History alive last week as Amazon the giant global online retailer is now “The Amazon Air Force” adding Atlas into its air freight portfolio.
    Amazon’s air service agreements with two U.S. based Aircraft, Crew, Maintenance, Insurance (ACMI) operators, Atlas and ATSG fields a combined force of 40 B767 freighters into the fourth biggest air cargo fleet in the world.
   “We will support package delivery to the rapidly growing number of prime members who love ultrafast delivery,” Dave Clark, (left) Amazon’s SVP Worldwide Operations and Customer Service told The Wall Street Journal on May 5th.
   Amazon, announcing the ACMI deal last week with Atlas for 20 Boeing 767 freighters, doubles down its March 2016 ACMI deal with Air Transport Services Group (ATSG) for 20 B767 freighters.
   Amazon will also occupy a major equity position with both ACMI operators.
   Atlas has granted Amazon warrants to acquire up to a 30% stake in the company at a price of $37.50 a share, after the issuance of Atlas Air’s common stock.
   Amazon also gets a seat on the Atlas board when the online retailer exercises warrants for an initial 10% stake in the air cargo operator.
   The Amazon ATSG deal announced in March includes warrants giving it almost 20% of Air Transport Services equity and a board seat. ATC warrants were priced at $9.73 per share over five years.
   The Amazon ATSG/Atlas fleet moving into 4th place worldwide, in terms of total dedicated freighter aircraft at one company, will trail integrators FedEx, UPS and DHL, but position ahead of Korean Air (24).
Geoffrey

     Is Amazon securing its own supply capacity or seeking out new profit centers?
     Amazon has made a number of major strategic supply chain investments and agreements over the last year as recently reported in FlyingTypers (link to previous article). Investing in its supply chain operations, capacity, and services may simply be a case of the retail giant securing capacity—and pricing—for peak seasons. But could it also be a bold move into the logistics and forwarding market, one many believe is ripe for plunder for a technical innovator with the volumes to make such investments count?
     If so, and if successful, other supply chain ‘disruptors’ with large volumes at their disposal could follow in its wake.
     Much of the attention has focused on what Amazon’s supply chain ambitions might mean for the biggest integrators such as UPS and FedEx, which currently do rather well meeting retailer’s shipping needs.
     Although initially the comparison might not appear relevant, your correspondent was reminded to think about changes in the commodities supply chains’ business over the last decade and more where traditional ‘shippers’ have increasingly seen the value of building up their own transportation capacity.
Perhaps the most well known major strategic move into supply chain management was the decision by iron ore miner Vale to enter into ship owning. Exports of iron ore from Brazil—located farther from buyers in China than major rival producers such as South Africa and Australia—are at a competitive disadvantage on freight costs. The higher the cost of freight, the greater Vale’s disadvantage. Back in the world of peak bulk freight markets in 2007-2008, this was a major issue.
     The miner’s ingenious strategy was to build a fleet of the world’s biggest bulk carriers supported by a network of trucks, roads, railways, and ports. The plan behind investing in vessels was simple—to secure its own long-term shipping freight costs at affordable prices. But the added bonus? By adding so much capacity to the market the company also hoped to quash freight rate volatility and sudden price spikes.
     The global financial crisis muddied the waters, but in many ways made the plan even more effective—since then, barring a brief rally, bulk shipping rates have been at record lows. When your correspondent bumped into Vale’s shipping manager recently, he said the ‘new normal’ of low freight markets was excellent for Vale.
     Vale was not the only shipper of dry bulk commodities to follow a strategy of safeguarding its future by investing in supply chains and disrupting incumbents. Miners and cement majors have bought ships or set up huge brokerage arms to manage their freight costs, but also to play the market at a profit.
Commodities trading houses have also generated vast profits by investing in their own supply chains over the last decade; Noble Group in particular moved from being asset-lite to a major transport player in its own right during this period, hugely increasing its volumes and profits until commodities prices plunged. By offering supply chain services to producers, buyers, and other third parties, traders and commodities giants built up immense cargo volumes, which enabled them to procure transport services at reduced prices and generate new profit points.
     Indeed, in the commodity transport sector in many parts of the world, conglomerates now control much of the transport superstructure and infrastructure—railways, truck fleets, ports, barges, roads, ocean carrier capacity—from which they can generate profits by granting access and services to third parties.
     The dry bulk shipping sector is now commoditized, fragmented, and over-supplied. Rates look like they will remain bearish for years. Indeed, the bulk shipping business looks uncannily like the air freight and container shipping markets right now.
     So, what’s next for Amazon? It already has its own warehouses, last-mile capacity and, now, an air freight network. It is also entering the ocean forwarding market. Could it eventually become a global logistics player in its own right?
     The rewards of entering the vast logistics and forwarding business could be manifold; success could simultaneously bolster its retail business and turn supply chain costs into profits. By offering factory-to-consumer services to its merchants and other shippers, it would vastly increase its already immense leverage when buying in additional capacity from airlines, integrators, and even shipping lines. It could also put additional downward pressure on freight rates, particularly if it was able to attract more volumes from third parties. It could also improve the scale and flexibility of its global service offerings in the process.

     The idea of Amazon becoming a major rival to the likes of FedEx and UPS is, at this stage, unlikely—although with its bottomless pockets and technical ability to simplify services and transactions for customers, things could change very quickly. But without a doubt, Amazon has the ability to disrupt a range of markets. Moreover, it could enter the logistics business in a graded way by cherry picking the most profitable parts of the business currently dominated by integrators, such as air freight fulfillment. This would have repercussions in many transport markets and geographies.
     So it is unsurprising that integrators and 3PLs are concerned; many have struggled to adapt the latest technology to global supply chains. It is hard to imagine Jeff Bezos making the same mistakes should he decide Amazon could offer better services at lower prices than incumbents. After all, as high street retailers know, he has done it before.
SkyKing

For Part I of This Series Click Here

The resort town of Siem Reap in northwestern Cambodia is breathtakingly beautiful. It stands as the gateway to the ruins of Angkor, which was the seat of the Khmer Kingdom from the 9th-15th centuries. The airport has a small-town feeling—quite understated and lovely.

Phom Penh Exclusive
     Looking for new markets remains a priority for some executives, especially after a rather lackluster and in some quarters even sluggish 2015.
      Now in 2016, uncertainty over China finding the next big thing continues as the long predicted migration of manufacturing to the low cost labor pool areas of Southeast Asia occurs.
      Looking at the airlines, despite the apparent continued success of Gulf operators EK, EY, QR, and others—notably Turkish Airlines— a growing portion of their cargo business is a trending shift from European and Asian operators to the more sophisticated cargo products offered by these carriers.
      However, further growth in terms of new business remains a challenge as the pace of opening new gateways has also begun to gain a regular, if slightly slowed, rhythm.
      A driver affecting both ocean and air is the slowdown in China, with its growing middle-class, which now constitutes roughly the population of the entire USA.
      Chinese workers having pulled themselves up from the sweatshops, many with positions in the future of China—they are off buying Buicks and other consumer goods.   
      Enter the efforts of the Chinese government looking to farm out or even release some manufacturing to other, less advanced Asian countries.

Cambodia The Kingdom of Wonders

      A recent article in The Phom Penh Post suggests some interesting possibilities that, if realized, might bring this ancient, often overlooked country—with its burgeoning, underpaid population eager for an economic breakout—four square into manufacturing and transportation,
      But first we must back up a bit and look at the air transport industry in Cambodia, which we learn from The Post is enjoying a previously unprecedented success despite the shortcomings in the Cambodian regulatory system, a serious lack of oversight, and a legal system making operating an airline quite a daunting task.
      Cambodia has long been known as the one spot in Asia where airlines sprout like mushrooms after rainfall and vanish even faster than they have started.
      Here are only some airlines that have come and gone in Cambodia: Aero Cambodia Airlines, Air Dream, Angkor Airways, Cambodia Airlines, First Cambodia Airlines, Imtrec Airlines, Kampuchea Airlines, Mekong Airlines, Progress Multitrade Transport PMT Air, and President Airlines.
      Notably, the carrier Siem Reap Airways International (FT), a spin-off from the Thai-based Bangkok Airways (PG) with Thai-trained crews and aircraft maintained in Thailand, was doomed by the political tensions between Thailand and Cambodia. Siem Reap International shut down its operations in 2008.

      Cambodia Angkor Air (K6), owned jointly by the Cambodian government (51 percent) and Vietnam Airlines (VN), with planes leased from VN and maintained and staff trained in Vietnam, succeeded Siem Reap International.
      Apsara Air, IP, restructured in 2014 after near bankruptcy and with operations recommenced in October 2014, currently operates a lone A321.
      Cambodian and Chinese investors jointly own IP.

Some Newer Cambodian Services

      Bassaka Air, 5B, launched its maiden flight in December 2014 and currently operates two A320 between Phnom Penh and Siem Reap as well as Macao.
      Another stronghold is 5B’s connection with the Cambodian/Chinese Naga Corporation, which operates multiple casinos in Cambodia; on behalf of Naga Corporation, charter flights to the Chinese mainland fly wealthy and not-so-wealthy gamblers to Cambodia from Changsha Hunghua (CSX) and Xi’an (XIY).
      Another upstart is Cambodia Bayon Airlines (BD), which commenced service in December 2014.
      Cambodia Bayon Airlines currently serves the Cambodian domestic market and Vietnam as its sole international destination and operates flights between Phnom Penh (PNH), Siem Reap (REP), and Sihanoukville (KOS) as well to Ho Chi Minh City (formerly Saigon, SGN).
      As a wholly owned subsidiary of Chinese Joy Air (JR), BD has 10 A320-200 and another 18 MA-60 on order, slated to enter service between late 2016 and 2019.
      BD will, if their ambitious business plans come true, shake up not only the Cambodian domestic market but also gain a significant chunk of the traffic between Cambodia and neighboring Vietnam, Laos, and Myanmar.
      Founded in 2011, Sky Angkor Air (ZA) caters to the booming tourism trade with Korea, operating flights between Cambodia and Singapore (SIN), Busan (PUS), Daegu (TAE), Seoul-Incheon (ICN), and Hanoi Noi Bai (HAN) as well as operating charter flights to mainland China.

Enter The Airports

      Phnom Penh Pochentong International (PNH) has recently seen its international terminal expanded by more than half, making it one of the most attractive airports in Asia with a taxi-to-gate time of less than 45 minutes. The facilities in Siem Reap (REP), home of Cambodia’s biggest attraction, Angkor Wat, have also been upgraded and expanded to accommodate the increasing flow of tourists—as well as a small but steadily growing number of Cambodian domestic passengers—to this world wonder.
      The third airport in Cambodia dubbed “international,” Sihanoukville (KOS) has also awoken from its long dormancy, owing to a rush of European and Asian tourists flocking to some of the most beautiful Asian beaches, which are still largely untarnished and fairly empty.
      KOS was abandoned during the Khmer Rouge regime and never reopened until 2007. Services were halted again in June 2007 after the fatal crash of PMTair (U4) flight 241, and didn’t resume until late 2011. However, so far no international services are operated to and from KOS.

The Air Cargo Factor

      As The Phom Penh Post pointed out, air cargo saw a 15 percent rise to and from Cambodia, bringing the total tonnage to 38,065 metric tons according to CAMS, the operator of the Cambodian airports.
      Growing labor unrest in Cambodia’s all-important garment industry boosted these figures, The Post reported.
      It is important to point out that while garments are usually shipped by sea using Sihanoukville Port, outages caused by labor action forced a speedier means of transport, meaning air cargo carried a considerable percentage of the exports in 2015.
      Whether or not such a forced shift to the air mode indicates any sustainable growth remains to be seen, but Cathay Pacific (CX) feels confident enough in the Cambodian market to deploy freighters twice a week.
      EVA Air (BR) has withdrawn their biweekly MD11 freighter after focusing on higher yields to and from the U.S.—a strategy that might backfire, since the markets do not take kindly to carriers jumping and abandoning each wagon as they fall in and out of favor.
      Still, the booming tourism to and from Cambodia necessitates strong air transport links both internationally and domestically, and carriers like K6, BD, and 5B—backed by Chinese and Vietnamese investment capital—are in for the long haul.

Who Are The Watchdogs?

      One main issue overshadowing Cambodian aviation is the almost complete lack of regulatory oversight exercised by the government, a lack of safety regulations and the implementation of internationally accepted standards, and the biggest problem plaguing Cambodia—and its ordinary citizens—widespread, runaway corruption.
      So far Cambodia has neither a labor safety code nor a fire code, and reports about flagrant abuse by government officials are frequent.

Growth In Private Initiative

      For example, while international hotel chains adhere to the fire codes or standards applicable in their home countries, most of the guesthouses and smaller hotels all over Cambodia are unfortunately little more than firetraps.
      Still, private initiative in many cases covers what governmental regulation lacks:
      FlyingTypers spoke to Hen Leat Cheang, General Manager of the Eureka Villas Hotel, a lovely, small hostelry in the heart of Phnom Penh City, about 25-minutes from Phnom Penh International Airport. 
      The place is owned by a retired Australian firefighter who trained Hen in fire fighting and prevention techniques.
      Today Hen promotes and sells this equipment in Cambodia and conducts classes in firefighting training.
      “As the only reliable source of specialized fire-safety equipment, we see our small business as an essential that has been instrumental in saving lives throughout Cambodia,” Mr. Hen told FlyingTypers. Contact: hen@eurekavillas.com
Jens

Vol. 15 No. 35
Amazon Upstream Into Transportation
Chuckles For May 3, 2016
Taking Stock Mixes Demand
Helmut Places People
Claudio Reinvented
Long Hot Days Catching The Rays