Airborne Express

AIRBORNE EXPRESS Case Analysis

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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 1990’s 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.

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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

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volume of urgent items to other business locations It owned the airport which served as its major hub so that it doesn’t have to

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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

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be served through ground trucks. This is 67% less expensive than aircrafts. Tie ups with independent contractors for pickup and delivery services.

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This is 10% less expensive than company owned delivery. More pickups and delivery per stop than its competitors. This saves

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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

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

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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

Airborne’s Wheel of Success

3. Quantify the Airborne’s 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 FedEx’s 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

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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. Airborne’s 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, Airborne’s President and COO, do in order to strengthen the company’s position? The key strategic decisions which Robert Brazier should take to strengthen the company’s 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: Airborne’s 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

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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.

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Airborne Express

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

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Supplier Power (Low)

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Little dependent on Supplier on aircraft manufacturer

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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

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No Substitute for parcel (Goods) delivery.

Exhibit 2: SWOT Analysis of Airborne Express

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

Airborne Express

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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

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

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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