AIRBORNE EXPRESS

Case Analysis

Airborne Express

1. How and why has the express mail industry structure evolved in
recent years? How have the changes affected small competitors?
Evolution of Express Mail Industry Structure
Express mail industry saw radical shift due to major carriers competing on multiple
fronts for market share. Express mail industry evolved deliveries through passenger
airplanes to specialized cargo flights. Federal Express (FedEx) created new market
for express mail by overnight delivery. Early 1990s saw parcel war between
Federal Express (FedEx) & United Parcel Service (UPS). Competition within the
industry was not only on price but included innovation for Speedy transport,
Customer service, Brand creation.
Major Players: By 1997, US Domestic express mail market consisted of three
major firms namely Federal Express (FedEx), United Parcel Service (UPS) and
Airborne Express, together served more than 85% of market. While there were Six
Second Tier Player BAX Global, DHL Worldwide Express, Emery Worldwide,
Roadway Package (RPS), TNT Express Worldwide and U.S. Postal Service.
Costumers Requirement:
1 Virtually every business & many individuals used express delivery service to
ship their most urgent documents and parcels Urgency of shipment and price
played dominant role in decision to ship by express mail rather than normal
delivery.
2 Relative price, reliability of carrier, access to tracking and other information,
customer service, the convenience of drop-off and sheer habit decided the
selection of carrier.
3 In financial services and consulting express mail had become the standard
means of delivering documents.
4 Perishable goods or time sensitive had increased over time which drive
companies to compete on the basis of time-to-market.
5 While the business of express mail service was volume driven, low switching
cost for customers, they had the more negotiating power. Discounts from
price list of 50% was common.
Operation of Express mail:
1 5 million packages were delivered by three dominant players with 98% of on
time arrival rate.
2 Information Technology enabled carrier for tracking, documentation,
segregating ease to carry business faster.
3 Each company maintained a large fleet of vans and driven.
4 Hub & Spoke model was used to deliver the packages.
5 Package were driven to airport, placed containers which further loaded in
cargo planes.
Containers were brought to hub. Packages were sorted
according to final destination with the rate of 60 packages per minute and
dispatched.
6 Packages with highest priority were delivered by 8:00 am to noon while lower
priority packages were delivered second day as they followed the different
route usually by road.
7 Companies even focused on customer service which handled hundreds of
thousands of queries daily.

Airborne Express
Substitutes:
Technological advancement has created more substitutes for transferring data
and reduced documentation like Fax, Email, Telex, etc. which has delivered in
zero time & at zero cost. However there is no substitute for transferring physical
goods.
Effects on small competitors
1 Highly Consolidated (Oligopoly) market in US has dried out small competitors.
2 Huge investment in infrastructure created Barriers to Entry.
3 Technology was creating new substitutes for documentation courier service.
4 Costumers look for relative price, reliability of carrier, Brand name, access to
tracking and other information, customer service, the convenience of drop-off
and sheer habit decided the selection of carrier which made more difficult to
survive for small competitor.
5 Postal services had monopoly in first class letters where they maintained high
prices.
6 DHL & TNT focused on international Market, While BAX Global & Emery
focused on heavy cargo and RPS focused on two-day delivery via ground
network targeting price sensitivity customers.

2. How has Airborne survived, and recently prospered, in its

industry?
The key factors which contributed in the survival and prosperity of Airborne Express
are as follows:

Airborne concentrated on the business customers who regularly shipped large

volume of urgent items to other business locations

It owned the airport which served as its major hub so that it doesnt have to

pay landing fees and can customize the operations to the customer needs
It successfully carried out warehouse operation in airport itself.
It proved to be a cost leader in the industry due to its cost cutting operations
in various aspects.
o It purchases used aircrafts and customizes it for carrying containers.
o It invests less in Research and Development.
o Highest aircraft utilization in the industry (80%).
o It concentrates more on afternoon and second day deliveries which can

be served through ground trucks. This is 67% less expensive than

aircrafts.
Tie ups with independent contractors for pickup and delivery services.

This is 10% less expensive than company owned delivery.

More pickups and delivery per stop than its competitors. This saves

20% cost incurred in pickup and 10% in delivery.

Spends very less in advertising and boosts its sales mainly through
strong sales force which establishes personal relationship

Airborne Express

It maintained its service flexible and solution oriented with an ability to

customize its services for large business customers e.g. Xerox, Nike, Compaq
and Technicolor.
The work culture of the company was very conservative and it reflected
humility in all its operations.

Cost
Leadersh
ip
Focus on
Business
Customers

Airbornes Wheel of Success

3. Quantify the Airbornes source of Competitive Advantage?

The industry structure is characterized by high variable costs and relatively low
fixed costs. Reducing cost is the only way to gain competitive advantage in the
industry. Following are the various elements in value chain of Airborne Express:
1. Marketing and sales force
2. Inbound logistics
3. Sorting operations
4. Package shipping
5. Delivery services
Airborne Express did not advertise. They relied heavily on personal selling and sales
promotion. Their target group was clearly identified as logistics managers of major
shippers. Their target was to grab contracts of big B2B customers by providing
customized services. Though Airborne was successful in getting the Xerox account
for delivery before 8 AM, they lost this competitive advantage in 1990s as UPS and
FedEx were able to provide this service for any customer for a surcharge.
Airborne invested selectively in technology. They used a wait-and-watch policy and
adopted an Information System only when it was successful for its competitors. Its
system FOCUS was loosely modelled on FedExs COSMOS. FOCUS was highly
customer friendly and convenient to Airborne at the same time. They also focused
on call-center automation more than FedEx or UPS. However they lagged behind

Airborne Express
their competitors FedEx and UPS on the fact their website did not have facilities for
scheduling pick up and creating shipping paperwork.
Airborne used its own airport which eliminated its cost of landing fee and gave it
considerable flexibility to tailor the facility. However this increased it maintenance
cost. Airborne purchased only second hand aircrafts which reduced purchase cost
compared to UPS and FedEx. But the aircraft purchases should be made considering
the demand and capacity requirements as purchase cost had a high percentage of
total costs in 1996. Its warehouse leasing options gave it an edge over its
competitors in building relationships with small time retailers. It can be seen that
airborne express has the highest utilization rate of its resources among its
competitors. (Refer Exhibit 5) Airborne also manages to run its aircraft 80 % full in
comparison with 60-70% of its competitors. Also the majority portion (65% approx.)
of ground vehicles of airborne express was outsourced to contractors which cost
10% less. Airbornes labor cost reduction was attributed to the fact that it picked up
and delivered more parcels per stop than FedEx and UPS. The sorting operations
were manually done and less automated than its competitors. Also as labor force
was non-unionized labor costs were less.
Airborne focused on reducing costs of salaries and expenses. Even top management
did not hire secretaries.

4. What must Robert Brazier, Airbornes President and COO, do in

order to strengthen the companys position?
The key strategic decisions which Robert Brazier should take to strengthen the
companys position are:
1. Adopting distance-based pricing: Airborne is perceived to be flexible and
solution oriented. Not implementing distance-based pricing can dilute their
brand image and will also result in losing clients, especially smaller business
clients, to the competitors. So, the distance-based pricing system should be
adopted to maintain pace with the competitors and retain market share.
2. International operations: Airbornes investment in international operations is
very less as compared to the competitors. Considering the current business
model of Airborne Express more investment in international operations is not
recommended. Exhibit 4 in the case shows that FedEx incurred losses in its
international operations for the first seven years before making profit in 1995.
Although, Airborne may go for tie-up with international carriers or logistics
partners to explore that market.
3. RPS alliance: RPS caters ground transport need of large-volume business
customers and Airborne is a major player in the express mail business. RPS
alliance will provide an integrated pickup and delivery system and enable
Airborne Express to improve its ground network.
4. Airborne should also focus on SMEs as business clients which have lesser
volume than big companies like Xerox. A strong tie up with RPS and a more

Airborne Express
customer friendly website, with tracking and scheduling functionality, will
help them to achieve this. It will help them to compete with FedEx and UPS.

Airborne Express

APPENDIX
Exhibit 1: Porters Five Forces Analysis of Express Mail Industry
Threat of new Entrants (Low)
Oligopoly (Consolidated Industry)
Barrier to Entry
Huge Investment

Supplier Power (Low)

Little dependent on Supplier on

aircraft manufacturer

Many Automobile manufacturer

High Technological Innovation

Low Margin

Buyer Power (High)

Within Industry (High)

Huge Fleet, man power
requirement
Dependent on Fuel Cost
Similar Service
Low Margins
High Replication of Innovation

Substitute (Low)
E mail ,Telex, Fax for Document
courier service as almost Zero
time at Zero Cost

No Substitute for parcel (Goods)

delivery.

Exhibit 2: SWOT Analysis of Airborne Express

Many suppliers
Low product differentiation
Low switching cost
Price sensitivity
Volume based discount

Airborne Express

Weaknesses
1. Less automation
2. Less tech savy
3. Lack of aggressive approach
4. Lower contribution from express
mail
5. Lesser service offerings compared
to competitors
6. On time delivery was realtively
lower than their competitors

Strengths
1. Focus on large scale business
customers
2. Intensive cost cutting - used
planes, 3rd party logistics, more
trucks, less sophisticated office
3. Stock exchange warehouses
4. Patented cargo containers and
customization
5. 80% utilization of aircrafts
6. Low prices

SWO
T

Threats
1. 8:00 AM deliveries by competitors
2. More service offerings by
competitors
3. US Postal service as a potential
competitor
4. Saturation of industry
5. Lack of customer loyalty

Oppurtunities
1. 17 billion dollar industry
2. Increase in customer base
3. Diversity in the products being
shipped
4. Increase in shipment volumes
5. Projected growth of 10 % in
volumes for the next 5 to 10 years

Exhibit 3: Market share of various companies in express mail industry

Airborne Express

15%

15%

45%

25%

FedEx

UPS

Airborne

Others

Exhibit 4: Operating Margin of the Big Three

Operating Margin
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%

FedEx

UPS

Airborne

Exhibit 5: Calculation of efficiency of various resources for UPS, FedEx and Airborne

Airborne Express

9
Firm
UPS
Airbor
ne
FedEx

Emplo
yee
336000

Plan
e
500

20700

Vehic
le
16000
0
13300

129000

38000

600

175

Packa
ges
12000
00
90000
0
28000
00

R1 = packages delivered per employee

R2 = packages delivered per ground vehicle
R3 = packages delivered per ground aeroplane
All calculations have been made for year 1996

R1

R2

R3

3.57

7.50

43.48

67.67

21.71

73.68

2400.0
0
5142.8
6
4666.6
7