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Understanding Amazon's Moves Into Transportation Services

Summary

The perception of most investors is that shipping costs are what is driving Amazon's interest in diversifying its business into transportation services.

Major executives, most recently from FedEx, have attempted to quiet any ideas of Amazon becoming a major competitor in the package delivery markets.

Acquiring companies like Air Transport Services and Progistics may be in the cards at some point; the near term will provide further clarity on this.

Investors should expect Amazon to be methodical; but similar to AWS success, investors should not be surprised to see major moves and revenue upside in the future.

Overview

Amazon.com (NASDAQ:AMZN) is in the process of further developing and expanding its fulfillment center footprint across the U.S. This strategy is important as the company is always focused on its primary objective, customer service. As part of the customer experience, Amazon is pushing the limit on fulfilling orders as quickly as possible within hours and days.

Everyone knows the story and criticisms regarding Amazon's strategy, so nothing is new here; the basic premise is still that the company continues to spend money at the expense of its bottom line. Focusing on the e-commerce business segment, this is directly tied to the costs Amazon must incur for its current and future fulfillment strategies.

Amazon is always in the news, and the recent buzz surrounds the company's new lease agreement for 20 cargo planes with Air Transport Services (NASDAQ:ATSG). This stir quickly led to speculative suggestions that Amazon would be going toe-to-toe with the likes of FedEx (NYSE:FDX) and United Parcel Services (NYSE:UPS). From these circumstances, we also know that Amazon has a fixed price at $9.74/share to purchase 20 percent of Air Transport's stock by 2019 leading to thoughts of an entire acquisition.

FedEx and UPS have been adamant that their successes during the previous holiday season are a testament to their timely delivery capabilities, but this does not change the opportunity for Amazon to begin to use its new air freight capacity to not only reduce its own cost, but to add new customers to expand its revenue. Companies such as FedEx and UPS own a portion of their cargo planes, but Amazon is staying true to its leasing approach adding to its purchase and lease obligations rather than direct debt.

What investors should think about is that Amazon is not only pursuing this type of strategy with Air Transport Services. The company is also relying on a private transportation company called Progistics Distribution for last-mile package deliveries. Additionally, Amazon has been linked to attempting to take a stake in HERE; combining the benefits of a new cloud customer and exposure to the highly lucrative autonomous vehicle market potential.

Clearly, Amazon is interested in developing and being a part of transportation-based technologies; drones anyone? But Amazon could potentially acquire companies like Air Transport Services and Progistics to quickly offset shipping costs and further expand customers relying upon these services. For Air Transport Services, this includes DHL Group (OTCPK:DPSGY) and the U.S. military. For Progistics, this includes Ryder Systems (NYSE:R), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), The Walt Disney Company (NYSE:DIS), W.W. Grainger (NYSE:GWW) and YRC Worldwide (NASDAQ:YRCW).

HERE includes an existing consortium of investors and has a heavy interest from many auto manufacturers and technology companies. Regardless, the opportunities will continue to abound for Amazon. Even an acquisition like UPS's recent one for Coyote Logistics could be an option in Amazon's near future.

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