Amazon Is Gearing Up To Challenge FedEx And UPS

Amazon.com (NASDAQ:AMZN) may want to play coy when it comes to its ambitions about becoming a full-fledged logistics company taking on UPS (NYSE:UPS) and FedEx (NYSE:FDX), but behind the scenes it is clear the e-commerce giant is inexorably moving in that direction.

The latest sign is Amazon's agreement to acquire a 40% stake in Atlas Air Worldwide (NASDAQ:AAWW) and a 33% ownership position in Air Transport Services Group (NASDAQ:ATSG), the two aircraft leasing companies through which Amazon operates its Prime Air cargo service. The e-commerce company will also begin leasing five new Boeing 737s from Atlas, with the possibility of adding 15 more.

This pales in comparison to UPS and FedEx, who operate around 250 and 650 planes, respectively, however the increase indicates Amazon's air transport aspirations are reaching new heights.

By expanding its fleet of aircraft, moving toward smaller planes while extending its leases, and taking larger ownership stakes in its air cargo partners, Amazon is setting itself up for the opportunity to play a larger role in third-party transport.

A 360 view of logistics

Amazon has said it simply wants to move its goods more quickly to its customers. On the e-tailer's fourth-quarter earnings conference call at the end of January, CFO Brian Olsavsky told analysts, "What we do is add capacity where we feel we need to speed up service or ensure demand, particularly at peak."

No doubt that's part of the plan, but as Fortune caught when Amazon filed its annual report, it now includes "transportation and logistics services" in its list of competitors, an industry it hadn't previously identified as a rival.

It's clear Amazon wants to control the entire product life cycle from manufacturer to customer. In addition to ground and air transportation, it has more recently begun taking a more hands-on role in so-called first-mile logistics, operating an ocean shipping service to bring goods into the U.S. from overseas manufacturers.

This vast network of control gives Amazon scale that appears to far exceed any need to fill in gaps of coverage that may occur at peak periods. It may soon have as many as 100 aircraft in its fleet; it ordered 20,000 Mercedes-Benz Sprinter vans in December 2018 to lease to third-party delivery companies; and last year it delivered more than 5,300 shipping containers through Beijing Century Joyo Courier Service, its ocean freight subsidiary.

Renting the runway

As its relationship with Atlas Air and Air Transport grows, so too does the size of its ownership stake in the companies.

Last month Atlas amended a seven-year agreement with Amazon to lease five 737-800 aircraft this year and five more next year. Amazon can place an additional 15 planes into service by 2021 if it so chooses.

In exchange, Atlas issued to Amazon warrants that will grow incrementally depending on the number of aircraft it leases that could eventually have the e-commerce giant owning 39.9% of Atlas at the end. Full vesting of the warrants means an additional $1.4 billion in incremental revenue will be due from Amazon. The smaller aircraft also gives Amazon more access and flexibility into a wider variety of markets.

Similarly, Air Services Transport Group amended its agreement with Amazon that will see its leases for 20 767s extended for three more years, while an additional 10 767s will be leased for 10 years, with five aircraft being delivered in the back half of this year and the other five coming next year.

Amazon, which already owned approximately 20% of Air Transport, will be granted 14.8 million new warrants that will increase its ownership position to as much as 33.2%.

Growing into its role

Burgeoning demand certainly drives some, maybe even most, of Amazon's thinking in this area, but when you take a bird's eye view of the e-commerce leader's expanding role in the transportation and logistics market, its cradle-to-grave shepherding of packages through its ecosystem, and even its small-scale trialing of third-party package delivery in California, it becomes apparent there is likely more here than catching overflow from its own offerings.

Amazon seems intent on building out its capabilities and growing itself to a size where it becomes necessary to take on new responsibilities simply to operate at maximum efficiency. In the process, it's growing to be a potent rival to standalone transporters like UPS and FedEx.

This article originally appeared in the Motley Fool.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.