Amazon, Atlas Air ink long-term aircraft leasing pact, possible financial arrangement

Atlas Air Worldwide Holdings Inc., an air cargo carrier that arranges leases with customers and provides the plane, crew, maintenance, and insurance, said today it signed two multiyear leases with Seattle-based Amazon for 20 Boeing 767-300 freighters converted from passenger aircraft configuration. In addition, Atlas granted Amazon equity "warrants" to acquire up to 30 percent of Atlas' common shares at a fixed price of $37.50 a share over the next seven years.

Under terms of the deal, Titan Aviation, Atlas' leasing unit, will lease the aircraft to Amazon, and Atlas will operate them. The so-called dry lease operation that involves Titan, Atlas, and Amazon will run for seven years. The agreement for the crew, maintenance, and insurance services solely provided by Atlas has a 10-year duration. Operations are expected to start in the second half of the year and will build until full ramp-up, set to take place throughout 2018, Purchase, N.Y.-based Atlas said. There is potential for further expansion beyond what was announced today, Atlas said. Amazon did not post comment on its web site.

Amazon's vesting in the warrants is tied to the launch of operations of all 20 planes, as well as other conditions, Atlas said. The 767-300 freighter can carry around 115,000 pounds at a range of about 3,300 nautical miles, according to Boeing data. The aircraft type will support Amazon's one- to two-day air express-delivery service on routes that may not be reachable by truck in that transit time window.

Nearly two months ago, Amazon struck a similar arrangement with Wilmington, Ohio-based Air Transport Services Group Inc. Amazon agreed to lease 20 of the same planes for a five- to seven-year period and to acquire a 19.9-percent ownership stake in ATSG if all warrants were exercised. The exercise price was set at $9.73 a share, based on ATSG's closing price on Feb. 9, the day the deal was announced.

The Atlas and ATSG deals bind Amazon to the two carriers both operationally and financially. It also removes capacity that might have been available to other users. And if Amazon exercises the warrants, it would mean making money as an investor in those companies. Satish Jindel, founder and president of SJ Consulting Group Inc., said today he expects Amazon to structure similar transactions as it continues to build out a transportation and logistics network to support fulfillment operations and relies less on third-party providers to ship its package volumes.

Jindel's firm recently issued a report forecasting that Amazon wants to be the primary, and, in many cases, the only conduit between producers and consumers. Part of that strategy calls for building close operational and financial relationships with transport and logistics companies, according to Jindel. The ultimate objective, he said, is for Amazon to leverage its massive volumes to make it the sole shipping partner of these firms.

There has been enormous speculation, which Amazon has neither encouraged nor sought to tamp down, that the company is morphing into a full-fledged logistics provider capable of providing transportation, freight forwarding, and contract logistics to support the movement of its own traffic as well as those of "third-party" merchants that market their wares on Amazon's site and rely on it to warehouse, fulfill, and distribute their shipments once they're ordered.

Colin Sebastian, an analyst for Robert W. Baird and Co. Inc., has written that Amazon would gain competitive advantage by managing the logistics of its core revenue-generating business and then extending the capacity as a service to other companies. Sebastian estimated the global logistics market available to Amazon to be about $400 billion. He added that given Amazon's already enormous scale, there are efficiency gains to be had from internally operating fulfillment, logistics, and delivery.

Amazon will continue to invest heavily in transport services. It spent $11.5 billion in outbound shipping in 2015, and SJ forecasts that number to rise to $16.4 billion in 2016, $22.34 billion in 2017, and $29.6 billion in 2018.