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Airborne Express Case Study

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Airborne Express

The officers of Airborne Express could hardly be more pleased.1

Results for the third quarter,

1997, were spectacular. Revenues for the quarter were up by 29% over the previous year, and yearto-

date net earnings had increased by more than 500%. Airborne's management team knew that the

great results were, in part, fleeting. As the third largest player in the express mail industry, Airborne

had gotten a boost from the recent strike at rival UPS. But that seemed to account for only a small

portion of the earnings gain, perhaps one-fifth. Roy Liljebeck, the company's chief financial officer,

commented:

While the UPS strike was the headline news in the quarter, Company operations

outside the strike window were steady, trending higher than performance in the

second quarter of 1997. Productivity gains remain strong and the overall operating

cost per shipment continues to improve.2

Airborne had been the fastest growing company in the industry for years, but its margins had been

anemic. Now, efforts to fatten those margins finally seemed to be taking hold. Of course, it didn't

hurt that Federal Express, the industry leader, had raised its prices.

Prospects seemed much brighter than they had a year earlier. At that time, Federal Express

and UPS were unleashing a flurry of new services and pricing schemes. One industry analyst

interpreted their moves as an effort "to sweep the corners of the market.... Fedex and UPS tower

over [Airborne]. They have saturated the core market and are looking for marginal revenue

opportunities." Airborne could easily "be hammered...between the two 900-pound gorillas."3

One move by the "gorillas" required an immediate decision. For years, the industry had set

prices without regard to distance. An overnight letter sent from Boston to New York carried the

same price as one from Boston to Los Angeles. In 1996, UPS moved to distance-based pricing; prices

were raised on long-distance shipments and lowered on short shipments. Federal Express followed

suit in July, 1997. Now customers were asking Airborne's sales people whether they too would

adjust prices to reflect shipping distance.

The Express Mail Industry in the United States

Businesses and individuals spent $16-17 billion on expedited shipments within the United

States in 1996. The flagship service of the industry promised overnight shipping with next-morning

798-070 Airborne Express

2

delivery. Services had proliferated, however, with some companies offering next-afternoon delivery

(for a price 10-20% lower than next-morning service), second-day service (40-50% less), third-day

delivery, and same-day or early-next-morning delivery (for several times more than next-morning

service).

Physical delivery of the package was only part of the service offered to customers. Major

delivery companies made it possible for customers to track shipments en route. They provided

consolidated information on shipments to major customers. Many offered extensive customer

service and guarantees of on-time service. For international shipments, delivery companies

expedited customs clearance. Some companies also offered warehousing services and logistics

consulting services.

Shipment volumes had risen 15-20% per year for the past decade, but, because prices had

fallen, total revenues of the industry had grown by only 10-15% each year. Industry observers

expected volumes to grow at roughly a 10% annual clip for the next five to ten years.

Customers. Virtually every business and many individuals used express delivery services to

ship their most urgent documents and parcels. Federal Express alone reported that it had two

million "current customers" in 1996.4 The highest-volume customers, including some catalog

retailers, relied on express services for the vast majority of their shipments. In industries such as

financial services and consulting, express mail had become the standard means of delivering

documents. Businesses varied significantly in terms of volume of shipments and the predictability of

volume.

Items shipped by express mail usually had a high ratio of value to weight and were

perishable in some sense of the word. Business documents, electronic components, medical samples,

and replacement parts were typical shipments. Shipments were diverse, however; one firm reported

that it had shipped rhinoceroses, art collections, race cars, and fishing bait.5 The portion of goods

considered perishable or time-sensitive had increased over time, as companies sought to drive

inventories out of their logistics systems and compete on the basis of time-to-market. A general

acceleration in the pace of business and shorter fashion cycles in some industries also tended to

broaden the customer base and to increase the express volume shipped by each

...

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