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Why Is Amazon Buying Converted 767 Freighters Instead Of Leasing?

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It’s no secret that Amazon AMZN is looking to control its own distribution destiny with its own air freight operation. Amazon Air AMZN expects to have 85 aircraft in service by 2022, and a recent study by DePaul University predicts the e-commerce firm could grow its fleet to as many as 200 planes in the next seven to eight years, putting it on par with UPS (275 aircraft) in terms of size.

On Tuesday, the company confirmed the purchase of four 767s from WestJet Airlines plus seven more from Delta Airlines DAL . The WestJet aircraft will join Amazon’s fleet this year and the Delta jets will begin hauling cargo in 2022. The acquisition is a significant step along the path to furthering Amazon’s core vertical integration strategy, making it independent of shippers like UPS and FedEx FDX .

Since the inception of Amazon Prime Air in 2016, Amazon has only leased cargo aircraft. But a hint of things to come emerged last September when the company directly registered one of the 767s it acquired from WestJet under its own name.

An Amazon spokesperson echoed comments from Amazon Air vice president Sarah Rhoads asserting that buying the 767s is “a natural next step” and that a mix of owned/leased aircraft yields flexibility. Apart from the simple growth logic, the company offered nothing further.

There may be at least one further motivation, however.

The Desirable 767

Up to now, Amazon has leased converted 737s and 767s through Air Transport Services Group Inc. (ATSG) an Ohio-based aircraft lessor specializing in air cargo. The company derived 29% of its 2020 revenue from Amazon, to whom it leases approximately 20 767s.

ATSG also counts cargo carriers ABX Air and Air Transport International (ATI) as subsidiaries. The latter operates 767s for Amazon. Leasing aircraft through ATSG and having them operated by outside carriers like ATI and Atlas Air ATCO has been good business for Amazon says Benedict Sirimanne, president of CSDS Aircraft Sales & Leasing, a California-based aircraft brokerage.

“They actually have a very good system going. There’s really no reason for them to change it. The leases are profitable for the operator and beneficial in terms of renewing the fleet further down the road. Even though Amazon is cash-rich, they don’t have to put all their cash into conversion.”

If outsourcing its air cargo operations has been a successful strategy for Amazon, a desire to in-source the 767 may be one of the reasons for departing from it.

Though it first entered passenger service in 1982, the 767 is a highly desirable cargo aircraft. Converted from passenger liner to freighter (P2F), one can carry about 60 tons of cargo and operate with greater cost efficiency over long ranges than P2F alternatives like the Airbus A300/310, MD-11 or 747.

Depending on engines (GE, Rolls-Royce or Pratt & Whitney), ex-airline 767-300ERs sell for about $5 to $7 million according to Sirimanne. But they still have to be converted to freighters, a four month process that costs about $14 million. With other equipment and aircrew certification, that puts the cost of a converted 767-300ER freighter at $20-$25 million, a relative bargain compared to the $35-$40 million a 747 freighter costs Sirimanne says.

“The 767 is one of the best freighters out there. You really can compete with it. It has enough cargo carrying capability, range, and it’s easy to get pilots. Maintenance is also relatively cheap on a 767 compared to a lot of other aircraft.”

Amazon apparently thinks so, too. According to Aviation Business News, Amazon Air will operate more than 40 767-300s in 2021. The company’s demand for 767s is filling up the conversion market.

Israeli Aerospace Industries’ Aviation Group (formerly Bedek) is the leading converter of passenger 767s to freighters with eight parallel conversion lines for the 767-300/200, in Israel and Mexico.

“[Amazon] has reserved something like 20 slots,” Sirimanne says. “They’re hogging all the conversions.”

If Amazon is looking to corner the market on 767 freighters, it has at least one serious competitor - China’s SF Express EXPR . The company is China’s largest air cargo carrier with a fleet of 62 freighters, including 767s. SF may be eyeing 16 767s coming to market from Japan later this year. “SF Express is expanding like crazy,” Sirimanne confirms.

Whether Amazon makes a bid for a few or most of these aircraft directly or via ATSG will say a lot about the company’s fleet strategy. Its lock on 767 conversion slots could theoretically slow P2F work for its competitors including Canadian 767 operator CargoJet.

Buying airplanes is a notable departure for the giant e-tailer in Ben Sirimanne’s experience. A couple years ago, he sold three ex-Air New Zealand 767-300ERs to ATSG which were ultimately leased by Amazon.

He also sold a General Electric CF6, the most widely used 767 engine, to Amazon through a broker in a deal involving Monocoque Diversified Services.

“They [Amazon] didn’t have a system to pay us. They used PayPal PYPL to pay a $3 million-plus bill for the engine. It was strange,” he laughs.

Why “buy when you can rent”? To get fleet commonality with the best freighter at pandemic-era prices may be Amazon’s answer.

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