Amazon handling its own logistics is going to be a big problem for UPS. I have a friend who works for the AP and recently visited a large distribution facility for a story. He said UPS does over 1M packages a day and anecdotally he said it seemed like every other package was Amazon or Zappos (an Amazon company). I wonder how UPS will react.
I was in awe hearing about the incredible efficiency of the operation. Apparently the delivery of 1M packages happens between the hours of 1am and 4am and over 300 planes fly in to be loaded before heading out later that morning.
Having lived in Louisville, KY (location of UPS Worldport, where much of this shipping takes place) I can attest to the nightly takeoffs/landings every 30-60 seconds or so
Good for them. There's no real competition between Fedex and UPS. Both raise their rates around 5% every year, even with fuel costs dropping dramatically. The claims process is specifically designed to be difficult.
Might be more interesting if Amazon decides to open up to outside customers and re-instates real competition. Both UPS and Fedex had better rates and service when DHL was still competing with intra-US shipments.
Fuel costs have an incredibly low short (or even medium) term impact on overall costs. It is a major expense and absolute necessity for these companies to even operate, they are probably incredibly hedged. It would take years of low prices (with confidence that they will stay low) for it to have a large impact.
I interviewed for a position at FedEx's main office few years back, and I was asked "Why should FedEx avoid a shipping-rate pricing war with UPS?" Their answer: we don't want to shrink the value of the overnight shipping market. That sounded reasonable at the time, albeit collusion-y, until I learned about market elasticity. Now it just sounds lazy and protectionist.
I find it interesting that the Google, Apple and especially Amazon have become very successful by going against the orthodoxy of the last few decades which was outsourcing everything that wasn't a core business because you can't possibly do it efficiently.
If these companies followed prevailing MBA business thinking, their products and services would be as mediocre as many other large but floundering fortune 500s.
Interesting, but consider that, in general, they probably did outsource some aspects early on, and learned the lessons needed. In most cases, the example you give are just too large for anything they do to be outsourced to anyone else - few other companies operate on Amazon scale.
The "outsource everything" mantra may also be fueled in part by VC firms who also just happen to be funding a bunch of other companies that... look at that... provide some of the services you should outsource. Many years ago, on a small scale, I had discussions with a small VC firm. In exchange for their investment, we were also expected to use some of the other companies in their network whenever possible (media/marketing/other tech/etc). That seems a bit of an extreme scenario, but i can't imagine this doesn't ever happen at all.
Don't most airlines work through a 3rd party that actually purchases and owns the planes?
this is driven by the fact that airlines don't consistently have taxable income. If you have net operating losses, which airlines often do, you can't fully take advantage of the tax shield provided by depreciation. Airplanes are big capital assets, hence they provide a large tax shield. That's why you often see financial entities (e.g. banks, insurance companies) who have regular taxable income have leasing arms.
Yes, but that's purely a capex to opex move on their financials, in the same way that the cloud enables enterprises to shift server capex costs to Microsoft or Amazon.
Notably, Amazon and Boeing are both based in Seattle. The executives probably golf together. It's also possible that the two companies might receive some sort of Washington State tax subsidy for the deal.
Edit: I stand corrected... Although I still wouldn't be surprised if the execs golf together. :)
Cost is only part of the equation. For Amazon customer service is a primary driver. UPS and FedEx both have terrible customer service reputations. USPS isn't any better.
By setting up their own distribution networks they control the entire chain from first click to final delivery, and to Amazon that is equally important as cost.
It also allows them innovate in an area that is sorely lacking innovation, all under their control.
This is the lesson of the new economy. You have to control all contact points with the customer. If you don't, you are letting a third party "sell" your brand which never works in your interest.
High modularity refers to when a system's components can be cleanly separated and recombined.
If I were to guess, I'd say that amelius is saying that it becomes increasingly common as companies grow for them to expand into functions that were originally outside their core function. Framed this way, "selling stuff online" may have once set an effective upper bound on what Amazon does, but now they appear to be expanding into "moving stuff from place to place."
I would love to see the financial analysis of this move. Paying for the leases on 20 737-300Fs is not going to be cheap, but it must be letting them cut costs somewhere important.
You can lease those class of aircraft for about 100-150K per year, might be even cheaper for cargo configurations.
A 20 year old 737-300 today would cost around 4-5M these days, so a fleet of 20 would cost Amazon around 100M which while is allot of money is some pretty much pocket change for them.
20 years is young for a cargo fleet. Passenger airlines in developed countries often aim to have an average fleet age younger than that, but the planes are built to fly for 20, 30, 40 years and sometimes more.
And remember that the maintenance procedures, mandated by law, for commercial aircraft are kind of insane. The analogy to a car (since everything has to have an analogy to a car) would be:
Every time you're about to get in the car and drive somewhere, first you do a full walk-around inspection of the exterior, then inspect all the lights, vents, wipers, horn, and so on. If anything is in less than perfect condition, you don't drive the car until it's been fixed.
Every ten days, you drop the car off overnight at a garage. They do a full fluid check, tire check and rotation, alignment, lubricate everything, and if they find anything less than perfect it gets fixed before driving again.
Once a month, oil change, filters replaced, new battery. If there's visible wear on the tires, replace them.
Every two years or so, you pull out the engine and replace it.
Every five years, you have the car completely disassembled and reassembled, replacing any part that's even the slightest bit worn or fatigued or shows any detectable amount of corrosion.
If you maintained a car this way, the car would last damn near forever. This is how planes are maintained, and is why they last as long as they do.
If you're really interested in looking more at this, look at the flightaware stats for the flights going out of KILN -- Wilmington, Ohio.
Outside of a Corporate Jet going to New Orleans (R&L Carriers), it's all ABX Air traffic...and it's going to airports near major Amazon Warehouses (Lehigh Valley/Allentown was the biggest one that came to mind when I was looking at the flights).
Atlas (ABX Air Competitor) doesn't have a lot of wiggle room -- they're doing freight contracts for DHL and PAX contracts for the Oil and Gas companies to Africa right now.
I think what Amazon's doing right now is moving or rebalancing the freight -- something that they've traditionally done via semi -- in order to get it in place for the holiday season. It will be interesting to me to see if these flights continue to keep up during the slower months in the beginning of the year.
That is what I was thinking and then I realized how UPS offloads delivery to USPS. It could be because they are overloaded.
Further, there is too much risk and loss of power when UPS's biggest customer is just one company. UPS probably doesn't want that risk and it would rather stay moderately sized than put all of its eggs in one basket.
But more importantly, it is Amazon that is taking these steps and I predict, because they have been hiring large swaths of people that many years ago they would not have even thought of, Amazon is beginning to think about doing business over the course of the next hundred years. It is preparing for those hundred years now, knowing that airplanes will be integral to continue meeting demand. These airplanes will most likely run side by side with their partner delivery companies.
The USPS stuff was historically corporate welfare that let UPS and Fedex have a third party handle unprofitable delivery.
USPS is beefing up its parcel operations and is getting more competitive. Generally speaking, in my city the post office performs better for most ground scenarios, mostly because they are separating parcel delivery from the standard routes.
That is the exact opposite experience in my part of the world. The local post offices have become fiefdoms.
I could not find any accountability without having to go through Amazon. And the USPS claims poverty with what's left of their 5 billion dollars surplus still sitting in their pension fund.
I believe logistics has become a weakness for Amazon. Other retailers seem to handle most of their warehousing and logistics on their own (?). Amazon reduced the need for warehousing but seemed to have become totally dependent on other companies for logistics. For long time they benefited from tax breaks and users willingness to wait few days for packages to get delivered. With price matching offered by several other retail stores, and Amazon thinking of starting their own retail stores, it makes sense to invest in their own logistics as well. I guess they would like to differentiate themselves in the long run as a ship-to-door retail company with excellent customer experience.
That's sort of a different project. They are already building up infrastructure for local delivery via amazonfresh and their same day delivery services, but can also still use UPS or FedEx for to ship from their local terminal.
Apple doesn't ever seem interested in providing something that's a commodity. If they did get into it, I assume it would only be for some premium, same-day type service.
Make no mistake, drone delivery is not planned to be the way most amazon packages are delivered, ever. It's a high-cost "I need it now" service, that's it.
If they can solve launching a drone from altitude from an aircraft without a rear cargo door at 250MPH without shredding it to pieces finding an efficient means of collecting them would be an easy task.
I was in awe hearing about the incredible efficiency of the operation. Apparently the delivery of 1M packages happens between the hours of 1am and 4am and over 300 planes fly in to be loaded before heading out later that morning.