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Basic Information of Airborne Express
Case Number: 9-798-070Author: Jan W. Rivkin
Publisher: Harvard Business Publishing
Year: Feb 5, 1998
Course Category: Strategy
Case Summary of Airborne Express
1997: Airborne Express quarterly revenues up by 29%, and YTD net earnings ad increased by more than 500%. Third largest player in express mail industry. Boost from the recent strike at rival UPS. Fastest growing company in the industry, but thin margins. Federal Express had recently raised prices.• Previous year: Fed Ex and UPS launched new services and pricing schemes
o UPS moved to distance-based pricing, with prices raised on long-distance shipments, lowered on short-distance shipments. Fed Ex followed suit in 1997. Would Airborne?
The Express Mail Industry in the United States:
• Services provided include: physical shipment of packages, shipment tracking, on-time service guarantees, customs clearance expedition, warehousing services, logistics consulting services
• Customers:
o Businesses
In industries such as financial services and consulting, express mail had become the standard means of delivering docs§
o Typical shipments: business docs, electronic components, medical samples, and replacement parts.
o Customer base broadening. Portion of goods considered perishable or time-sensitive increasing over time. Acceleration in the pace of business increased express volume shipped by each customer.
o Main consideration factors when deciding whether to ship an item express mail were urgency of shipment and price
§ Carrier selection based off of relative price, carrier reliability, brand name, tracking capabilities, customer service, drop-off convenience, and/or habit. Discounts based on volume encouraged customers to focus on one carrier. However, customers tend not to be loyal when a contract expires.
• Operations:
1. Large fleet of vans and drivers. Drivers leave central depot and collect packages. At point of pick up, hand-held computer used to scan the package’s barcode and enter package data. Data transferred to central computer, which determined routing. Package scanned at each subsequent transfer points so that the company could track its progress.
2. Packages driven to airport, placed in containers, which were, in turn, placed on company-operated cargo planes. Upon landing at airport, usually around 11 pm, crew, using special equipment, unloaded plane in 20 minutes. Second crew simultaneously servicing plane in prep for outbound flight.
3. Cargo containers taken to hangar, where packages are sorted according to final destination. Labor-intensive. Once sorted, packaged placed in containers and loaded onto planes. Planes typically depart from 3 am – 4 am. Planes landed around 6 am at destination airports.
4. Packages unloaded, distributed to vans, and delivered to final destinations.
• Lower-priority packages follow slightly different route – more likely to travel by truck rather than air.
• Heavy investment in large hub facilities, air and ground fleets.
• Devoted to customer service and sophisticated information systems.
• Competition:
• Domestic Express Mail Market: 3 major players = Fed Ex, UPS, Airborne Express, serving > 85% of the market. 2nd tier players: BAX Global, DHL Worldwide Express, Emery Worldwide, Roadway Package System, TNT Express Worldwide, US Postal Service.
•
• DHL, TNT focused on international market.
o DHL offered extensive service in hard-to-reach areas of the globe. Required knowledge of customs procedures and officials to clear customs quickly. Not heavily invested in domestic capabilities.
• BAX Global, Emery focused on heavy cargo
• RPS focused on 2-day delivery via a ground network, targeting price-sensitive business customers. Known for efficient ground transport and sophisticated IT.
• Fax, email
• Compete on multiple fronts, including prices, products, and customer service
Major Competitors
• Federal Express
o 45% domestic express mail market
o History:
§ Invented the industry. Prior to founding, express deliveries flew as freight in holds of passenger planes. Frederick Smith, proposed an airline dedicated solely to express delivery of mail. Argued airlines designed to carry passengers suboptimal for carrying express mail. Any route acceptable for a package as long as it arrives on time. Hub-and-spoke routing more efficient for express mail. Packages would be collected at a single airport, sorted, and sent to their destinations.
1971, Federal Express incorporated. Target market§ focused on small packages, which were largely ignored by other air carriers. High barriers to entry: assembling fleet of jets, constructing a hub in
1983, reached $1 billion in revenue, the first company to do so within 10 years of start up, without acquisition.§
o Technology:
COSMOS, central computer system, coordinated vehicles, people, packages, routes, and weather information.§
Supertrackers used by couriers to enter in package info§
Digitally Assisted Dispatch System (DADS) directed couriers to pickup locations and uploaded info from Supertrackers to COSMOS§
§ Gave customers Powership computer terminals and shipping software to prepare shipping paperwork, streamline billing, and track shipments.
www.fedex.com§
o Marketing & Sales
Aggressive marketing led to widely recognized mottoes§
High advertising expenditures + sales reps + money-back guarantee§
o People & Culture
§ “People, Service, Profit…When people are placed first, they will provide the highest possible service, and profits will follow.”
Promoted from within. No layoffs policy. Cross-trained employees and cultivated a large part-time workforce.§
Extensive employee-training programs§
Employees given wide latitude to make decisions on their own. Expected to take risks and resolve problems on own.§
Emphasis on communication.§
• FXTV broadcast daily company news, weather conditions, competition info, etc.
§ Formal compensation system. Managers’ incentive pay based on performance against negotiated objectives, employee satisfaction playing a significant role. Hourly workers were also eligible for bonuses.
o International Ventures
1985, Fred Smith’s vision§ of global delivery of express mail. However, expensive. 1992, overseas operating losses topped $600 million, so company scaled back. Relied on partner companies to complete deliveries.
• United Parcel Service (UPS)
o Largest package delivery company in the world, but most volume not express mail, traveled via ground network.
o History
Founded in 1907 as a messenger service. Repositioned itself as the delivery arm of major department stores.§
§ 1950s: automobile ownership widespread, retail stores moved to suburbs. Repositioned again around “common carrier” service to deliver parcels in general, not just department store deliveries, by truck. Only reached goal of complete national coverage in 1980s, due to legal and regulatory battles to deliver within and between states. 1953, coupled ground network with cargo services of major airlines to offer two-day delivery service.
1981, purchases first aircrafts. 1987, took direct control of all air operations.§
§ USPS viewed as main rival. Focused on reducing costs since rates were highly regulated. Charged single price to all customers. Saved money by picking up at company’s convenience and not investing in collecting info (could not track packages easily).
Late 1980s/early 1990s,§ refocused around customer service and invested in aircrafts, sorting infrastructure, and technology, in order to compete with Fed Ex. Radically and successfully restructured.
o Operations:
Hub in
Speculated that UPS’ sorting and routing facilities were highly automated and employed the latest technology.§
Single fleet of trucks handled pickup and delivery of all UPS shipments.§
o Technology:
§ determined to match Fed Ex’s information collection capabilities, invested $3 billion in advanced technology between 1990 and 1995. Resulted in ability to track packages efficiently, deliver electronic proof of delivery, and offer money-back guarantee of on-time delivery.
Internet site rivaled Fed Ex’s§
o Marketing & Sales:
No marketing department before 1980, with little to no advertising§
1996, spent 80% more on media than Fed Ex§
o People & Culture:
§ “owned by managers and managed by owners;” privately owned, with stock issued to company managers, and, as of 1995, nonmanagement employees as well.
Promote from within§
The Policy Book, emphasized management by consensus and an ethic of humility§
High wages kept labor-management relationships good.§
• 1997, drivers among best paid, largely in part to union involvement. 16-day labor strike flooded competitors business. Resolution favored labor, with an increase in full-time positions, as well as full-time and part-time wages over a five-year period. Ramifications of strike included $700 million in lost revenue and poor reputation for absolute reliable delivery.
o International Operations:
Invested heavily in developing global distribution network, and, even with high operating losses, seemed committed.§
Airborne Express:
• Often overlooked, but growing faster than competitors in mid-1990s, with 16% of domestic express mail market in 1997.
• History:
o 1968, The Airborne Flower Traffic Association of California (shipped fresh flowers from Hawaii to mainland) and Pacific Air Freight (delivered perishables to/from Alaska) merged to form Airborne Freight Corporation. Prior to Fed Ex, most successful in express mail industry.
o Target: business customer that regularly shipped a large volume of urgent items, primarily to other business locations. Example: Xerox
• Operations:
o Owned airport that served a major hub. Did not pay landing fees and no obstacles to tailoring the facility to its needs. However, did need to maintain airport itself, and did not share expenses with other airlines.
o Leased warehouse space on airport property (Fed Ex and UPS offered warehousing options as well, bot not onsite at airport)
o Sorting operations less automated, more human labor-intensive.
Unions represented app. Half of workforce, including all pilots.§
o Fleets consisted primarily of used aircraft, built in 1960s and 1970s. Patented cargo containers did not require cargo door. Aircraft run app. 80% full (vs. competitors 65-70%). Costs of flight did not vary by amount of cargo carried.
o Shippers and recipients concentrated in metropolitan areas.
o Greater portion of volume = afternoon and second-day deliveries, so could use trucks more than competitors (30% volume never on plane, vs Fed Ex’s 15%).. Cost of a truck 1/3 that of aircraft.
o Unlike competitors, did not maintain retail service centers and owned/operated only a portion of its delivery vans.
Independent contractors 60-65% volume, and 10% less expensive than company-owned pick up and delivery.§
• Technology:
o Invested selectively. Let competitors test innovations and introduced themselves if clear benefit derived.
o Freight On-Line Control and Update System (FOCUS) comparable to Fed Ex’s COSMOS
o Offered high-volume shippers software which tied directly into FOCUS, allowing customers to track packages and to submit shipping info themselves as opposed to engaging service agents.
o Website not as comprehensive as competitors
• Marketing & Sales:
o Did not advertise in mass media. Targeted logistics managers of major shippers via sales force.
o Known for low prices
o Mid-1990s, “the flexible, solution-oriented express carrier” with an ability to tailor its services to needs of large business customers. However, Fed Ex and UPS offered 8 am service to any customer for a surcharge, as well as claimed to be able to tailor services to customer needs too.
• People & Culture:
o Humility
• International Operations:
o More modest than Fed Ex and UPS.
o Used commercial airlines and local partners to complete shipments
• RPS Relationship
o RPS targeted the ground transport needs of large-volume business customers, whittling at UPS customer base. Offered low prices, superior info and tracking capabilities. Tried to intro air operations, but folded after large losses.
o Companies’ physical distribution systems remained separate. Cooperation in marketing process and sharing of shipment info. However, hinted at a closer alliance.
Airborne’s Future:
• Postal Service had performed well during UPS strike and success seemed to reawaken its ambitions. Planned major advertising blitz to promote express services. Petitioning government to grant volume discounts.
• UPS was expected to make play to recoup volume.
• UPS strike had shaken customers loyalty to a single company for shipping needs.
Case Analysis of Airborne Express
1. How and why has the structure of the express mail industry evolved in recent years? How have the changes affected small competitors? How has the rivalry between FedEx and UPS impacted them and the rest of the industry?Business and individuals spent $16-17 billion on express mail within the US in 1996. Shipment volumes had risen 15-20% per year for a decade. Services had proliferated by delivery time. Service is not limited to physical delivery. It also includes warehouseing services and logistics consulting services.
Express Mail Industry:
1. 16-17 billion on expedited shipments in US in 1996.
2. Shipment volumes had risen 15-20% per year for a decade.
3. Services had proliferated by delivery time.
4. Service is not limited to physical delivery. It also includes tracking services, warehouseing services, logistics consulting services and expedited customs clearance for international shipments.
5. Shipping companies competed on the basis of time-to-market, eg. Increased volume shipped by and to each customer.
6. Customers’ concern when choose a shipping service includes price, reliability, brand name, access to tracking, customer service, convenience of drop-off, and sheer habit.
7. Shipping companies owns vans, drivers, and aircrafts. They have hub airports. They employ the advanced logistic technology.
8. FedEx, UPS and Airborne were the Big Three in the industry, together served more than 85% of the market.
9. Invested in global distribution system.
10. Originally set one price for every customer, evolved into distance pricing (ie. Lower prices for shorter distance deliveries)
Different company target different markets. To survive, small company must find their differentiation in the industry (ie. DHL specialized in international shipping; RPS specialized in ground transport 2 day deliveries).
FedEx: overnight delivery; cutting-edge information and logistic technology; Hubs; customer self help; aggressive marketing strategy; no layoff policy; great customer services; employee’s wide latitude of decision making; incentive pay; employ both part time and full time; international expansion.
UPS: ground services; largest delivery company in the world; followed FedEx to purchase their own aircraft; started to advertising; stock owned by managers and not for public trade; employ both part time and full time; international operation.
“Parcel Wars” – Fedex and UPS copied and tried to beat each other in pricing, products and services. When one lowered prices, the other followed and created some other promotion to outdo the offer.
As a result, small companies need to find their specialty in the market. They will also have employ advanced technology and logistic system and provide great/special customer services.
2. How has Airborne survived, and recently prospered, in this industry?
Airborne targeted the business customer that regularly shipped a large volume of urgent items, primarily to other business locations (mainly 50 metroplitans). They were known for their low prices. They cut cost in many ways: having their own airport; leasing warehouse space to customers; hiring part-time employee; purchasing used aircrafts; load more per flight than rivals; no retail service center; using independent contractors; a little bit late delivery time; no advertising; picking the technology after FedEx and UPS tested. They provided flexible, solution oriented service to customers.
3. Quantify Airborne’s sources of advantage.
• Part-time salary is 7/hour, compared to FedEx’s 8/hour.
• Run aircraft 80% full, compared to typically 65-70%.
• 80-85% of the volume was shipped to 50 metropolitan, compared to FedEx’s 60%
• 30% of the volume was not shipped by airplanes, compared to FedEx’s 15%.
• The cost of a running a truck is 1/3 of the cost of owning and operating a similar amount of aircraft capacity.
• Use of independent contractors accounted for 60-65% of volume – using contractors cost them 10% less than doing work themselves.
• No advertising cost.
• Drivers picked up more parcels than Fedex resulting in lower labor costs per unit by 20% for pickup and 10% for delivery.
• Besides, owning their own airport would a big advantage in control and operating cost.
4. What must Robert Brazier, Airborne’s President and COO, do in order to strengthen the company’s position? Provider recommendations that will strengthen Airborne’s position in this industry.
Evidently, Airborne needs to employee advanced technology and explore the global business. Robert Brazier needs to make sure that Airborne will still hold their advantages in the global business.
5. In retrospect, we know that Airborne’s position was not sustainable and the company was acquired by DHL. What were early clues about the lack of Airborne’s sustainability? Will the DHL/Airborne combination be an effective competitior against FedEx and UPS?
One early clue – less efficient that Fedex/UPS in on-time deliveries. Should have invested more in technology. Lack of global vision/awareness. Inability to adapt to market – 80% of volume delivered to major metropolitan areas, not servicing ALL customers. Did not take full advantage of opportunity with RPS deal – kept arms length deal. Should have leveraged relationship to increase technology and cust base to gain market share. The DHL/Airborne combination could be an effective competitor again FedEx and UPS, although they have their own specialty and targeting markets. DHL does well in the international market, but its domestic business is not strong. Airborne and DHL could be a strong plus to each other.
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