Airborne Express Case Study

Case questions:
1. How and why has the express mail industry structure evolved in recent years? How have the
changes affected small competitors?

In recent years, the express mail industry has evolved in the following ways;

 The global business imperative toward increasing efficiency – in part through inventory
management – has driven both significant increases in the number of express shipments, as
well as customer expectations of reduced costs and delivery times.
 As prices reduced closer and closer to costs, the express market has increasingly turned to
differentiation on customer facing aspects such as online ordering and package tracking.
None of these have proven to be impossible to mimic, and now serve as the minimum
expected levels of service.
 The increasing prevalence of email and scanning has placed pressure on the core letter /
document market
 Similarly, the increasing online shopping prevalence has expanded opportunities in the parcel
delivery segments.

The combination of reducing prices and increasing upfront costs (the hub and spoke model requires
almost a billion dollars to setup new) required to compete in an overall low cost provider strategy such
as FedEx and UPS mean that smaller players such as BAX (heavy cargo) and RPS (low cost ground
transport) have had to adopt focussed low-cost strategies to remain viable. By carving out niches –
highly optimized to their target clients and sufficiently small to not cause too much attention from the
bigger players – smaller players have managed to compete in the peripheries.

2. How has Airborne survived and, recently, prospered in the industry?

Airborne has (similarly to BAX and RPS) carved out a focussed differentiation strategy – initially
targeting business customers with large volume urgent items – even to the extent of dropping
customers if their volumes were not high or consistent enough. In doing so they have been able to
establish a fit-for-purpose operational structure that is highly cost efficient for this market segment,
enabling them to offer very low prices to their chosen segment. As is evident in Figure 1, Airborne
Express has consistently undercut prices of the main rival, while apparently increasing focus on the
lighter shipment segment as is evident in Figure 2, contra to the movement of FedEx.

Some of their key efficiencies include;

 purchasing low cost used planes (requiring minimal modification with their specialized cargo
containers) and an airfield with community reinvestment status, along with running planes at
higher utilization levels
 targeting more metropolitan area deliveries, and increased use of afternoon / second day
deliveries enabling greater use of the more cost efficient truck transportation
 provision of many unmanned drop off boxes versus sparser retail service centres provided by
FedEx and UPS
 the extensive use of contractor vans for deliveries – allowing greater flexibility to adjust costs
to revenue, while improving supplier side negotiation strength against the drivers of their
owned & operated vans as well as the flexibility to change contracted van companies.
 Adopting a fast-follower approach in the technology space – following and adopting only
those technologies that demonstrate clear value adds, reducing wasted investment.

Mark Burgoyne |Airborne Express Case Study 1

Additionally, they have also been able to provide highly personalized service to their customers,
including implementing a system to ensure customers spoke to the same agent each time, provision
of warehouse space on its airport, as well as personalized targeting of logistics managers –
developing personal relationships and therefore providing a more compelling value chain for their
target market(s).

3. Quantify Airborne's sources of advantage.

Airborne’s quantifiable advantages are derived from the cost side – which then enable a price side
competitive edge - and are facilitated by strategic decisions to be selective in their target market,
choosing those market segments that complement their strengths. These include;

 Used aircraft purchased for $24MM each vs typical costs of $90MM for a new aircraft
 Aircraft utilization at 80% vs industry average 65-70%
 Targeting clients with concentrated shippers/receivers allowing more efficient consolidation –
80-85% of shipments to/from top 50 metro areas vs 60% or lower for FedEx and UPS. This in
turn further enables Airborne couriers to pickup more parcels per stop than FedEx – reducing
labour by 20% for pickup and 10% for delivery
 Targeting higher proportion of afternoon or second day deliveries, enabling higher proportion
of van deliveries – 30% of deliveries using vans alone (vs 15% for FedEx) with non-flight
deliveries typically 1/3 of the total cost of equivalent aircraft capacity
 Extensive use of contractors for vans, handling 60-65% of Airborne volume – yielding
estimated further 10% costs savings over own/operate vans
 No mass market advertising costs
 With the operational efficiencies above, Airborne is currently able to provide the market place
with prices lower than either UPS or FedEx in most weight and timeframe categories (see
Figure 3). It is interesting to note the relatively modest list price savings offered by Airborne
Express when taken in the context of the above operational efficiencies and the lower net
profit (averaging 1-2% vs FedEx at 3% and UPS at 5%), which I would interpret as follows;
o List price is offered to everyone
o Provides sales managers with flexibility to target key accounts (with the frequency,
reliability and suitable delivery paths) with significant discounts to secure their
business.

Expanding on this in a comparison with the stated cost structure per FedEx overnight letter reveals an
approximate 22% cost savings advantage – see Appendix 3, parts 1, 2 and 3 for logic and
calculations.

4. What must Robert Brazier, Airborne's President and COO, do in order to strengthen the
company's position?

Robert has driven significant specialized efficiencies which have enabled it to compete successfully
within its niche client base in an otherwise highly competitive broader market place. There are
however a number of areas that strike me as concerning and these are;

1. The targeting of such a sustained low net profit margin (1%) – passing on all the efficiency
gains to their customers through steadily declining prices.
2. Continued targeting of a customer segment with lighter and lighter packages, in light of
looming threat of a partially deregulated USPS
3. Lack of added value realized through their vertical alliance with RPS. This initiative brings no
costs savings, provides no more obvious value than securing additional contract vans, and
runs the risk of damaging their brand through poorer service. It is clearly not strategic in
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 nature, and appears to be simply an attempt to broaden their geographic footprint, but in
doing so dilutes their niche competitive advantage.
4. Vertical growth in Airborne’s targeted niche will likely bring only modest incremental gains, yet
attempting organically broader growth – targeting expanded client base geographically, or
even internationally – brings with it two significant risks. International growth has been shown
to be very expensive and difficult (7 years of consecutive losses from FedEx) – requiring deep
pockets, and to expand significantly domestically Airborne runs the very real risk of FedEx
taking notice and aggressively start competing directly – something that has not happened to
date. The concern is what mode of growth should be targeted?

My recommendations would be as follows;

1. Implement a pause in their steady pricing reductions – target at a market rate of 3-4% net
profit, which should be achievable without sacrificing customer base given their efficiency
advantages. As an extension of this point, Airborne should ignore/reject pressure to
implement a distance based pricing model. Airborne’s model relies upon 1-on-1 sales person
engagement with their customers, and appropriate distance based bespoke pricing could still
be offered if required to secure these key clients.
2. Airborne should consider two avenues on the reducing package sizes concern
 It could consider approaching the rapidly growing major e-tailers such as Amazon
and Dell to secure transport contracts for delivery of products to their clients in major
population hubs, competing on cost efficiencies and customized service including
their on-airport storage.
 Should USPS be granted permission by congress to offer bulk discounts, Airborne
should consider approaching USPS to form a strategic alliance – leveraging
Airborne’s proven client sales and management skills, for which USPS would have
little embedded know-how. Additionally, Airborne is estimated to have a 30% cost
advantage over FedEx in the pickup and long haul (per part 3 of Appendix C), which
may also be of interest to USPS for some segments / areas as, while USPS would
bring reach and financial strength, it is unlikely that USPS could achieve the targeted
efficiencies that Airborne has demonstrated.
3. Airborne should cancel the RPS alliance if no significant value adds can be derived. RPS has
no aircraft, no mention of any advantage in customer relationship, and appears to solely offer
larger footprint (at the expense of diluted competitive advantage in Airborne’s specialized
niche). If an alliance is to be sought it should be done in a way that build on strengths or
addresses significantly weaknesses (without eroding existing strengths), and this
arrangement seems to do neither.
4. To break out of the modest vertical growth model paradigm, a strategic alliance looks to be
the best option. Such an alliance should provide Airborne with the protection and breadth of
footprint that a large organization can bring, while providing that organization with the skillset
and optimized offerings to better compete on key business accounts. USPS as mentioned
above is one to consider should congress approve the bill to allow discount. UPS is another
target – with UPS appearing to offer a good cultural fit with their “owned by managers,
managed by owners” mantra likely fitting well with Airborne’s conservative and frugal
characteristics, and with UPS’s higher net profit margins (see Figure 4 – twice FedEx and 5x
Airborne’s net income%) meaning UPS is quite possibly looking to address the low mark-up
market segment without diluting it’s own brand strengths (and apparent broad differentiation
strategy – as evidenced by overseas footprint and higher profit margins). UPS’s market
lagging revenue growth (CAGR of 9% behind FedEx and 13% and Airborne at 15% - see
Figure 5) adds further weight to the notion that UPS may be looking for options to capture
some of that growth. FedEx by comparison, seems to be already aggressively competing in

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 the low markup arena – meaning any alliance would have far fewer synergies to offer – likely
cannibalizing much of their combined existing business.

Appendix 1: Macro Environment - PESTEL Analysis

Component Comments
Political  Congress weighing approval for USPS to grant volume discounts, which may
add competition to the market
Economic  Negligible macro economic effects at play.
Sociocultural  Sociocultural expectations increasingly dictate a more personalized and
online presence, necessitating information systems and infrastructure
upgrades
Technological  Leaps in computing capabilities, the embrace of which by FedEx has
demonstrated significant value in optimization and scheduling, mean
competing players such as Airborne Express must follow in order to remain
competitive
 Growth of internet usage presents exposure and opportunities
o Exposure in the form of increasingly the letter/document market
can be eroded by email and scanning
o Opportunities in the form of growing online shopping segment
needing physical boxes to be delivered
o Additionally, another dimension of customer facing differentiation
can be carved out in their online ordering and tracking
experience.
Environmental  N/A as at 2007
Legal &  N/A
Regulatory

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Appendix 2: Competitive Environment - Porters 5-Force Analysis

Force Comments
Substitute  Very strong substitute product pressure exist for documents in the form of
Products growing prevalence of email and scanning, reducing the need to express mail
as many items.
 Possible additional competition from regular mail as USPS seeks to have
congress grant them permission to offer bulk discounts
Buyers  Very low barriers to buyer flight exist.
bargaining power
Potential new  The risk of potential new entrants would be low. The capital expenditure
entrants required to setup competitive hubs, and the logistics of setting up a
distribution chain will prove to be prohibitively high to most newcomers –
especially in the context of the modest net income’s seen in the industry.
Suppliers  With the location of Airborne Express chosen (Ohio), the labour market is
bargaining power relatively depressed, meaning Airborne Express has some advantage in their
labor costs. There is an exposure however in that ~50% is unionised and
could (like with UPS) elect to strike.
 The main suppliers beside labour would be for fuel / maintenance supplies,
for which due to the wide availability there is likely some modest bargaining
power available
Competing  The two ‘800 lb gorillas’ could pose a significant challenge to Airborne
sellers express, especially if they elect to go after key accounts / markets that
Airborne relies upon. They can easily go on the offensive to grab such
localized market share – even sustaining losses in the process. The main
advantage that Airborne seems to have in this area is that they seem to be
small enough such that FedEx and DHL are just concentrating on each other.
 There does however seem to be an easing now, with the major player FedEx
recently raising its prices after a long downward trend.

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Appendix C – Quantification of Cost Advantage

1. Quantification of aircraft cost advantage

It is assumed that the average cost of Airborne Express airplanes is $24MM as per their recent
purchase. It is further assumed that the average cost of FedEx’s aircraft is $50MM (half second hand,
half new)

In order to estimate the effective cost difference normalized to a per letter basis, we must first
estimate what the total daily depreciation is for each company. No direct information is provided about
their financing structure, but the case does provide a hub depreciation cost per letter of $0.25. By
assuming the same sort of financial structure (and interest rates) are applied to airlines, we can make
educated guesses as to the airline costs.

FedEx has 8 USA based hubs, which handle 2.8MM packages per day. We further know that
replacement cost for each hub is approx. $800MM.

So total CAPEX = 8 x $800MM = $6,400MM

Total depreciation is $0.25 per letter x 2.8MM packages = $0.7MM per day

Therefore capital depreciation in the industry runs at approximately $0.7 / 6,400 = $0.0001 / day /
$CAPEX

The Airborne Express aircraft depreciation is then 175 planes x $24MM x 0.0001 = $0.46MM / Day

The FedEx aircraft depreciation is 608 planes x $50MM x 0.0001 = $3.04MM / Day (assuming leased
aircraft are the same cost)

FedEx handles 2.8MM letters daily, 85% of which travel by air = 2.38MM. Therefore aircraft
depreciation per letter runs at $3.04MM / 2.38MM = $1.43 per letter transported by air

Airborne Express handles 0.9MM letters daily, 70% of which travel by air = 0.63MM. Therefore aircraft
depreciation per letter runs at $0.46MM / 0.63MM = $0.73 per letter transported by air

2. Calculation of Long Haul Flight & Trucking advantage

In addition to aircraft depreciation, we must also factor in long haul trucking (for non air deliveries) as
well as operational expenses for the aircraft.

FedEx Breakdown

We know that;

 the Long Haul Flight & Trucking costs for FedEx runs at $2.44 / Letter
 85% of FedEx deliveries use aircraft for long haul
 15% use vans only
 Van transport is approximately 1/3 the cost of aircraft
 Aircraft cost = $1.43 / letter + fuel / maintenance

We can then solve;

$2.44 = 0.85 x ($1.43 + fuel) + 0.15 x (1/3 x ($1.43 + fuel))

$2.44 = $1.215 + 0.85 fuel + $0.0715 + 0.05 fuel = $1.287 + 0.9 x Fuel

Yielding the FedEx Aircraft fuel / maintenance costs = $1.28 per letter transported by air, and

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FedEx long haul van costs = ($1.28 + $1.43)/3 = $0.90 / letter delivered by van

Airborne Breakdown

We know that;

 FedEx long haul van transport = $0.90 per letter delivered by air
 FedEx aircraft fuel & maintenance = $1.28 / letter delivered by air
 70% of Airborne deliveries use aircraft for long haul
 30% use vans only
 Airborne aircraft run 80% full vs 70% full for FedEx
 Airborne van transport using contractors is approximately 10% less than the market
 Approximately 60% of Airborne vans are contract

Airborne long haul van costs = $0.90 x (1 – (0.1 x 0.6)) = $0.85 / letter transported by van

Airborne long haul aircraft fuel & maintenance = $1.28 x 70% / 80% = $1.12 / letter transported by air
(simply a ratio to account for the higher aircraft utilization that Airborne achieve)

Therefore Long Haul Flight & Trucking costs for Airborne runs at (0.7 x ($0.73 depreciation + $1.12
Fuel)) + (0.3 x $0.85) = $1.55 (vs $2.44 for FedEx)

3. Complete overnight letter cost comparison

Item FedEx Cost Estimated Airborne Cost

Pickup
20% Pickup savings due to efficiency, 10% savings of
Labour $ 1.09 12.1% $ 0.82 9.1% 60% pickups by contractors
Fuel $ 0.07 0.8% $ 0.07 0.8%
Maintenance & Depreciation $ 0.21 2.3% $ 0.21 2.3%
Subtotal $ 1.37 15.2% $ 1.10 12.2%

Long-haul transport
Flight & Trucking related $ 2.44 27.1% $ 1.55 17.2% See previous workings in part 1 and 2
Assume unchanged - that the lower automation
Hub Labour $ 0.30 3.3% $ 0.30 3.3% offset the lower labour costs
With lower automation, there is lower cost. Assume
Hub Depreciation $ 0.25 2.8% $ 0.13 1.4% 50% lower
Subtotal $ 2.99 33.2% $ 1.98 21.9%

Delivery
10% Pickup savings due to efficiency, 10% savings of
Labour $ 1.64 18.2% $ 1.39 15.4% 60% pickups by contractors
Fuel $ 0.10 1.1% $ 0.10 1.1%
Maintenance & Depreciation $ 0.31 3.4% $ 0.31 3.4%
Subtotal $ 2.05 22.8% $ 1.80 20.0%

No mass market advertising, assumed 5c for

Advertising $ 0.22 2.4% $ 0.05 0.6% targetted ads

Sales $ 0.21 2.3% $ 0.26 2.9% Targetted sales assumed to come with 25% premium
Fast follower approach - assume 25% reduction in
IT $ 0.54 6.0% $ 0.41 4.5% costs
No customer service centres for drop off, assume
Customer Service $ 0.20 2.2% $ 0.10 1.1% halved cost
Corporate Overhead $ 0.97 10.8% $ 0.97 10.8% Suspect lower, but leave the same
Total Cost $ 8.55 95.0% $ 6.66 74.0% 20% Lower costs

Margin $ 0.45 5.0% $ 2.34 26.0%

Price $ 9.00 100.0% $ 9.00 100.0%

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Figure 1 - Revenue per shipment

Figure 2 - Weight per shipment

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Figure 3 - List prices of Express mail Carriers

Figure 4 - Company Net Incomes (%)

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Figure 5 - Normalized Revenue Growth

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