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Instant Analysis: Amazon.com to Lease 20 Boeing Jets for Delivery Service

By Evan Niu, CFA - Mar 9, 2016 at 1:50PM

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Amazon is looking to supplement its current distribution services with a new air cargo network.

Image source: Amazon.

What happened?
Months after initial reports that Amazon.com ( AMZN -1.38% ) was interested in launching its own air-delivery service, the company has made a tangible step in that direction. Air Transport Services Group ( ATSG 1.02% ) has announced that it will lease 20 Boeing 767 freighter aircraft to Amazon Fulfillment Services in order to operate an air cargo network.

CEO Joe Hete said that the two companies have been working on a deal since last summer, and the new customized network will supplement Amazon's existing distribution network and carriers. On top of that, ATSG has given Amazon warrants that would allow the e-commerce company to acquire nearly 20% of ATSG's common stock at $9.73 per share, over a five-year period.

ATSG also reported earnings last night. Following all of the news, shares have soared to all-time highs.

Does it matter?
Shipping costs are a critically important part of Amazon.com's overall cost structure. Indeed, rising fulfillment costs last quarter were a contributing factor to investor concerns about profitability. Amazon paid net shipping costs of $5 billion last year, or 5.1% of total revenue.

Building a vertically integrated distribution network would be a massive undertaking in terms of capital requirements, and it doesn't seem realistic that Amazon would ever be able to fully integrate delivery services. But at the same time, it may be able to generate some cost savings by supplementing its existing delivery networks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,389.79 (-1.38%) $-47.57
Air Transport Services Group, Inc. Stock Quote
Air Transport Services Group, Inc.
ATSG
$26.76 (1.02%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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