Airborne Express

Group 06- Section BRahul Ranjan 097Pavan Kumar HK – 094Aditya Samant- 146Karteek kala - 073Anurag Sai- Priyanka Gupta – FPM002

• 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

Evolution of Express Mail Industry Structure

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 companies to compete on the basis of time-to-market

• Discounts from price list of 50% was common

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 delivered by 8:00 am to noon while lower priority packages were delivered second day as they followed the different route usually by road

• Companies even focused on customer service

Threat of new Entrants (Low)

Oligopoly (Consolidated Industry)

High barrier to Entry (BTE)

Huge Investment or capital requirement

Low Margin Buyer Power (High) Low switching cost Low product differentiation Price sensitivity Volume based discount

Bargaining Power of Supplier Power (Modest) 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) Airport providers have high power in negotiation of landing fees Low power of Technology & equipment provider

Competitive Rivalry within Industry (High)

3 major players and 6 second-tier players Price wars between UPS and FedEx Competitors imitate product innovations,

price (low differentiation) Low Margins, high volume required High Replication of Innovation

Threat of Substitute (Low) E mail ,Telex, Fax for

Document courier service as almost Zero time at Zero Cost

Facsimile No Substitute for parcel

(Goods) delivery.

Porter’s 5 force analysis

(Express Mail industry)

PESTEL Analysis (Macro environment)- Express Mail Industry

Airborne’s 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.

• It’s 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

Strengths1. Focus on large scale regular business customers2. Intensive cost reduction - owned airport, used 3rd party logistics, more trucks, less sophisticated office3. Stock exchange warehouses4. Patented cargo containers and customization5. 80% utilization of aircrafts6. Low prices

Weaknesses1. Less automation in sorting2. Less tech savvy3. Lack of aggressive approach (advertising & sales force)4. Lower contribution from express mail5. Lesser service offerings compared to competitors6. On time delivery was relatively lower than their competitors (97% as compared to 99% of others)

Opportunities1. 17 billion dollar industry2. Increase in customer base3. Diversity in the products being shipped4. Increase in shipment volumes5. Projected growth of 10 % in volumes for the next 5 to 10 years

.

Threats1. 8:00 AM deliveries by competitors2. More service offerings by competitors3. US Postal service as a potential competitor4. Saturation of industry5. Lack of customer loyalty

SWOT

SWOT Analysis of Airborne Express

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

• It owned the airport which served as its major hub so that it doesn’t have to pay landing fees and can customize the operations to the customer needs

• Successfully carried out warehouse operation in airport itself.

• 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.

• Conservative work culture and reflected humility

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%).

• Concentrates more on afternoon and second day deliveries which can be served through ground trucks. This is 67% less expensive than aircrafts

• Tie ups with independent contractors for pickup and delivery services. This is 10% less expensive than company owned delivery

• More pickups and delivery per stop than its competitors. This saves 20% cost incurred in pickup and 10% in delivery.

• Spends very less in advertising and boosts its sales mainly through strong sales force which establishes personal relationship

• •

Airborne’s wheel of success

Focus on business customers

Cost Leadership

Airborne-Under 5 lbs. 26% lower price on average than Fed Ex

Cost per Overnight Letter

Fed Ex $8.55

Airborne $6.04

Difference $2.51

Airborne Cost Advantage

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

•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

RPS Alliance

Pounds per Shipment '85-97

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8

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Fed Ex Airborne

Revenues per shipment 85-97

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25

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

FedEX Airborne

•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.

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

Pricing

FedEx is leading price increase for high volume low margin business customers.

• Airborne’s 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.

• Used aircraft purchased for $24 Mn 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 • 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

Quantify the Airborne’s source of Competitive Advantage?

Cost Savings • Marketing and sales force• Inbound logistics• Sorting operations• Package shipping• Delivery services

Value Chain

• It’s advantage was its fleet (contractual pick-up & delivery services) and company owned airport

• Proprietary communications technology (FOCUS) increasing delivery speed and reliability

• Airborne was known for high-quality, reliable service• Company offered a variety of flexible delivery options

and products (CUSTOMIZATION)• Prices were generally lower than those of competitors

Sources of competitive advantage Collis' five tests of sustainable competitiveadvantageSuperior- Airborne Express' current strategy is superior to that of their competitors. They have already reached a position where their costs are 45% lower than that of Federal Express

Structurally Durable: The biggest threat toAirborne Express would be the de-regulation of US Postal Services. They are capable of matching Airborne Express' prices and have the scale required to compete directly with Airborne Express.

Inimitable- The position achieved by Airborne Express would be difficult for a current competitor to copy. Airborne's workforce is mostly un-unionized. In addition, Airborne owns 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 hold-up. In addition, the company is considered to be conservative and frugal which shows that there is limited slack in the company

The biggest threat to its sustainability is the de-regulation of USPS.

Quantification of Sources of Advantage- Airborne Express

Aircraft cost advantage• Assumption-• Avg. cost of Airborne Express aircraft is $24M• Avg. cost of FedEx’s 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 Fuel

• 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• Airborne van transport using contractors is approximately 10% less than the

market

• Approximately 60% of Airborne vans are contract• Airborne long haul van costs = $0.904 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 COSTINGParticulars Fedex Cost Airborne Cost (approx)Pick upLabour 1.09 12.11% 0.82 9.11%20% savings due to pickup efficiency and 10% savings due to 60% contractFuel 0.07 0.78% 0.07 0.78%Maintenance and depreciation 0.21 2.33% 0.21 2.33%Sub total 1.37 15.22% 1.10 12.22%

Long Haul transportFlight and truck expenses 2.44 27.11% 1.01 11.22%Hub Labour 0.3 3.33% 0.3 3.33%assuming it to be same as less automation offsets less labour chargesHub Depreciation 0.25 2.78% 0.13 1.44%Hub cost is lower because of less automation, so is the depreciation (assume 50%)Sub total 2.99 33.22% 1.44 16.00%

DeliveryLabour 1.64 18.22% 1.39 15.42%10% savings due to pickup efficiency and 10% savings due to 60% contractFuel 0.1 1.11% 0.1 1.11%Maintenance and depreciation 0.31 3.44% 0.31 3.44%Sub total 2.05 22.78% 1.80 19.97%

Advertising 0.22 2.44%0.18

2.03%60 million of annual expenditure sales and marketing and 900000 parcels/daySales 0.21 2.33% IT 0.54 6.00%

0.556.12%

customerService 0.2 2.22% 181 million of annual expenditure on general administration and 900000 parcels/dayCorporate Overhead 0.97 10.78% 0.97 10.78%Sub total 2.14 23.78% 1.70 18.93%Total Cost 8.55 95.00% 6.04 67.12%Margin 0.45 5.00% 2.96 32.88%Price 9 100.00% 9 100.00%

• 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 Airborne’s 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

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