AEO's Acquisition of AirTerra Melds Separate Parcel Delivery Visions

It took about 10 years for logistics industry veteran Brent Beabout to develop the concept behind AirTerra Inc., a Seattle-based parcel-delivery company that he founded in August 2020. But it took just 10 months in business for AirTerra to be acquired, and the company was taken out before it ever moved a package.

The unusual chain of events has a history behind it. Several years ago, Beabout (pictured) and Shekar Natarajan, chief supply chain officer of Pittsburgh-based retailer AEO Inc. AEO, formerly American Eagle Outfitters, held high-level logistics positions at Walmart Inc.'s WMT e-commerce division. At the time, Beabout was conjuring up a twist on a traditional parcel shipping model known as zone-skipping.

Under zone skipping, parcel shippers that individually lack the volumes to justify a truckload move can combine their traffic for truckload hauls ranging between 600 and 2,000 miles. By avoiding zone-based pricing on the so-called middle mile, the longest leg in the move, shippers can save significant sums by just paying for their part of the truckload service and the final-mile delivery once the goods are consolidated.

The trick is having enough goods to warrant the expense of the middle-mile service. Beabout reckoned that many retailers in the $1 billion to $5 billion annual revenue range fell short of doing that except for perhaps their peak season. Beabout began building a year-round zone skip program aimed at the small to midsize retailer segment. AirTerra would also track shipments as it moved through the middle mile, where generally the merchant and consumer have no visibility on the move.

Both executives eventually left Walmart, with Beabout heading to retailer Nordstrom Inc. JWN and Natarajan to AEO. What then happened in May 2021 was a bolt from the blue. Supported by AEO CEO Jay Schottenstein, considered one of the more able and visionary retailer bosses, Natarajan pitched the idea to Beabout of AEO buying AirTerra and establishing it as an independent entity to support AEO's supply chain and provide logistics services to other retailers, many of which compete with AEO. Beabout accepted the offer, the terms of which were not disclosed. In late July, AirTerra went live.

Today, AirTerra provides zone-skipping services to retailers that in the past would have used FedEx Corp. FDX or UPS Inc. UPS for such moves. On the eastbound leg, AirTerra consolidates parcels for multiple retailers at its fulfillment center outside Los Angeles. A two-man truckload sleeper team then hauls the parcels directly to AirTerra's East Coast facility in Hazleton, Pennsylvania, about 30 miles from Scranton. From there, the parcels are turned over to various carriers for last-mile deliveries. Deliveries from Los Angeles to Newark, N.J. are typically executed in 4 to 6 days depending on the service. A similar westbound service is provided as well, AirTerra said.

AirTerra doesn't impose surcharges other than what it will assess during the upcoming peak delivery season, Beabout added. Beabout said AirTerra is not accepting any more business during peak, saying that business since the company's launch has been "overwhelming."

Beabout said that his twofold objective is to build the first virtual network linking regional parcel carriers, final-mile providers, and the U.S. Postal Service, and to level the playing field for smaller retailers by giving them cost-effective parcel delivery options to FedEx and UPS. 

From AEO's perspective, the transaction is significant because it gives the company greater control over its supply chain and allows rivals to leverage their resources to offer cross-country parcel distribution to their customers. AEO did not comment on the operation's ramifications in an emailed statement to FreightWaves. The resource-sharing approach is seen as another in what is expected to be many initiatives by parcel users to diversify their carrier options. 

It also comes in the wake of decisions by Costco Wholesale Corp. COST, Walmart, and Home Depot Inc. HD to lease container vessels in an effort to ensure their goods get to market in a timely fashion amid unprecedented bottlenecks in the ocean freight supply chain.

Many parcel shippers are dissatisfied with the rising prices and erratic reliability of the mega carriers. However, Beabout said that issue was not a primary driver in AEO's decision to buy his company.

Richard Metzler, CEO of regional parcel delivery firm LSO, which serves all of Texas in its 10-state network, said there is "definitely a market" for AirTerra's model. "There have been quite a few companies that wanted to use us but could not make the zone-skip economics work," Metzler said. "We have not done anything with (AirTerra) yet but would be open to referring smaller e-commerce companies to them under the right terms."

Unlike FedEx and UPS, whose hub-and-spoke services require intermediate stops and shipment transfers at their respective hubs in Memphis, Tennessee, and Louisville, Kentucky, AirTerra's point-to-point service doesn't stop until Hazleton, said Bill Besselman, AirTerra's chief commercial officer. The FedEx and UPS stops would add a half-day to transit times, while the potential for snafus at those points could add as much as one to two days to the delivery schedule, Besselman said. Shipment variability "is the real killer," he said in an email.

Currently, AirTerra serves about 60% of the U.S. population. However, Beabout said the company plans to expand its footprint in the coming months by adding more distribution centers. It also plans to roll out a last-mile service, called FastPost, which would replace a former FedEx service that was known as SmartPost. Under that service, FedEx would induct parcels deep into the Postal Service's delivery network for final-mile services to residences. FedEx took all of the former postal business in-house earlier this year.

Image Sourced from Pixabay