Amazon's shipping spend continued to rise in second quarter as volumes climbed

Amazon.com Inc.'s shipping costs continued to escalate in the second quarter, with the Seattle-based e-tailing giant spending nearly $4.57 billion on transport services, up from $4.38 billion in the first quarter and a 36-percent increase over spending in the 2016 second quarter.

Much of the rise in shipping spend is due to the rapidly growing demand for products ordered on Amazon's website, as well as for fulfillment services it provides for merchants as a de facto third-party logistics provider (3PL). Revenue in the second quarter rose to $37.9 billion, up from around $30 billion in the year-earlier quarter. Fulfillment costs jumped to $5.1 billion from $3.8 billion, part of an $8.2 billion leap in total operating expenses that more than offset the revenue gains. Amazon historically had provided a breakout of shipping revenue, but recently discontinued the practice. The company reported its second-quarter results late yesterday.

Amazon, which since its inception had relied on third-party carriers to haul its goods, has been moving more of the shipping functions in-house mostly to gain full control over its burgeoning volumes. It has leased 40 Boeing 767 freighters for its "Prime Air" service, designed to support two-day delivery operations. The 25th aircraft went operational in the quarter. It is constructing an air hub in Cincinnati as part of the build-out. It has purchased thousands of 53-foot truck-trailers, and is reportedly looking to recruit thousands of independent truck drivers to haul them. Its Chinese subsidiary has received authority from the U.S. government to operate as a non-vessel operating common carrier (NVOCC) to move oceangoing cargo from China to the U.S. under its own bill of lading.

Amazon is also involved in the freight brokerage category through its investment in Convoy, a Seattle-based digital brokerage start-up that Amazon Chairman and CEO Jeff Bezos had previously raised capital for. Earlier this week, Convoy announced it received $62 million in funding from various investors. Amazon was not mentioned as being one of the investors.

Amazon is a heavy user of the U.S. Postal Service (USPS) and Atlanta-based UPS Inc. It has scaled back its business with Memphis-based FedEx Corp. In USPS' 2016 fiscal year, Amazon moved about 1 billion packages through the agency's "Parcel Select" product, where massive shipment volumes are injected deep into the postal infrastructure for last-mile deliveries to residences.

Earlier this year, UPS and FedEx rolled out a "zone 1" rate offering for ultra short-haul delivery services. The pricing, which for the first time would be targeted at deliveries made within a 50-mile radius, is designed to divert short-distance, business-to-consumer traffic that would normally move via USPS. UPS and FedEx would price those deliveries cheaply because they wouldn't involve the use of line-haul services that add to the carriers' costs.

Amazon might be intrigued by the new pricing initiatives because they fit its current and future distribution footprint, and because UPS and FedEx have fewer last-mile distribution locations than USPS, which would allow Amazon to streamline its parcel consolidation network.