Airborne Express Case Q&A

Info other than Case Airborne Express is acquired by DHL in 2003

DHL retained ownership of Airborne's ground operations and spun off its air operations as

ABX Air, Inc.

Currently DHL is the number 1 delivery service company.(2nd is Fed Ex and 3rd is Blue Dart) Airborne Express Case Q&A 1. Consider the structure of the Express Mail industry in the US and how it has evolved. Why has it evolved this way?

2nd heading is about Express Mail Industry in US (in case study given)

In 1996 shipments was $16-17b Company.

Quick on-time physical delivery was coming

Use of technology was changing the game like routing

Tracking of shipment was a new service offered

Customer service was improving

2. What is Airborne’s strategy? How has it positioned itself in the industry? How is it different from FedEx or UPS?

Targeted business customer that regularly shipped large volumes of urgent items like

Xerox (Position)

Never advertised much publically, instead focused on larger shipping companies

Sales force was given good freedom to negotiate volume discounts.

It positioned themselves as low price service.

They owned airports which served as its major hub to reduce the operational cost

Selective in technology selection. Wanted others to use it first.

3. How does Airborne deliver value to its customers?

High-quality, reliable service

Company offers a variety of flexible delivery options and products

Prices are generally lower than those of competitors

Proprietary communications technology increases delivery speed and reliability

4. How has Airborne done financially with its chosen strategy?

Revenue per shipment went down – from $19.37 to $8.25 (From 1985 to 1996)

Rounds per shipments went down

Revenue grew from $542m to $2484 (operating margin was low till 1996)

Return on equity was down

More details on financial is given in summary below

5. What exactly is Airborne’s competitive advantage? Can we quantify the advantage?

o It’s advantage was its fleet and airport

o Proprietary communications technology increases delivery speed and reliability

o Airborne was known for high-quality, reliable service

o Company offered a variety of flexible delivery options and products

o Prices were generally lower than those of competitors

6. Is Airborne’s competitive advantage sustainable?

o Use of airport and other assets was not efficient

o With better technologies available in market it’s proprietary communication tech was not going to give any sustainable competitive advantage.

o Competitors were matching quality and reliable services so it was not a sustainable competitive advantage.

7. What strategic options does Airborne have? Which one do you recommend?

Merger with DHL promises to increase scope of international marketing and operations

Growth of e-commerce and shorter product development cycles may generate increased need for express delivery services

Value-added services (supply chain management, inventory control, etc.) may become

most profitable segment

Airborne may be able to target niche markets not currently served by UPS and FedEx

8. Should Airborne Express switch to distance-based pricing to match its competitors?

Case Analysis: Airborne Express (a), Harvard Business School.

Case Analysis: Airborne Express (A), Harvard Business School.

Not so long ago, there was no such thing as overnight express service and freight delivery. Then Federal Express, United Postal Service (UPS) and Airborne Express, among six second-tier

companies, came upon the scene. In 1973, Federal Express invented the concept of overnight express package, soon followed by the other two largest express companies–UPS and Airborne,

during the 1980s. The fast growth of the Express Mail industry was mainly due to the success of the express delivery service. Thanks to Frederick Smith, a Yale undergraduate back in 1965, who had envisioned a whole different system on his economics term paper. Smith proposed an airline

dedicated exclusively to express delivery of mail. Regardless of a “C” grade received on his

paper, Smith incorporated Federal Express in 1971and officially began operations on April 17, 1973.

Some of the features in the evolution of the Express Mail Industry includes but is not limited to

the creation of the hub system and air express service. Created by Federal Express, the hub system is the symbol of the modern air courier industry. It made possible the large-scale,

overnight deliveries and it has remained the standard operating method in use to this day. This system allows air courier industry to ship all freight to the company’s central hub, where it is sorted, and rerouted to its final destination. Also under consideration, the air express service

played an important role in the evolution of the Express Mail Industry. FedEx is the pioneer in assembling a fleet of executive jets and modifying them to carry cargo. Integrators such as

Airborne have dominated this particular service by owning the airport that served as its major hub, and as a result, it did not have pay lending fee.

In analyzing the Express Mail Industry structure using Porter’s Five Forces Model we can see

the efficiency of this model and how it shaped this industry. The five forces: Intern Rivalry, Buyers, Suppliers, New Entrants and Substitutes are factors within Porter’s model that intensify or weaken rivalry among direct competitors in an industry. For instance, Intern Rivalry played a

fierce competition among competing service providers in the Express Mail Industry. Major carriers competed by constantly cutting prices, in order to secure their market share, and by

offering customer support, matching each other’s innovations. Airborne was known for its low prices. It offered the lowest price of overnight, morning, afternoon and second-day delivery compared to FedEx and UPS, as presented on exhibit 8: List Prices of Express Mail Carriers, on

page 21.

Another significant force, Buyer Bargaining Power, also played a fierce competition to provide delivery services for large corporations and companies. For example, Airborne Express targeted

its business customer, such as Xerox, that regularly shipped a large volume of urgent items and needed early arrival of its package. By customizing a service for each Xerox package, with a barcode scanner that emits a special beep when scanned, Airborne could make Xerox delivery as

early as 8 AM, thus developing a special relationship and winning Xerox account in 1988. Equally important, Supplier Bargaining Power, in this case service suppliers, particularly airport,

aircraft and truck and maintenance, and airport services have strong bargaining power. Taking the example of Airborne, the company reduced some of the bargaining power of maintenance providers by owning the airport and not having to pay landing fees.

Additionally, New Entrants, such as UPS and Airborne, were potential entrants to the market at a

significant scale. In order to compete with the largest Express Mail Industries, Airborne had to overcome its publicity disadvantage compared to FedEx and UPS. Moreover, existing rival’s

brand name, experience, relations and technology gave the new entrant Airborne, a hard time establishing such coincidence. Last, but certainly not least, Substitutes, did not seem to produce a potential threat to the transportation in the Express Mail Industry. The combination of Roadway

Package System (RPS) on the ground made possible for Airborne to adopt the one-stop shopping technique. The three rivals ensured their market share with this technique and continued to make

money by transporting packages from one place to another. However, up to this day and every time more people are making use of internet as a substitute for overnight document delivery. The

advantages of online forms, emails, digitalization of documents and digital signatures are welcomed by many organizations and firms, which can save money and time.

Likewise, UPS and Airborne survived the competition in an industry with significant economies

of scale. Even though Airborne is smaller than the two 900-pound gorillas, and that is FedEx and UPS, the evolution of its industry allowed the third largest player to prosper. Despite their

similarities, each rival in the Express Mail Industry developed its own and distinct business strategies. For instance, FedEx customers are widely aware that the industry is the first company that introduced an electronic shipping solution to the market. The firm prided itself on its cutting-

edge information and logistics technology. On the contrary, Airborne did not introduce new technology and in fact, used their competitors as guinea pigs. Nevertheless, UPS had made a

determined effort to match Federal Express’s information technology expertise, investing $3 billion in advanced technology and closing most of the technology gap by 1997.

Among the strategies used by the three largest Express Mail Industries, Airborne had generic

competitive strategy advantage as a low cost provider. The firm offered lower overall costs than rivals on express mail that attracted particular large business customers. By using this strategy, Airborne placed itself in the best position to win the business of price-sensitive service buyers.

Nonetheless, FedEx won the competitive battle of customer’s loyalty to its brand by making use of core strategies and bonding customers to the differentiating features of the industry’s product

offering. The strategy used by UPS, focused more on large packages on contrary of the other two. FedEx and UPS had a fierce competition in the early 1900s, indicated by industries observers as a bloody “parcel war.” Each company not only matched the other’s price, but also

the other’s innovation.

Some key areas and elements used in the Express Mail industry include but are not limited to price, where for the first time, affordable prices made possible for business to make a large use

of overnight shipping packages. Also includes product, where a variety of select packages fulfilled most business needs and lastly includes services, where overnight express delivery became largely used, virtually by every business, and had become the standard means of

delivering documents.

The Compound Annual Growth Rate of revenues for the period of 1986 to 1996 for FedEx, UPS and Airborne are successively 14.85%, 10.00% and 16.44%. After analyzing the CAGR of

revenues for each of the three firms, Airborne had a higher CAGR at the end of the investment period, followed by FedEx and lastly UPS. On this basis, one would conclude that Airborne is doing well and in fact might be gaining market share. The Compound Annual Growth Rate of

Net Income for the three firms at the same period of time is FedEx: 8.84%, UPS: 5.53% and Airborne: 7.58%. In this case FedEx had a higher CAGR of Net Income followed by Airborne

and lastly UPS.

The Return on Equity for the three firms (FedEx, UPS and Airborne) for the same period of time is successively 94.30%, 237.90% and 98.20%. In this case, UPS had a higher ROE rate followed by Airborne and lastly FedEx. This means that UPS is making a better use of the money

shareholders invested in it. The last financial analysis and that is Profit Margins, for the three firms only for the year 1996 is FedEx: 3.00%, UPS: 5.12% and Airborne: 1.09%. Once more

UPS had a higher rate and at this time, a higher ratio of profitability. Comparing the three firms in the same industry, UPS had a higher Profit Margin in 1996 which indicates a more profitable

company that has better control over its costs compared its competitors.

As noted, UPS’S profitability rate is without a doubt higher than its rivals and revealed how much profit the company generated with the money shareholders have invested. For the most

part, a company that has a higher ROE is more likely to be one that is capable of generating cash internally. Airborne had a second higher ROE but its Profit Margin had a lowest rate among the three. This shows that Airborne is the one who is keeping less money per dollar of sales in its

earnings. The recommendation for Airborne is to pay a closer look to its cost impeding cost to increase at a greater rate than sales.

On the whole, the Express Mail Industry will certainly take a new turn in the near future. The

world had become a very small place for this industry and its better defined by its time zones rather than its distance. It is possible that some very large merges will surge and divide Express

Mail Industry market on larger shares and most likely FedEx and UPS will keep it strong.