When Amazon announced that it was getting into the airfreight business, the usually tight-lipped e-commerce giant made an uncharacteristically bold statement with a low fly-by of the first 767 freighter in its new “Prime Air” livery over the crowds at Seattle’s annual summertime Seafair festival. By the time “Prime One” roared over the spectators in July 2016 with great fanfare, Prime Air had already been more than a year in the making, thanks in part to the quiet, behind-the-scenes work of Joseph C. Hete, president and CEO of aircraft lessor Air Transport Service Group, Inc. (ATSG).
Others in the ACMI business, and most other cargo carriers alike, can only envy the fantastic year that ATSG had in 2016. Even those previously unfamiliar with ATSG will likely recognize Joe Hete’s name after this year. After all, through ATSG’s core, medium-widebody leasing and operating solutions arm – Airborne Global Solutions – and its subsidiary airlines (ABX Air, Inc., and Air Transport International), Hete led the e-commerce industry into the “own-operated dedicated-network” era with a landmark deal to lease and operate twenty 767 freighters for Amazon.
Hete, a 30-year veteran of the industry, has been CEO since ATSG’s founding in August 2003 and, as such, has been responsible for establishing the strategic planning for all entities under the ATSG umbrella. His prowess in aligning his portfolio of aircraft with the continuously shifting demands of the market was on display during early negotiations with Amazon.
“In the late ’90s, as we were looking for the next-generation airplane to fit the express business, the 767 was the right choice,” Hete said. The wide-body jets later proved to be a popular option for Hete’s own Airborne Express, and for the domestic air networks operated by DHL and FedEx. Then, when Amazon made its first approach, ATSG executives noted that Amazon was already sold on the 767.
Negotiations proceeded rather quickly following the launch of a six-month pilot operation. Initially the deal covered two 767-200Fs ATSG had available at the time, which Amazon leased on an ACMI basis. Trial flights were launched to both coasts from ATSG’s hub in Wilmington, Ohio, which also proved to be a popular asset for ATSG. “We were the only company out there in a position to not only throw up the additional aircraft they needed, but also to put together the network, in terms of the ground handling, cargo loading and unloading, and having a facility and location that could handle a dedicated air network,” Hete recalled.
Soon after, Amazon wanted to scale-up its trial operations to include five aircraft. Seeing an opportunity, Hete took a bold risk and began pushing for a longer-term commitment while seeking out more 767s that he knew Amazon would want. “The single-most impactful decision I made this year was the decision to jump out early, and procure 767-300 feedstock,” Hete said. “We jumped out ahead of everybody else, and even though we did not have a firm commitment for the number of aircraft we needed for Amazon, we thought it made good sense to get ahead of the power curve, and start locking up that feedstock along with conversion slots with IAI-Bedek.”
To make the deal happen, Hete and his team also had to make the difficult decision of refusing to renew leases for some of its dry-lease customers as their contracts expired. “We said that if we can make this customer happy, then there are a lot more potential growth opportunities with someone like Amazon than there are with a customer that’s going to take a couple of aircraft on dry lease,” Hete said.
With fleet additions on the horizon, ATSG was then able to take a couple of pages from its own extensive experience as an operator for DHL, and hammer out a dry-lease deal with Amazon. The final deal worked out with Amazon in March 2016 includes twelve 767-200Fs on five-year ACMI leases, plus eight 767-300Fs on seven-year ACMI leases. In addition, Amazon also received warrants exchangeable for the purchase of up to 19.9 percent of ATSG’s common shares.
The Amazon deal, Hete noted, “ended up looking pretty similar” to the earlier DHL arrangement, which “has worked extremely well from the DHL perspective.” Unlike the DHL arrangement, however, Amazon’s planned weekly aircraft utilization was much greater than that of ATSG’s existing express customers. Instead of operating on a five-and-a-half-day schedule, aircraft in service with Amazon operate seven days per week.
Even after clinching the deal with Amazon, Hete remains an executive to watch in 2017. Next year, Hete will continue leveraging new opportunities to deploy his company’s 767 freighters around the globe in express service, while leading ATSG into new territories, far beyond the confines of its Wilmington headquarters. For instance, ATSG is well-positioned to take advantage of China’s rapidly-growing, e-commerce-fueled airfreight express market. The seeds it planted earlier with a joint venture with Okay Airways and Vipshop are expected to begin sprouting in 2017.
Also by next year, of course, ATSG will have those twenty 767Fs flying domestically for Amazon. Stay tuned in 2017 as Hete and ATSG continue putting 767s into express service all around the world.