Sunday, December 27, 2015

Amazon using Lehigh Valley International Airport (KABE) for secret pilot program

Online retail behemoth is conducting a secret pilot program that could change the way it moves packages around the globe, and Lehigh Valley International Airport is right in the middle of it.

The covert operation even has a cool name: Aerosmith.

According to sources, LVIA is among five airports Amazon is using to shuttle packages aboard cargo jets in what has become one of the industry's worst-kept secrets. Analysts say it's a potential game-changer that has the world's largest online retailer testing the waters for setting up its own delivery network to wean itself from FedEx, UPS and the U.S. Postal Service nationwide.

Anyone who was among the thousands of people guaranteed package delivery by Christmas two years ago, only to have an empty space under the tree, knows why Amazon is doing this, said Lora Cecere, founder and CEO of Supply Chain Insights, a Philadelphia consulting firm that researches and analyzes the logistics industry.

UPS took the blame for being overwhelmed by a glut of late-arriving packages and bad weather during the 2013 holiday season blunder, but Amazon had to apologize to its customers and give refunds.

This year it was FedEx blaming the weather and apologizing for deliveries that didn't make it before Christmas.

"I really like what Amazon is doing with its Aerosmith project," said Cecere, who said she learned of it from a friend working at one of the airports in the program. "If you remember how they failed to deliver the past couple holiday seasons, it makes a lot of sense. It puts Amazon more in control of its destiny, and it also gives it an opportunity to cut its costs dramatically."

Amazon officials have not acknowledged that Aerosmith exists.

"We're actually not commenting on these stories," said Amazon spokesman Scott Stanzel. "We don't comment on internal workings and rumor and speculation."

In recent weeks, several industry publications — starting with online magazine Motherboard in November — have quoted anonymous sources who described an Amazon air cargo program run out of Wilmington, Ohio, by Air Transport Services Group.

Aerosmith figures to be very profitable for the struggling LVIA, which hired 60 full-time workers to handle what's grown to five cargo flights a day out of the airport in Hanover Township, Lehigh County. LVIA officials say the air cargo program, which started there in September, could net the airport more than $1 million next year.

Formerly known as Airborne Express, Air Transport has the world's largest fleet of converted Boeing 767 cargo jets. The company, through its subsidiary ABX Air, signed a deal with LVIA in September to fly cargo jets into the Lehigh Valley to deliver and pick up consumer goods. In September, ABX spokesman Paul Cunningham said the cargo was coming from a single client, but he declined to reveal the client.

Asked last week if the cargo flights into LVIA were part of the Aerosmith project, Cunningham said, "There seems to be a lot of speculation about that. Nothing has changed since [September]. I still can't discuss it."

However, a source directly involved in the project confirmed that the flights into LVIA are part of Aerosmith. Similar Amazon cargo flights by ABX are also running through airports in Tampa, Fla.; Ontario, Canada; and Oakland, Calif., according to the source. ABX's Wilmington airfield serves as the hub, while LVIA and other airports serve as the spokes, the source said.

The number of daily ABX flights into LVIA was two in September but increased to five this month because of the Christmas delivery rush, said LVIA Executive Director Charles Everett Jr.

At LVIA, the packages arrive by Boeing 767 cargo jets — the largest planes that fly into the airport — and are carted by airport workers to a warehouse just off the airfield, where they are loaded onto as many as two dozen tractor-trailers a day. Those trucks take the packages to warehouses outside Atlantic City; Baltimore; Newark, N.J.; Philadelphia; Richmond, Va., and Allentown, said Everett, who wouldn't discuss Amazon.

Not coincidentally, there are Amazon warehouses in or outside each of those cities, including two in Upper Macungie Township said to employ more than 1,000 people during the busy holiday shopping season.

"Our contract is with ABX Air," Everett said. "We have signed a non-disclosure agreement not to discuss details that are not part of that contract."

It's clear what Amazon intends to do, said Marc Wulfraat, president of MWPVL International, a supply chain, logistics and distribution consulting firm in Montreal.

"They're trying to determine whether they can duplicate the hub-and-spoke air cargo operations run by UPS out of Louisville and FedEx out of Memphis. The only difference is they'd run it out of Wilmington," Wulfraat said. "Aerosmith is a great experiment and if it works I'd expect to see them roll it out in airports across the nation. This will change the landscape for outbound delivery."

Wulfraat and Cecere both suggested that by cutting third-party air carriers out of its chain — or at least reducing their use — Amazon could cut its delivery times by as much as a day.

Currently, if someone in Allentown orders a coffee-maker through Amazon, delivery can be done in as little as one day. With massive fulfillment centers across the nation, Amazon would ship from the closest warehouse that has the coffee-maker in stock. If it's within a few hundred miles, a truck and ultimately a delivery van would deliver the coffee-maker to the consumer's doorstep.

But if the coffee-maker is stocked at a fulfillment center more than an eight-hour drive from Allentown, UPS or FedEx would be used and the coffee-maker would be flown from one of their hubs to Allentown, where it could be moved by truck to an Amazon sorting center and then delivered to the consumer.

Under Aerosmith, which borrows the name from the famous rock group, that same package would instead be flown to ABX's Wilmington air hub before being flown to Allentown. The strategy would enable Amazon to ship in bulk more often and to bring more of that delivery chain under its control, Wulfraat said.

"They won't have to rely so much on the national carriers anymore," he said. "This will take volume away from FedEx and UPS."

Officials from FedEx and UPS declined to comment on Aerosmith.

"Amazon is an important customer to UPS," said UPS spokesman Steve Gaut. "We don't comment on our customers' plans, nor [do we] speculate on their impact to UPS."

"FedEx is a highly integrated global transportation network, in fact, one of three major delivery networks in the U.S.," Mike Glenn, president and CEO of FedEx Services, said last week during a company earnings call. "That's not likely to change in the foreseeable future."

Its own air cargo program also would have the potential to save Amazon a lot of shipping costs by allowing the company to pay a per-plane-load bulk rate, rather than a per-package rate. Even more important, it would enable Amazon to avoid what Cecere called the high cost of "dimensional pricing." Because Amazon has such a wide range of products but a limited number of box sizes, it's common for a small item such as a coffee mug to be packed in a box three times its size. The problem for Amazon, Cecere said, is that its third-party providers have started charging based on the size of the delivery, rather than the weight.

"FedEx is killing Amazon with its dimensional pricing," Cecere said. "With such a diverse line of goods for sale, Amazon just can't figure out how to avoid shipping boxes full of air."

Wulfraat said some analysts have speculated that Amazon is trying to break into the cargo delivery industry by building a full-blown network of trucks, planes and vans that would not only allow it to deliver its own goods, but to compete against UPS, FedEx and the Postal Service to deliver for others.

Those predictions are based on some of Amazon's moves in the past year. Earlier this month, Amazon announced that it purchased thousands of truck trailers that will be used to move goods between its massive warehouses. It will still need to contract or hire drivers with trucks to haul the trailers.

Wulfraat doesn't buy the total supply chain domination model some are predicting.

"These other operators have invested billions of capital into the science of moving product. Amazon can cut costs and get better control of its supply chain, but it'll never be able to eliminate the need for third-party help," Wulfraat said. "It will always need FedEx and UPS."

ABX is third-party help, but unlike those other national companies, its only task is flying freight. It owns no vans and does no home delivery. That gives Amazon greater control over a contractor whose focus, and financial viability, would rest with serving Amazon.

Each ABX plane at LVIA can carry up to 85,000 pounds of cargo, Everett said. That gave Amazon the capacity to deliver more than 400,000 pounds of packages per day on those five flights through the airport.

The flights add to a distribution network that is flourishing in the Lehigh Valley, whose strategic location near New York, Philadelphia and other major metropolitan areas makes it attractive for companies that move goods.

"The Lehigh Valley has become a key battleground in the e-commerce wars," said Don Cunningham, president and CEO of the Lehigh Valley Economic Development Corp., adding he had no direct knowledge of Aerosmith. "When you consider that we're within [truck] delivery reach of 100 million consumers, I'm not at all surprised that LVIA is part of this pilot. That airport has become an important asset in these wars."

With regional airports struggling to increase passengers, Amazon's air cargo experiment presents a golden opportunity for LVIA to grow a new operation and the revenues that come with it.

FedEx has been running two flights a day through LVIA for years, but has its own package handlers to load and unload the planes. It pays LVIA only for landing fees and fuel.

Because ABX Air needed ground handlers to receive its planes and cargo handlers to move the packages between the planes and delivery trucks, the airport was able to hire them and charge ABX for the services. With three ABX Air flights a day into the airport expected through 2016, Everett projects LVIA to net $800,000 to $900,000 in profit from the deal for the year, but that was before the number of daily flights increased to five this month. Everett expects the flights to reduce to three after the Christmas delivery rush ends, but the potential is there for much growth, he said.

ABX Air's contract with LVIA runs through the end of 2016.

"We appear to be in the right location at the right time," Everett said. "We're going to do whatever we can to take full advantage of that."

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