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Transcript of Airborne Express
Fixed Cost Analysis
Cost Based Analysis
• Parcel delivery market: one of the fastest growing industries in the past couple decades.
• Express delivery market ships more than 5 million packages a day in the United States.
• Market for express deliveries is difficult to enter.
• Capital requirements are expensive: Airplane fleet, Truck fleet.
• Some of the established brands are: UPS, FedEx, Airborne.
• Smaller competitors are BAX Global, DHL Worldwide express, Emery Worldwide, Roadway Package System (RPS), TNT Express Worldwide.
• Wide range of economies of scales.
o UPS has the largest economy of scale in the express delivery industry
• There is a low amount of product differentiation
• Companies compete on the basis of price strategies, specific logistics strategies, brand reputation, and niche target marketing.
Firm Level Analysis
Fixed Cost Analysis
• Operates 13,300 vans and a fleet of 175 aircrafts.
o Half of the vans are operated through contractors.
• Unlike Federal Express and UPS, Airborne owns their own airport, which serves as their major hub.
• They purchased this airport (formerly the Strategic Air Command) for 875,000 in 1980
o They did not have to pay landing fees, which can be substantial amount.
o Sid not face any obstacles in tailoring to the facilities needs.
o They do need to maintain and operate the airport themselves.
o No other airlines would help with their expenses.
• Airborne built a warehouse space at the airport for their business partners who they would lease to.
o This was done so their business partners could get their orders in and out quickly.
• Pays less property tax due to the Community Reinvestment Act.
• Does not maintain retail service centers (thus saves capital on that)
o However, it has 11,000 drop-off boxes.
• Invested in Freight On-Line Control and Update System (FOCUS)
o Allows a customer to trace packages themselves rather than speak with an agent.
Cost Based Analysis
• Its own airport hub
• Planes are usually 80% full
• Picked up and delivered more parcels per stop
o Saved 30% between pick-up and drop off costs
• Tailors to specific business needs
• Greater portion of Airborne’s deliveries were afternoon and second-day deliveries.
o Allowing them to use more trucks more often
• This saves airborne over 50% in delivery costs
• Does not express a lot of residential
• Only guarantees over night deliveries by noon the next day (rivals guarantee by 10:30 am)
• Only 96% of Airborne’s arrive on time
o FedEx and UPS are 99% or higher
• Software is not nearly as advanced as rivals
• Marketing is not as aggressive as rivals
• Roadway packaging systems relationship
• Global Expansion/global shipping
• Rival distance-based pricing
• Future UPS moves
• U.S. Service Success
• In order to continue healthy growth over the year, airborne should consider an alliance or merger with RPS.
o Can help airborne cut into UPS’s traditional customer base with its ground transport.
o Airborne will get use of RPS’s info and tracking capabilities and RPS will get appeal and name recognition
• Globalization: further expand investments into overseas and global shipping; do not allow competition to get too ahead of you.
Airborne Today; Since 1997
Airborne Express launched ground delivery service and 10:30 AM delivery service. Also launched some services of its own, including small business center and Airborne eCourier.
August 14, 2003
Airborne Shareholders approved the acquisition of airborne, INC, by DHL of Brussels, Belgium.
August 15, 2013
The acquisition became effective the next day. DHL retained ownership of Airborne's ground operations and spun off its air operations of ABX Air, INC.
Entered the Fortune 500 list for the first time
Carl Donaway became the company's new president
Lead to many managerial changes
Airborne started a ground service for the first time in history.
Airborne was a focused cost leader:
• Outsourced its delivery and pickup labor
o Used independent contractors to reduce cost by 10% to 20%
o Used commercial airlines and local partners to reduce international operations costs
• Increased its asset capacity utilization
o Utilized 80% of its aircraft cargo area, compared to 65% to 70% its competitor achieved
o Couriers made more deliveries and pickups than competition
• Minimized its input and output costs
o Low marketing costs
o Large portion of its long-haul transportation was done by trucks instead of aircrafts
o The company was descended from two specialist airfreight carriers.
• The Airborne Flower Traffic Association of California was founded in 1946 to ship fresh flowers from Hawaii to the mainland.
• Pacific Air Freight, founded in 1949, focused on the delivery of perishables to and from Alaska.
o Airborne targeted the business customer that regularly shipped a large volume of urgent items, primarily to other business locations.
o The company purposely passed over residential deliveries and infrequent shippers.
o Airborne owned the airport that served as its major hub.
• Purchased an abandoned Strategic Air Command base in Wilmington, Ohio, for $875,000 in 1980.
• Pros: Did not pay landing fees, nor did it face any obstacles to tailoring the facility to its needs.
• Cons: it had to maintain the airport itself, and it did not share facility expenses with other airlines.
o Offered warehousing options on the airport site where retailers could take orders from their customers as late as 2 AM and have goods delivered via Airborne the same day.
o Airborne managed to run its aircraft roughly 80% full compared to competitors at 65-70%.
o Airborne could use trucks more often than its competitors for the long-haul portion of a delivery.
o Roughly 30% of Airborne’s volume never saw the inside of an airplane (versus 15% for Federal Express).
o Airborne differed from its rivals in at least two ways.
o Did not maintain retail service centers.
o Owned and operated only a portion of its delivery vans.
• Contracted pickup and delivery was 10% less expensive than company-owned pickup and delivery.
o Don’t invest in new technology instead they see another competitor had success with their technology then try and copy that.
• “Let them try out the new stuff and see what works. We won’t introduce new technology unless there’s a clear derived benefit for our customer.”
o A new project on call center automation ensured that many customers would speak with the same service agent each time they called.
o Internet site did not offer as many functions as its rivals’ did.
• Could track a shipment, but not schedule a pickup or create shipping paperwork.
Marketing and Sales
o Did not advertise in the mass media rather, it targeted logistics managers of major shippers, primarily via a 500-person sales force.
o They created special sort codes to accommodate early delivery
People and Culture
o “Strait-laced,” “frugal,” and “very conservative.”
o Company reflected humility:
• “Just don’t get too strung out. And, for God’s sake, don’t get arrogant or cocky, because that’s not the way to be.” - President and COO Robert Brazier
o Overseas ambitions were far more modest than the aims of Federal Express or UPS
• They International operations 6% of total identifiable assets in international operations as compared to Federal Express and UPS that were 19% and 12%, respectively.
o Senior officers believed that “there are no significant service advantages which would justify the operation of [our] own aircraft on international routes.”
o Airborne began to forge a relationship with Roadway Package System (RPS), a subsidiary of Caliber Systems.
o The relationship with RPS helped make deep inroads into UPS’s traditional customer base by targeting the ground transport needs of large-volume business customers.
Cost focused company in a heavily fixed cost industry
Strategic at lower their fixed costs which helped increase their profit margins
By focusing on b2c shipping, missed out on the large profits they could have made from doing residential deliveries.
Even with low cost and high profit margin still unable to survive against the other two big players in the express mail industry