Airborne Express Case StudyCase 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 It is clearly not strategic in Mark Burgoyne |Airborne Express Case Study 2 .and are facilitated by strategic decisions to be selective in their target market. 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. There are however a number of areas that strike me as concerning and these are. 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%). 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. 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. in light of looming threat of a partially deregulated USPS 3. These include. including implementing a system to ensure customers spoke to the same agent each time. What must Robert Brazier.Additionally. parts 1. 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. they have also been able to provide highly personalized service to their customers. This initiative brings no costs savings. Airborne’s quantifiable advantages are derived from the cost side – which then enable a price side competitive edge . reliability and suitable delivery paths) with significant discounts to secure their business. 2 and 3 for logic and calculations. choosing those market segments that complement their strengths. provides no more obvious value than securing additional contract vans. The targeting of such a sustained low net profit margin (1%) – passing on all the efficiency gains to their customers through steadily declining prices. Lack of added value realized through their vertical alliance with RPS. and runs the risk of damaging their brand through poorer service. 3. Continued targeting of a customer segment with lighter and lighter packages. Quantify Airborne's sources of advantage. 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. 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. 4. 2. Airborne's President and COO. 1. 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). o List price is offered to everyone o Provides sales managers with flexibility to target key accounts (with the frequency. provision of warehouse space on its airport. which I would interpret as follows. as well as personalized targeting of logistics managers – developing personal relationships and therefore providing a more compelling value chain for their target market(s). competing on cost efficiencies and customized service including their on-airport storage. 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). USPS as mentioned above is one to consider should congress approve the bill to allow discount. As an extension of this point. Airborne’s model relies upon 1-on-1 sales person engagement with their customers. International growth has been shown to be very expensive and difficult (7 years of consecutive losses from FedEx) – requiring deep pockets. it is unlikely that USPS could achieve the targeted efficiencies that Airborne has demonstrated. and appears to solely offer larger footprint (at the expense of diluted competitive advantage in Airborne’s specialized niche). Implement a pause in their steady pricing reductions – target at a market rate of 3-4% net profit. FedEx by comparison.see Figure 5) adds further weight to the notion that UPS may be looking for options to capture some of that growth. but in doing so dilutes their niche competitive advantage. Additionally. 3. Airborne is estimated to have a 30% cost advantage over FedEx in the pickup and long haul (per part 3 of Appendix C). while providing that organization with the skillset and optimized offerings to better compete on key business accounts. To break out of the modest vertical growth model paradigm. 2. seems to be already aggressively competing in the low markup arena – meaning any alliance would have far fewer synergies to offer – likely cannibalizing much of their combined existing business. which should be achievable without sacrificing customer base given their efficiency advantages. for which USPS would have little embedded know-how. Mark Burgoyne |Airborne Express Case Study 3 . a strategic alliance looks to be the best option. Vertical growth in Airborne’s targeted niche will likely bring only modest incremental gains.nature. 1. and appropriate distance based bespoke pricing could still be offered if required to secure these key clients. and appears to be simply an attempt to broaden their geographic footprint. 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. which may also be of interest to USPS for some segments / areas as. managed by owners” mantra likely fitting well with Airborne’s conservative and frugal characteristics. 4. Should USPS be granted permission by congress to offer bulk discounts. no mention of any advantage in customer relationship. The concern is what mode of growth should be targeted? My recommendations would be as follows. 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). and this arrangement seems to do neither. Airborne should consider approaching USPS to form a strategic alliance – leveraging Airborne’s proven client sales and management skills. UPS’s market lagging revenue growth (CAGR of 9% behind FedEx and 13% and Airborne at 15% . RPS has no aircraft. Airborne should cancel the RPS alliance if no significant value adds can be derived. 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. or even internationally – brings with it two significant risks. Such an alliance should provide Airborne with the protection and breadth of footprint that a large organization can bring. UPS is another target – with UPS appearing to offer a good cultural fit with their “owned by managers. while USPS would bring reach and financial strength. Airborne should ignore/reject pressure to implement a distance based pricing model. yet attempting organically broader growth – targeting expanded client base geographically. 4. PESTEL Analysis Component Political Comments Economic Sociocultural Technological Environmental Legal & Regulatory Congress weighing approval for USPS to grant volume discounts. the embrace of which by FedEx has demonstrated significant value in optimization and scheduling. N/A as at 2007 N/A Mark Burgoyne |Airborne Express Case Study 4 . which may add competition to the market Negligible macro economic effects at play. 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. Sociocultural expectations increasingly dictate a more personalized and online presence. necessitating information systems and infrastructure upgrades Leaps in computing capabilities.Appendix 1: Macro Environment . another dimension of customer facing differentiation can be carved out in their online ordering and tracking experience. 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.Porters 5-Force Analysis Force Substitute Products Comments Buyers bargaining power Potential new entrants Suppliers bargaining power Competing sellers Very strong substitute product pressure exist for documents in the form of growing prevalence of email and scanning. The main suppliers beside labour would be for fuel / maintenance supplies. There does however seem to be an easing now. 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. Mark Burgoyne |Airborne Express Case Study 5 .Appendix 2: Competitive Environment . the labour market is relatively depressed. With the location of Airborne Express chosen (Ohio). meaning Airborne Express has some advantage in their labor costs. The capital expenditure required to setup competitive hubs. Possible additional competition from regular mail as USPS seeks to have congress grant them permission to offer bulk discounts Very low barriers to buyer flight exist. for which due to the wide availability there is likely some modest bargaining power available The two ‘800 lb gorillas’ could pose a significant challenge to Airborne express. with the major player FedEx recently raising its prices after a long downward trend. There is an exposure however in that ~50% is unionised and could (like with UPS) elect to strike. The risk of potential new entrants would be low. reducing the need to express mail as many items. It is further assumed that the average cost of FedEx’s aircraft is $50MM (half second hand.8MM packages = $0.04MM / 2. the Long Haul Flight & Trucking costs for FedEx runs at $2. We further know that replacement cost for each hub is approx.28 per letter transported by air.287 + 0.Appendix C – Quantification of Cost Advantage 1. By assuming the same sort of financial structure (and interest rates) are applied to airlines.46MM / 0. Therefore aircraft depreciation per letter runs at $3.0001 / day / $CAPEX The Airborne Express aircraft depreciation is then 175 planes x $24MM x 0.85 x ($1. which handle 2.25. So total CAPEX = 8 x $800MM = $6.63MM. we can make educated guesses as to the airline costs.46MM / Day The FedEx aircraft depreciation is 608 planes x $50MM x 0. we must also factor in long haul trucking (for non air deliveries) as well as operational expenses for the aircraft.43 / letter + fuel / maintenance We can then solve.04MM / Day (assuming leased aircraft are the same cost) FedEx handles 2. No direct information is provided about their financing structure.400MM Total depreciation is $0.43 + fuel)) $2.8MM letters daily.43 + fuel) + 0. Calculation of Long Haul Flight & Trucking advantage In addition to aircraft depreciation.15 x (1/3 x ($1.38MM = $1.85 fuel + $0. FedEx Breakdown We know that. 70% of which travel by air = 0.215 + 0. and Mark Burgoyne |Airborne Express Case Study 6 . $800MM.73 per letter transported by air 2. half new) In order to estimate the effective cost difference normalized to a per letter basis.25 per letter x 2.7 / 6. $2. we must first estimate what the total daily depreciation is for each company.9MM letters daily. FedEx has 8 USA based hubs.05 fuel = $1.44 = 0.0715 + 0. 85% of which travel by air = 2.0001 = $3. Therefore aircraft depreciation per letter runs at $0.7MM per day Therefore capital depreciation in the industry runs at approximately $0.63MM = $0.44 / 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 = $1.0001 = $0.38MM. but the case does provide a hub depreciation cost per letter of $0.44 = $1.400 = $0.8MM packages per day.43 per letter transported by air Airborne Express handles 0. Quantification of aircraft cost advantage It is assumed that the average cost of Airborne Express airplanes is $24MM as per their recent purchase.9 x Fuel Yielding the FedEx Aircraft fuel / maintenance costs = $1. 6)) = $0.1 x 0.90 x (1 – (0.12 / 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 (0.73 depreciation + $1.85) = $1. FedEx long haul van transport = $0.90 / letter delivered by van Airborne Breakdown We know that.55 (vs $2.3 x $0.7 x ($0.90 per letter delivered by air FedEx aircraft fuel & maintenance = $1. Complete overnight letter cost comparison Mark Burgoyne |Airborne Express Case Study 7 .43)/3 = $0.44 for FedEx) 3.28 x 70% / 80% = $1.FedEx long haul van costs = ($1.28 + $1.85 / letter transported by van Airborne long haul aircraft fuel & maintenance = $1.12 Fuel)) + (0.28 / 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. Figure 1 .Revenue per shipment Figure 2 .Weight per shipment Mark Burgoyne |Airborne Express Case Study 8 . List prices of Express mail Carriers Figure 4 .Figure 3 .Company Net Incomes (%) Mark Burgoyne |Airborne Express Case Study 9 . Normalized Revenue Growth Mark Burgoyne |Airborne Express Case Study 10 .Figure 5 .