Just beginning to flex its muscles in the logistics and transportation industry in the U.S., Amazon.com (AMZN 2.47%) is now making a big move up north by acquiring a minority stake in Canadian freight cargo carrier Cargojet (CGJTF 3.64%).
Amazon already uses Cargojet's aircraft services for mid-mile delivery from Amazon warehouses to distribution centers, but the deal that sees the e-commerce giant take a 9.9% stake in the carrier has been structured to encourage it to use Cargojet's network even more, giving Amazon the ability to claim new ground in a different market.
Image source: Amazon.com.
Online sales growth up north
E-commerce growth is surging globally, and Amazon recently introduced one-day delivery in both the U.S. and Canada. Carriers like UPS and FedEx now deliver seven days a week, but the latter has severed most of its ties to Amazon to make itself available to other large customers expanding their e-commerce presence.
Where promises for two-day delivery could largely be handled by truck, the guarantees for speedier shipping necessitate the use of more air cargo capacity. Walmart and Target have been notable Amazon rivals that are successfully meeting the demand for faster delivery times, and while in-store pickup for online orders is a preferred method for same-day fulfillment, the need to get packages from warehouse to customer means air freight capacity is going to be a premium service.
Like in the U.S., Amazon is the primary online shopping destination for Canadian consumers. A survey of the e-commerce market by the Royal Bank of Canada (RBC) says 85% of Canadian consumers have made a purchase on Amazon compared to just 32% at runner-up Walmart. Amazon has quadrupled its same-day or one-day delivery reach within the country since 2015. Earlier this year, Amazon added 13 additional cities in Canada eligible for one-day Prime delivery.
Market dominance
Cargojet already completely owns the air freight market with a 95% share of the domestic overnight cargo business. While the carrier doesn't break out its e-commerce business separately, RBC says the segment was wholly responsible for Cargojet's rising total volumes over the past three years, which grew 7% in 2016 and 14% over the last two years, and there's more room to grow.
Cargojet had 100% on-time delivery rates during Amazon's 48-hour Prime Day event this year as it handled over 1 million pounds more than it does during a typical week while operating 23 additional flights.
Which helps explain why Amazon is buying into Cargojet. Under the agreement, the carrier will issue warrants to Amazon in two tranches. The first one gives the e-commerce leader the right to acquire a 9.9% stake in the company over six years at 91.78 Canadian dollars per share, but it's conditioned on Amazon increasing its usage of Cargojet's network up to CA$400 million in business volume (about $301 million). The second tranche gives Amazon warrants for an additional 5% of the company if it uses an additional CA$200 million worth of business volume after the first tranche vests at a price to be determined.
Analysts believe the agreement suggests Amazon doesn't want to establish its own air fleet in Canada as it has here. Amazon leases aircraft in the U.S. from Air Transport Services Group and Atlas Air Worldwide for its Amazon Air fleet, but after starting out with a small ownership position in the U.S. air freight carriers, it now owns a third or more of their stock.
Air freight takes flight to speed deliveries
The online retailer has nearly 60 planes in its fleet after announcing in June it would lease 15 additional Boeing 737s to speed delivery of packages, with plans to have 70 planes in the air by 2021. The hub it is building at Cincinnati/Northern Kentucky International Airport will be able to handle up to 100 planes.
Amazon continues to expand its logistics and transportation network, this time in the Great White North, where it can piggyback on the growth of Cargojet and its continued air freight dominance.
