Airborne

Express
Study Group XX:

www.london.edu
Executive summary

1 • Airborne’s performance can be explained by macroeconomic, industry and

strategic factors:
- Healthy economy
- High-growth, low-margin industry
- Competitive advantages on cost

2 • Airborne can strengthen its strategic positioning by:

- Maintaining current tariff schemes
- Implementing a strategic partnership with RPS
- Implement a strategic partnership for international operations with DHL

2
1 Airborne’s performance can be explained by
macroeconomic, industry and strategic factors
Revenue growth Airborne’s Performance
1997, % • Fastest growing company in the express mail sector,
with a 14% CAGR from 1992 to 1996 and 16% in 1997
• Operating margin is expected to reach an historic high
7.9% by EOY 1997
• In 1997 had a slight competitive disadvantage in the
express mail industry (as measured by ROE), yet it
showed strong annual growth
Economy
Economy Express Mail Airborne Airborne • GDP growth only accounts for one-third of Airborne’s growth
Industry Competitive Firm
Attractiveness1 Advantage Performance2
• Most of Airborne’s ROE can be explained by strong
performance of the US economy
Express Mail Industry
Return on Equity • The industry has significantly outgrown the economy,
1997, % thanks to a 15-20% increase in volume
• Industry margins are in line with the economy average
due to a 5-10% decline in prices
-1.5
Business Strategy
• Airborne’s low cost strategy and value proposition have
resulted in high growth and tight margins
Additional factors
• The 1997 UPS strike boosted Airborne’s earnings by as
Economy Express Mail Airborne Airborne much as 20%
Industry Competitive Firm • Rise in competitors’ prices have contributed to a recent
Attractiveness3 Advantage Performance increase in industry margins

1 Average of 1996 revenue growth weighted by share of express mail volume of FedEx, UPS and Airborne Express (1997); 2 Projected considering lineal revenues 3
for Q4 1997; 3 Average of ROE weighted by share of express mail volume of FedEx, UPS and Airborne Express
1 The Express Mail industry has grown at 10-15%
since 1986, but margins have narrowed
Express mail industry Volume Margin Average price
Five forces analysis No threat High threat Yearly parcels Average UPS, USD/parcel
(billion) FedEx, Airborne
Margin Volume Price
Threat of new entrants Customer power
• High upfront investments to • Very price-sensitive buyers
build a distribution network • For business customers,
(e.g. aircraft, ground bargaining power is high
transport, hubs, etc.)
• Switching costs from one
• Economies of scale are key provider to another are
in this industry almost non-existent
• Need to set up a very Industry rivalry
capillary network • Powerful 1986 88 90 92 94 96
competitors
• Significant exit • The express mail industry has grown at
barriers 10-15% since 1986 to reach revenues of
Supplier power • Medium product Threat $17B in 1996
differentiation of substitution
• Suppliers are mainly • Sales volume has increased at 15-20%
labour, local partners / • Growing e-mail adoption, due to increasing number of time-sensitive
distributors enabling faster sharing of goods needing to be shipped and are
• In local markets, little documents and reducing expected to continue to grow at 10%
concentration of suppliers need for physical mailing annually in the next 5-10 years
• Non-specialized labour is • Increase in volume and • Intense competition has driven down
cheap, but unions are variety of items shipped prices by 5-10% annually but prices are
pushing prices up expected to rise thanks to newly
implemented distance-based tariffs
4
1 Airborne has a competitive advantage in costs of
~25% over its main rivals
Costs for Airborne vs. FedEx overnight letter Sources of Airborne’s competitive X% advantage
USD per unit (estimated) Advantage in costs over FedEx

FedEx Estimated Cost

• Higher driver efficiency, reducing labor
Airborne competitive
advantage vs. FedEx costs 20%
Pickup 1.37

22%
• Use of contractors at 10% lower cost
• No retail centers

• Load factor (80%) is higher than its

Long-haul rivals (70%)
2.99
transport • Higher percentage of evening and two-

10%
day deliveries allow higher truck usage
• Cheaper wages and part-time workers

Delivery 2.05 • Higher driver efficiency, reducing labor

costs 10%
• Use of contractors at 10% lower cost
• No retail centers 15%
Other2 2.14 • Very selective investment in technology
• No advertising in mass media
• Frugality in headquarters 50%
25%
• Overall unit costs are up to 25%
Unit cost 8.55
lower than FedEx

5
2 Airborne is strategically positioned as a lower cost
alternative to competitors that offers fewer ‘frills’
• Recurring business
Who
customers in metro areas
• Focus on high volume
and urgent needs
• Low cost service
• Good (~97%) reliability
• Same tariff at any distance
What
• Drop off boxes and
warehouse services (no
retail centers)
• 12pm delivery on overnight
• Low cost structure
• Operational efficiencies
• Limited tech offering
• Cheap labor
• Sub-contracting practices
How
• Close relationship with
clients
• Targeted, lower-spend
sales and marketing
strategy
• Business customers with
time-sensitive parcels
• Customers seeking
premium ‘everyday’
shipping
• Premium pricing
• Excellent (99%+) reliability
• Focus on quality service
and customer satisfaction
• Distance-based tariffs
• Retail sites and drop-off
boxes
• Overnight with 8am delivery
• Air-centric strategy (>600
aircraft)
• Advanced technology
systems
• Customer-centric culture
• Primarily un-unionized labor
• Extensive workforce training
• High marketing spend
($138m)
• 8 US hubs; 5 international
hubs
Strategic positioning
Benefits vs. price
• Customers seeking
BC
premium ‘everyday’
shipping
BA
PC
• Premium pricing PA
• Excellent (99%+) reliability
and customer service
• Distance-based tariffs
• Retail sites and drop-off
boxes
• Overnight with 8am delivery
Airborne Competition
• Coordinated, efficient
network for air and
ground operations Airborne’s strategic
• Large investments in positioning and
technology competitive
• Unionized labor advantages allow for a
• High marketing spend
($80-100m) clear cost strategy
• 6 US hubs; international
operations
6
2 Recommended actions to strengthen Airborne’s
strategic positioning beyond 1997
Description
• Competitors are adopting
distance-based pricing,
Distance-based which would make Airborne
A pricing even cheaper on long-haul
parcels
• Current relationship
between Airborne and RPS
is an arms-length affair with
RPS
B Partnership
joint offers to customers on
case-by-case basis
• Airborne’s international
operations currently small
International compared to competitors,
C Strategy operating variable-cost
approach using commercial
airlines and local partners
Recommendation Rationale
• Do not adopt new pricing • Bigger competitive
scheme advantage with Airborne’s
target customers (long
distance)
• Strengthens AE’s value
proposition of simplicity
• Engage in an official • Expand service offering and
partnership agreement gain access to RPS’s
with RPS to offer an superior technology with
economic two-day delivery little capital expenditure
service • Further weaken UPS
• Agree to official • DHL handle 40% trans-
partnership with DHL in boarder express shipments
order to offer extensive and have extensive service
international express
shipments to business
to hard-to-reach locations
• No overlap (DHL has not
customers invested heavily in US
capabilities)
7
 RECOMMEDNATION A
2 A shift toward distance-based pricing would be
inconsistent with Airborne’s current strategic position
A shift from FedEx and UPS toward distance Maintaining the current pricing scheme
based pricing will increase Airborne’s price would strengthen Airborne’s current value
discount for longer distance deliveries proposition

Price per parcel

USD per overnight letter • Maintain current customers

Who
• Acquire new long-distance, price-
Competitors sensitive customers

• Higher price discount in long-distance

Competitors hauls

What
(avg.) • Maintain simplicity and convenience
for loyal customers by keeping a
single rate
Airborne

• Maintain current practices

How
• Might need extra capacity to handle
Distance additional customers
Zone

8
2 RPS (ground) and DHL (Int’l) partnerships would
increase offerings to clients while keeping specialization
RECOMMEDNATION B
• Engage in an official partnership
agreement to offer an economic two-day
Strategy delivery service
Outline • Focus on short-haul ground routes and
end delivery
• Perfect complements (air + ground)
• Access to superior technology
• Further weakens UPS in its core business
Pros
(ground transportation)
• Little capital expenditures needed
• Potential cannibalization from RPS in
shorter routes (however, this will prompt
Airborne to focus on long-haul air traffic, its
Cons core business)
• No control over prices at RPS could distort
Airborne’s value proposition
RECOMMEDNATION C
• Agreement with DHL to offer international
services to key business clients in the US
• Do not include international services for
particulars or SMEs
• A potential TNT partnership was discarded
due to their major focus in Europe
• Allows Airborne to offer international
capabilities to its most relevant clients
• Minimal overlap of geographical presence
• Avoids large capital expenditures in
international markets
• No control over prices at DHL could distort
Airborne’s value proposition