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Airborne Express

Group 06- Section B


Rahul Ranjan

097

Pavan Kumar HK 094


Aditya Samant-

146

Karteek kala -

073

Anurag SaiPriyanka Gupta FPM002

Evolution of Express Mail Industry Structure


Radical shift due to major carriers competing on multiple fronts for market share
Evolution of deliveries through passenger airplanes to specialized cargo flights
Federal Express (FedEx) created new market for express mail by overnight delivery
Competition not only on price but included innovation for Speedy transport, Customer
service, Brand creation (Price & Non-price competition)
Acceleration in pace of business & short fashion cycles and increasing focus on
increasing efficiency (through inventory management) has led to increase in express
shipments
Differentiation on customer service aspects such as online scheduling of pick-up and
package tracking
Increasing prevalence of email and scanning has placed pressure on the letter / document
market
Increasing online shopping prevalence has expanded opportunities in the parcel
delivery segments

Customers Requirement
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
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
In financial services and consulting express
mail had become the standard means of
delivering documents
Perishable goods or time sensitive had
increased over time which drive

Operations of Express Mail


5 million packages were delivered by three
dominant players (FedEx ,UPS , Airborne) with
over 98% on time arrival rate
Information Technology enabled carrier for
tracking, documentation, segregating ease to
carry business faster
Each company maintained a large fleet of
vans/trucks and drivers
Hub & Spoke model was used to deliver the
packages
Package were driven to airport, placed in
containers which further loaded in cargo
planes. Containers were brought to hub.
Packages were sorted according to final
destination
Packages with highest priority were

Labor, Service suppliers, particularly airport,


aircraft and truck and maintenance, and airport
services
Labor have high bargaining power- Unions
negotiation
Little dependent on Suppliers of aircraft & truck
manufacturer and fuel suppliers (Wide options
available)
(Express Mail
Competitive
Rivalry
Industry
Airport
providers have
high within
power in
negotiation of
industry)
(High)
Threat of Substitute
landing fees
Threat of new
(Low)

of Technology
& equipment
3 major
players and
6 second-provider
Entrants (Low) Low power
tier players
E mail ,Telex, Fax for

Oligopoly
Price wars between UPS and
Document courier
(Consolidated

FedEx
service as almost
Industry)
Competitors imitate product
Zero time at Zero
High barrier to
innovations, price (low
Cost
Entry (BTE)
differentiation)
Facsimile
Huge Investment
Low Margins, high volume
No Substitute for
or capital
required
requirement
parcel (Goods)
Buyer Power
(High)
High Replication
of Innovation
Low Margin
delivery.
Low switching cost
Low product differentiation
Price sensitivity
Volume based discount

Porters 5
force
analysis

PESTEL Analysis (Macro environment)- Express Mail Industry

Airbornes Background
Airborne Express is a express mail and cargo delivery company
It is the third largest player after FedEx and UPS
Airborne was founded as the Airborne Flower Traffic Association of California in 1946 to fly
flowers to the state of Hawaii.
Airborne Express developed special narrow containers which allows the use of
passenger jet aircraft without needing a large cargo door modification.
Its headquartered in Seattle, Washington, with its own airport hub at Wilmington, Ohio.
Airborne Express targets the business customers that regularly ships large volume
of urgent items
They purposely pass over residential and infrequent shippers
Airborne tailors to specific business needs

SWOT Analysis of Airborne Express


Strengths

Weaknesses

1. Less automation in sorting


1. Focus on large scale regular business
2. Less tech savvy
customers
3. Lack of aggressive approach (advertising
2. Intensive cost reduction - owned airport,
& sales force)
used 3rd party logistics, more trucks, less
sophisticated office
4. Lower contribution from express mail
3. Stock exchange warehouses
5. Lesser service offerings compared to
competitors
4. Patented cargo containers and
customization
6. On time delivery was relatively lower
Opportunities
than their competitors
(97% as compared to
5. 80% utilization
of aircrafts
Threats
SWOT99% of others)
6.1.Low
17 billion
prices dollar industry
1. 8:00 AM deliveries by competitors
2. Increase in customer base
2. More service offerings by competitors
3. Diversity in the products being shipped
3. US Postal service as a potential competitor
4. Increase in shipment volumes
4. Saturation of industry
5. Projected growth of 10 % in volumes for
5. Lack of customer loyalty
the next 5 to 10 years

Resources and Capability Analysis


( Airborne Express)

Airborne has its own airport, which is a tangible resource

They have a strong culture that is founded on frugality and functionality.


This helps the company because the employees are constantly trying to save time
and money.
flexible cost structure is competitive advantage
It is also rare because other competitors are bogged down by bureaucracy,
unionized labor, and most costs associated with flights
It is hard to imitate because UPS and Federal Express are too big to restructure
their cost structure.
It is exploitable because they know that customers are looking for the lowest
prices and they can offer what the two top players cannot.

How has Airborne survived and, recently, prospered in


the industry?
Focussed differentiation strategy
targeting the business customers
who regularly shipped large volume
of urgent items to other business
locations- even to the extent of
dropping customers if their volumes
were not high or consistent enough

Proved to be a cost leader- How ?


Purchases used aircrafts and customizes it for
carrying containers
Invests less in Research and Development
Highest aircraft utilization in the industry
(80%).

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

Concentrates more on afternoon and second


day deliveries which can be served through
ground trucks. This is 67% less expensive than
aircrafts

Successfully carried out warehouse


operation in airport itself.

Tie ups with independent contractors for


pickup and delivery services. This is 10% less
expensive than company owned delivery

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.

More pickups and delivery per stop than its


competitors. This saves 20% cost incurred in
pickup and 10% in delivery.

Airbornes wheel of success

Cost
Leaders
hip
Focus on
business
customers

Domestic Express Mail Industry

Airborne Target Market


Business Customers
Large volumes of urgent items to other
business locations.
Next day afternoon and second day is
largest volume
Airborne utilizes twice the % of Trucks than
Fed Ex saving money, keep price down.
Avoid residential, customers with seasonal
spikes.
Geographic focus on only 50 Metro areas

Fed Ex and UPS Target Market


Target virtually every business as well as
individuals
Majority of high volume shipments come
from catalog retailers

Labor Costs
UPS union labor average $20hr
Fed Ex $10-17
Airborne- Ohio hub averages $7hr

Advertising Costs

O v e r n i g h t a f te r n o o n d e l i v e r y

AirborneUnder 5 lbs.
26% lower
price on
average than
Fed Ex

$ 9 0 .0 0
$ 8 0 .0 0
$ 7 0 .0 0
$ 6 0 .0 0
$ 5 0 .0 0
$ 4 0 .0 0
$ 3 0 .0 0
$ 2 0 .0 0
$ 1 0 .0 0
$ 0 .0 0
L e tte r

1 lb .

2 lb .
Fedex

5 lb .
UPS

A ir b o r n e

1 0 lb .

5 0 lb .

FedEx approximately $138 MN


UPS between $80-$100 MN
Airborne $0

Customers
Price
Reliability
Brand Name
Access to tracking
Customer service
Convenience of drop off
Customer loyalty is low
Due to the strike customers do not want to
go with just one vendor

Airborne Cost Advantage


Cost per Overnight Letter
Fed Ex $8.55
Airborne
Difference

$6.04
$2.51

Airborne Advantages:
Twice the trucking over Fed Ex
Majority of trucks are outsourced -10% savings
20% less labor on pick up
Cheaper Hub labor
10% less labor on delivery
Lower IT costs
Lower corporate overhead

Pricing
Distance Pricing rather
than one price for any delivery,
distance pricing allows vendors
to charge more for long hauls,
but less for short distances.
FedEx and UPS both
adopted this pricing.
If Airborne does not adopt
distance pricing discounts
compared to competition on
coast to cost traffic would be
higher
than
on regional
FedEx is
leading
price increase

RPS Alliance
RPS has strength in ground
transportation
RPS has superior information and
tracking system
RPS currently targets large
volume business customers
similar to Airborne
RPS lacks air operations

for high volume low margin


business customers.

Fed Ex trend from lighter to heavier,


more expensive shipments in order to
compensate for low margins on lower cost
lighter parcels.
Airborne trend from heavier more
expensive to lighter less expensive. Taking
advantage of lower cost structure able to
undercut the market leaders.

Quantify the Airbornes source of Competitive Advantage?


Airbornes quantifiable advantages are derived from the cost side (Cost Advantage)
facilitated by strategic decisions to be selective in their target market,
choosing those market segments that complement their strengths.

Cost
Used aircraft purchased for $24 Mn each vs typical costs
Savings

of $90MM for a new aircraft

Aircraft utilization at 80% vs industry average 65-70%

Targeting clients with concentrated shippers/receivers allowing more

Value
Marketing
and sales forc
Chain
Inbound logistics
Sorting operations
Package shipping
Delivery services

efficient consolidation 80-85% of shipments to/from top 50 metro areas vs 60% or lower for FedEx
and UPS
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)
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
Less R&D cost and no retail centres and use of own airport as hub

Sources of competitive advantage

Collis' five tests of sustainable


Its advantage was its fleet (contractual
competitive
pick-up & delivery services) and company
advantage
owned airport
Superior- Airborne Express' current strategy is
Proprietary communications technology
superior to that of their competitors. They have
already reached a position where their costs are 45%
(FOCUS) increasing delivery speed and
lower than that of Federal Express
reliability
Airborne was known for high-quality,
Structurally Durable: The biggest threat
reliable service
to
Company offered a variety of flexible
Airborne Express would be the de-regulation of US
delivery options and products
Postal Services. They are capable of matching
(CUSTOMIZATION)
Airborne
Express'
and have
scale required
Inimitable
- The position achieved by Airborne
Express
wouldprices
be difficult
for athe
current
to compete
directly with
Airborne
Express. owns
competitor
Prices were
generally
lower
than those
to copy.
Airborne's
workforce
is mostly
un-unionized.
In addition,
Airborne
of competitors
patents
on their shipping containers.
Non-Substitutable: Substitutes Email & Fax; Small effect since customers send
packages consisting of parts & items other than documents

Non-appropriable : non-unionized labor force has limited power to cause holdup. In addition, the company is considered to be conservative and frugal which shows
The biggest
threat
is the de-regulation of USPS.
that there
is limited
slack to
in its
thesustainability
company

Quantification of Sources of AdvantageAirborne Express


Aircraft cost advantage
Assumption Avg. cost of Airborne Express aircraft is $24M
Avg. cost of FedExs aircraft is $90M
Hub depreciation cost per letter of $0.25 for all airlines.
Estimation of effective cost difference per letter basis,
we must first estimate what the total daily depreciation
is for each company.

FedEx
8 USA based hubs, Hub replacement cost = $800M.

total CAPEX = 8 x $800M = $6,400M


Total Dep. = $0.25 per letter x 2.8M packages = $0.7M per day
Therefore capital Dep. in the industry = $0.7 / 6,400 = $0.0001 / day / $CAPEX
FedEx aircraft Dep. = 608 planes x $90M x 0.0001 = $5.472M / Day
FedEx handles 2.8M letters daily (85% of which travel by air) = 2.38M. Therefore
aircraft depreciation per letter runs at $5.472M / 2.38M = $2.30 per letter
transported by air

Airborne Express
aircraft depreciation = 175 planes x $24M x 0.0001 = $0.46M / Day
Airborne Express handles 0.9M letters daily, 70% of which travel by air = 0.63M.
Therefore aircraft depreciation per letter runs at $0.46M / 0.63M = $0.73 per letter
transported by air

Calculation of Long Haul Flight & Trucking advantage


Aircraft depreciation + long haul trucking (for non-air deliveries)
+ operational expenses for the aircraft.
FedEx Breakdown Given:
the Long Haul Flight & Trucking costs for FedEx = $2.44 / Letter
85% of FedEx deliveries use aircraft for long haul
15% use vans only
Van transport cost = 1/3 (cost of aircraft)

Aircraft cost = $2.30 / letter + fuel / maintenance


We can then solve;
$2.44 = 0.85 x ($2.30 + fuel) + 0.15 x (1/3 x ($2.30 + fuel))
$2.44 = $1.955 + 0.85 fuel + $0.115 + 0.05 fuel = $2.07 + 0.9 x

Yielding the FedEx Aircraft fuel / maintenance costs = $0.412 per


letter transported by air, and
FedEx long haul van costs = ($0.412 + $2.30)/3 = $0.904 / letter
delivered by van
Airborne Breakdown We know that;
FedEx long haul van transport = $0.904 per letter delivered by
air
FedEx aircraft fuel & maintenance = $0.412 / 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

Approximately 60% of Airborne vans are contract


Airborne long haul van costs = $0.904 x (1 (0.1 x 0.6)) =
$0.85 / letter transported by van
Airborne long haul aircraft fuel & maintenance = $0,412 x 70% /
80% = $0.36 / 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 + $0.36 Fuel)) + (0.3 x $0.85) =
$1.012 (vs $2.44 for FedEx)

ACTIVITY BASED COSTING


Particulars

Fedex
Cost

Airborne Cost
(approx)

Pick up
Labour

1.09 12.11%

0.82

20% savings due to pickup efficiency and 10% savings due to 60%
9.11% contract

Fuel
Maintenance and
depreciation

0.07

0.78%

0.07

0.78%

0.21

2.33%

0.21

2.33%

Sub total

1.37 15.22%

1.10 12.22%

Long Haul transport


Flight and truck
expenses

2.44 27.11%

1.01 11.22%

Hub Labour

assuming it to be same as less automation offsets less labour


3.33% charges
Hub cost is lower because of less automation, so is the
1.44% depreciation (assume 50%)

0.3

3.33%

0.3

Hub Depreciation

0.25

2.78%

0.13

Sub total

2.99 33.22%

1.44 16.00%

1.64 18.22%

10% savings due to pickup efficiency and 10% savings due to 60%
1.39 15.42% contract

Delivery
Labour
Fuel
Maintenance and
depreciation

0.1

1.11%

0.1

1.11%

0.31

3.44%

0.31

3.44%

Recommendations

Implement a pause in their steady pricing reductions- target high net profit margin,
which should be achievable without sacrificing customer base given their efficiency advantages
Airborne should consider two avenues on the reducing package sizes concern
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
Airbornes proven client sales and management skills, for which USPS would have little
embedded know-how
Airborne should cancel the RPS alliance if no significant value adds can be derived
To break out of the modest vertical growth model paradigm, a strategic alliance looks to be
the best option. UPS and USPS are potential options

THANK YOU