Airborne Express

Case Memo #1
Wednesday, April 10, 2019

BUS ​42001-81 - Competitive Strategy

Spring 2019
Professor Jacob Leshno
Airborne 1 - Five Forces Analysis of Industry
Airborne faces a highly competitive express mail industry due to existing competition rivalries
and strong buyer power. The relative power of each industry force is summarized in Exhibit 1.

Competitors: ​The big three players in the express mail industry are UPS, FedEx, and Airborne
Express, together serving 85% of the market. General services are not easily differentiable and
face low switching costs, so these firms have relied on differentiating on technologies, customer
service, and pricing. Package tracking and good customer service were initially advantages for
FedEx, however UPS eventually bridged that gap. As UPS and FedEx switched to
distance-based pricing, Airborne was able to differentiate itself as being lower cost. There are
also indirect competitors: BAX, DHL, Emery, RPS, TNT, USPS. Though these second-tier
carriers only make up 15% of the market, they have established expertise in international
markets (DHL & TNT), heavy cargo (BAX & Emery), information technology (RPS), and
overall convenience (USPS). These smaller carriers have been able to serve different customer
segments for positive-sum competition, but there is strong competition between the top three.

Suppliers​: The suppliers in the express mail industry are related to either distribution or labor.
The distribution players include airplane manufacturers, delivery van manufacturers, and
airports. Airplane manufacturers hold a high level of supplier power as there are few (and large)
airplane manufacturers for a carrier to partner with. Airborne holds some advantage here because
it mostly purchases and refurbishes used airplanes. Delivery van manufacturers hold less power
as there are more players in that space. Airports, due to the high cost of switching major
destinations for the express mail carriers, hold high supplier power. Labor, specifically unionized
labor, drives the majority of the supplier power in the industry. FedEx is least susceptible to this
power, as only their pilots are unionized. UPS and Airborne, however, have a large unionized
workforce which have historically held high bargaining power for wages and contracts.

Buyers: ​With relatively low switching costs and a fairly standard product, buyers have
significant power in the express mail industry. They have established themselves as having low
loyalty once contracts expire. Through bargaining power, they negotiate discounts on contracts.

Substitutes: ​There is some pressure on the express mail industry from substitute products. Some
shipments can be replaced by fax and email, which can perform the same function as express
mail (which can improve both price and performance), but other shipments are not as easily
replaced. With the trend of increased use of technology, some business documents that are
typically sent by express mail can be sent online instead at a lower cost. Other shipments
(medical samples, replacement parts) do not face much threat from substitutes. As a result, the
threat of substitutes is fairly high on one product (low weight mail) but low on heavier
shipments.

Threat of Entry: ​The barriers to entry for the industry are relatively high. There are high fixed
costs involved in the service network and distribution of mail, including large capital investment
in planes, trucks, sorting centers, labor network, and marketing. The capital expenditures for air
and ground fleets and hub facilities are large. The incumbents in the industry have established
distribution channels for delivery of mail, including a physical distribution network, customer

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service support, and sophisticated information systems to inform routes. There are economies of
scale for delivery that would force an entrant to come in at a large scale or accept a cost
disadvantage. The industry giants, like FedEx and UPS, have established brand recognition from
a history of advertising, which leads to some product differentiation that an entrant would need
to overcome. In addition to the barriers to entry, the three established firms that serve 85% of the
market have substantial resources to fight back against entrants. Thus, due to the high barriers to
entry and the potential for retaliation, the threat of entry is relatively low.

Airborne 3 - Situation of Airborne Express in 1997

a) There are five activities where Airborne performs more efficiently/differently than its
competitors. By owning its own airport, Airborne is able to lease warehousing space on the
property to customers which in turn allows for better next day service and gives them a
competitive advantage. Airborne’s patented cargo containers fit through passenger doors of
planes reducing conversion costs and utilizes jet space at 80% compared to UPS and FedEx at
65-70%. By concentrating business in large metropolitan areas, Airborne also utilizes their
delivery drivers better than their competitors. Airborne also focuses on customer service by
offering customizable, “solution-oriented” delivery services to cater to individual customer
needs. They intentionally target certain types of customers (B2B, B2C) and ignore business from
other willing markets (consumers). Finally, they are known for their low prices, specifically,
Airborne continues to operate under a set price model compared to FedEx and UPS, which
adopted a distance-based price model.

b) We performed a cost analysis from the information given about FedEx in order to estimate the
cost of Airborne Express shipping an overnight letter. Exhibit 3 shows that it costs FedEx about
$8.55 to ship an overnight letter. At $9.00 (with discounts), it has about a $0.45 margin. As
shown in Exhibit 2, we estimated costs of Airborne Express by information from the case on its
relative position compared to FedEx, with an estimated per overnight letter cost of $6.87 (with
the same percent discount as FedEx, a $0.25 margin). Assumptions are summarized in the table.
We also estimated Airborne’s profit margins by its financial statements in order to verify our
estimate, and it resulted in a similar cost for an overnight letter. The smaller per unit margin is
what we might expect, as Airborne was able to perform some operations more efficiently, but is
also charging a lower price.

c) We do not believe that Airborne’s competitive advantages are sustainable. For example,
rented warehouse space for customers is finite at its own airport, and there are opportunities for
other players within the industry to negotiate on-site deals at other hub airports to warehouse
customer goods. FedEx and UPS’s driver efficiencies will grow as more packages are delivered,
reducing Airborne’s advantage. At some point, Airborne will also need to update its fleet, and its
patent on cargo containers will expire. That being said, this is one area where the learning curve
might allow Airborne a continued marginal competitive advantage. Though its costs are lower
than FedEx’s, it also has narrower margins due to its lower price. If Airborne is able to cater to
individual customer needs resulting in higher willingness to pay above costs, and patent rights
allow it to move down the learning curve, then Airborne might be able to sustain a competitive
advantage, but we believe this to be unlikely.

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Exhibit 1: Five Forces Analysis

Exhibit 2: Cost of Shipping Express Letters

Airborne
FedEx- Express-
cost per estimated
unit cost per
Item (Exhibit 3) unit Airborne Express Assumptions
Pickup
Per the case, one estimate suggested
Airborne was able to reduce pickup labor
Labor $1.09 $0.87 costs/unit by 20%
With a smaller fleet size, we expect Airborne
to have a smaller cost of fuel. This won't be
a huge jump, however, as FedEx is likely
Fuel $0.07 $0.04 benefitting from some economies of scale.
With a smaller fleet size, we expect Airborne
Maintenance and to only bear about 1/2 of the maintenance
depreciation $0.21 $0.10 requirements when compared to FedEx.
Subtotal $1.37 $1.01

Long-haul transport
Per the case, there are estimates that cost
Flight- and of trucks were 1/3 costs of planes. With 30%
trucking-related expense $2.44 $2.16 of Airborne's volume going only by truck (vs.

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 FedEx's 15%), we solved and calculated for
the estimated cost per unit for Airborne.
Relied more on humans than FedEx for
Hub labor $0.30 $0.33 sorting, assumed slightly higher labor costs.
Rather than facing hub depreciation,
Airborne is likely facing depreciation with its
owned airport. We estimate this to be about
Hub depreciation $0.25 $0.10 1/2 of FedEx's hub depreciation.
Subtotal $2.99 $2.59

Delivery
Per the case, one estimate suggested
Airborne was able to reduce delivery labor
Labor $1.64 $1.48 costs/unit by 10%
With a smaller fleet size, we expect Airborne
to have a smaller cost of fuel. This won't be
a huge jump, however, as FedEx is likely
Fuel $0.10 $0.08 benefitting from some economies of scale.
With a smaller fleet size, we expect Airborne
Maintenance and to only bear about 1/2 of the maintenance
depreciation $0.31 $0.15 requirements when compared to FedEx.
Subtotal $2.05 $1.71

With no advertising, there are no advertising

Advertising $0.22 $0.00 costs for Airborne.

FedEx is using 1,100 Reps/ 2.8m packages,

amounting to .0004 Reps/package. Airborne
is using 500 Reps/900,000 packages,
amounting to .0006 reps/package. We used
the ratio of reps/package to solve for
Sales $0.21 $0.32 Airborne's cost/unit.

With fewer technological risks being taken,

Airborne is likely to have a lower IT
cost/unit. This won't be a huge jump,
however, as FedEx is likely to benefit from
Information technology $0.54 $0.45 economies of scale.

Airborne is likely to have a slightly lower

customer service cost/unit, as FedEx
Customer service $0.20 $0.15 invested heavily in workstations to support

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 their customer service.

Airborne has taken a frugal approach to

operations, and we estimate they bear
about 2/3 of the overhead cost/unit as
Corporate overhead $0.97 $0.65 FedEx.

Total cost $8.55 $6.87

Margin $0.45 $0.25

Assuming the same price discount as

Price* $9.00 $7.12 FedEx

* The price reported here is lower than the list price shown in Exhibit 8 because of discounts
granted to large-volume customers.