing 767 delivery jets, and as per a Seattle Times report, the company plans to lease used jets to launch its operations. With used jets lease rentals costing $300K to $325K per month, the cost of Amazon's air freight operations can be modelled as follows:

$ (in 000's)
Operating cost per hour for flying a B 767 5.03
Daily Aircraft Utilisation Rate (in hours) 10
Operating cost of flying one plane daily 50.3
Operating cost of flying 20 planes daily 1005.59
Operating cost of flying 20 planes yearly 367039.6
Operating costs excluding pilot salary 367039.6
Annual Lease rentals 78000
Salary (11 pilots/aircraft @ annual pay of $200K) 44000
Total Cost 489039.6

The cost of Amazon's airfreight operations works out to $489M/year which is significantly lower than the $1.5B which the company is currently shelling out to air freighters. The net annual savings at the current sales and shipments rates will work out to just over $1 Billion for Amazon.

Conclusion

Amazon is all set to launch its air freight operations with 20 used B767 jets. The move makes sense for the company and could net the company upto $1 billion in annual savings. The savings could have a huge impact on Amazon bottom line as Amazon net profits stood at $596 million in 2015. If the company can actually use these savings to deliver earnings growth, the impact on Amazon stock price could be significant. However, if Amazon continues to pass on the savings to customers, it could aid continued growth of Amazon GMV and revenues as the company continues to march ahead.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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