Airborne Express Case Study Case 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; •
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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 !s prices reduced reduced closer and closer closer to costs, the express express mar"et has has increasingly increasingly turned to differentiation on customer facing aspects such as online ordering and pac"age trac"ing #one 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 mar"et %imilarly, 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 spo"e model requires almost a billion dollars to setup new' required to compete in an overall low cost provider strategy such as (ed)x and *+% mean that smaller players such as !- &heavy cargo' and .+% &low cost ground transport' have had to adopt focussed low/cost strategies to remain viable y carving out niches – highly optimi0ed 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?
!irborne has has &similarly to !- and and .+%' carved out out a focussed differentia differentiation tion strategy – initially 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 operational structure that is highly cost efficient for this mar"et segment, enabling them to offer very low prices to their chosen segment !s is evident in (igure 1, 1, !irborne )xpress has consistently undercut prices of the main rival, while apparently increasing focus on the lighter shipment segment as is evident in (igure 2, 2, contra to the movement of (ed)x %ome of their "ey efficiencies include; •
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purchasing low cost used planes &requiring minimal modification with their speciali0ed cargo containers' and an airfield with community reinvestment status, along with running planes at higher utili0ation levels targeting more metropolitan area deliveries, and increased use of afternoon $ second day deliveries enabling greater use of the more cost efficient truc" transportatio transportation n provision of many unmanned drop off boxes versus sparser retail service centres provided by (ed)x and *+% the extensive use of contractor vans for deliveries – allowing greater flexibility to ad3ust costs to revenue, while improving supplier side negotiation strength against the drivers of their owned 4 operated vans as well as the flexibility to change contracted van companies !dopting a fast/follower approach approach in the the technology technology space – following following and adopting only those technologies that demonstrate clear value adds, reducing wasted investment
Mark Mark Burg Burgoyn oyne e |Airbo |Airborn rne e Expr Expres ess s Case Case Study Study 1
!dditionally, they have also been able to provide highly personali0ed service to their customers, including implementing a system to ensure customers spo"e to the same agent each time, provision of warehouse space on its airport, as well as personali0ed targeting of logistics managers – developing personal relationships and therefore providing a more compelling value chain for their target mar"et&s'
3. uantify Airborne!s sources of advantage.
!irborne5s quantifiable advantages are derived from the cost side – which then enable a price side competitive edge / and are facilitated by strategic decisions to be selective in their target mar"et, choosing those mar"et segments that complement their strengths These include; • • •
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*sed aircraft purchased for 62788 each vs typical costs of 6988 for a new aircraft !ircraft utili0ation at < vs industry average =>/?< Targeting clients with concentrated shippers$receivers allowing more efficient consolidation – />< of shipments to$from top > metro areas vs =< or lower for (ed)x and *+% This in turn further enables !irborne couriers to pic"up more parcels per stop than (ed)x – reducing labour by 2< for pic"up and 1< for delivery Targeting higher proportion of afternoon or second day deliveries, enabling higher proportion of van deliveries – @< of deliveries using vans alone &vs 1>< for (ed)x' with non/flight deliveries typically 1$@ of the total cost of equivalent aircraft capacity )xtensive use of contractors for vans, handling =/=>< of !irborne volume – yielding estimated further 1< costs savings over own$operate vans #o mass mar"et advertising costs Aith the operational efficiencies above, !irborne is currently able to provide the mar"et place with prices lower than either *+% or (ed)x in most weight and timeframe categories &see (igure @' It is interesting to note the relatively modest list price savings offered by !irborne )xpress when ta"en in the context of the above operational efficiencies and the lower net profit &averaging 1/2< vs (ed)x at @< and *+% at ><', which I would interpret as follows; Bist price is offered to everyone o +rovides sales managers with flexibility to target "ey accounts &with the frequency, o reliability and suitable delivery paths' with significant discounts to secure their business
)xpanding on this in a comparison with the stated cost str ucture per (ed)x overnight letter reveals an approximate 22% cost savings advantage – see !ppendix @, parts 1, 2 and @ for logic and calculations
". #hat must $obert %ra&ier, Airborne!s 'resident and ()), do in order to strengthen the company!s position?
.obert has driven significant speciali0ed efficiencies which have enabled it t o compete successfully within its niche client base in an otherwise highly competitive broader mar"et place There are however a number of areas that stri"e me as concerning and these are; 1 The targeting of such a sustained low net profit margin &1<' – passing on all the efficiency gains to their customers through steadily declining prices 2 Continued targeting of a customer segment with lighter and lighter pac"ages, in light of looming threat of a partially deregulated *%+% @ Bac" of added value reali0ed through their vertical alliance with .+% This initiative brings no costs savings, provides no more obvious value than securing additional contract vans, and runs the ris" of damaging their brand through poorer service It is clearly not strategic in
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nature, and appears to be simply an attempt to broaden their geographic footprint, but in doing so dilutes their niche competitive advantage 7 ertical growth in !irborne5s targeted niche will li"ely bring only modest incremental gains, yet attempting organically broader growth – targeting expanded client base geographically, or even internationally – brings with it two significant ris"s International growth has been shown to be very expensive and difficult &? years of consecutive losses from (ed)x' – requiring deep poc"ets, and to expand significantly domestically !irborne runs the very real ris" of (ed)x ta"ing notice and aggressively start competing directly – something that has not happened to date The concern is what mode of growth should be targetedD 8y recommendations would be as follows; 1 Implement a pause in their steady pricing reductions – target at a mar"et rate of @/7< net profit, which should be achievable without sacrificing customer base given their efficiency advantages !s an extension of this point, !irborne should ignore$re3ect pressure to implement a distance based pricing model !irborne5s model relies upon 1/on/1 sales person engagement with their customers, and appropriate distance based bespo"e pricing could still be offered if required to secure these "ey clients 2 !irborne should consider two avenues on the reducing pac"age si0es concern It could consider approaching the rapidly growing ma3or e/tailers such as !ma0on and Eell to secure transport contracts for delivery of products to their clients in ma3or population hubs, competing on cost efficiencies and customi0ed service including their on/airport storage %hould *%+% be granted permission by congress to offer bul" discounts, !irborne should consider approaching *%+% to form a strategic alliance – leveraging !irborne5s proven client sales and management s"ills, for which *%+% would have little embedded "now/how !dditionally, !irborne is estimated to have a @< cost advantage over (ed)x in the pic"up and long haul &per part @ of !ppendix C', which may also be of interest to *%+% for some segments $ areas as, while *%+% would bring reach and financial strength, it is unli"ely that *%+% could achieve the targeted efficiencies that !irborne has demonstrated @ !irborne should cancel the .+% alliance if no significant value adds can be derived .+% has no aircraft, no mention of any advantage in customer relationship, and appears to solely offer larger footprint &at the expense of diluted competitive advantage in !irborne5s speciali0ed niche' If an alliance is to be sought it should be done in a way that build on strengths or addresses significantly wea"nesses &without eroding existing strengths', and this arrangement seems to do neither 4. To brea" out of the modest vertical growth model paradigm, a strategic alliance loo"s to be the best option %uch an alliance should provide !irborne with the protection and breadth of footprint that a large organi0ation can bring, while providing that organi0ation with the s"illset and optimi0ed offerings to better compete on "ey business accounts *%+% as mentioned above is one to consider should congress approve the bill to allow discount *+% is another target – with *+% appearing to offer a good cultural fit with their Fowned by managers, managed by ownersG mantra li"ely fitting well with !irborne5s conservative and frugal characteristics, and with *+%5s higher net profit margins &see (igure 7 – twice (ed)x and >x !irborne5s net income<' meaning *+% is quite possibly loo"ing to address the low mar"/up mar"et segment without diluting it5s own brand strengths &and apparent broad differentiation strategy – as evidenced by overseas footprint and higher profit margins' *+%5s mar"et lagging revenue growth &C!H. of 9< behind (ed)x and 1@< and !irborne at 1>< / see (igure >' adds further weight to the notion that *+% may be loo"ing for options to capture some of that growth (ed)x by comparison, seems to be already aggressively competing in the low mar"up arena – meaning any alliance would have far fewer synergies to offer – li"ely cannibali0ing much of their combined existing business •
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Appendix 1: Macro Environment - PESTEL Anaysis (omponent Political Economic Sociocultural
Technological
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Environmental Legal & Regulatory
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Congress weighing approval for *%+% to grant volume discounts, which may add competition to the mar"et #egligible macro economic effects at play %ociocultural expectations increasingly dictate a more personali0ed and online presence, necessitating information systems and infrastructure upgrades Beaps in computing capabilities, the embrace of which by (ed)x has demonstrated significant value in optimi0ation and scheduling, mean competing players such as !irborne )xpress must follow in order to remain competitive Hrowth of internet usage presents exposure and opportunities )xposure in the form of increasingly the letter$document mar"et o can be eroded by email and scanning pportunities in the form of growing online shopping segment o needing physical boxes to be delivered !dditionally, another dimension of customer facing differentiation o can be carved out in their online ordering and trac"ing experience #$! as at 2? #$!
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Appendix !: Competitive Environment - Porters "-#orce Anaysis *orce Substitute Products
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Buyers bargaining poer Potential ne entrants
Suppliers bargaining poer
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!ompeting sellers
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ery strong substitute product pressure exist for documents in the form of growing prevalence of email and scanning, reducing the need to express mail as many items +ossible additional competition from regular mail as *%+% see"s to have congress grant them permission to offer bul" discounts ery low barriers to buyer flight exist The ris" of potential new entrants would be low The capital expenditure required to setup competitive hubs, 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 income5s seen in the industry Aith the location of !irborne )xpress chosen &hio', the labour mar"et is relatively depressed, meaning !irborne )xpress has some advantage in their labor costs There is an exposure however in that J>< is unionised and could &li"e with *+%' elect to stri"e The main suppliers beside labour would be for fuel $ maintenance supplies, for which due to the wide availability there is li"ely some modest bargaining power available The two K lb gorillas5 could pose a significant challenge to !irborne express, especially if they elect to go after "ey accounts $ mar"ets that !irborne relies upon They can easily go on the offensive to grab such locali0ed mar"et share – even sustaining losses in the process The main advantage that !irborne seems to have in this area is that they seem to be small enough such that (ed)x and ELB are 3ust concentrating on each other There does however seem to be an easing now, with the ma3or player (ed)x recently raising its prices after a long downward trend
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Appendix C $ %uanti&cation o' Cost Advanta(e 1 Muantification of aircraft cost advantage It is assumed that the average cost of !irborne )xpress airplanes is 62788 as per their recent purchase It is further assumed that the average cost of (ed)x5s aircraft is 6>88 &half second hand, half new' In order to estimate the effective cost difference normali0ed to a per letter basis, we must first estimate what the total daily depreciation is for each company #o direct information is provided about their financing structure, but the case does provide a hub depreciation cost per letter of 62> y assuming the same sort of financial structure &and interest rates' are applied to airlines, we can ma"e educated guesses as to the airline costs (ed)x has *%! based hubs, which handle 288 pac"ages per day Ae further "now that replacement cost for each hub is approx 688 %o total C!+)- N x 688 N 6=,788 Total depreciation is 62> per letter x 288 pac"ages N 6?88 per day Therefore capital depreciation in the industry runs at approximately 6? $ =,7 N 61 $ day $ 6C!+)The !irborne )xpress aircraft depreciation is then 1?> planes x 62788 x 1 N 67=88 $ Eay The (ed)x aircraft depreciation is = planes x 6>88 x 1 N 6@788 $ Eay &assuming leased aircraft are the same cost' (ed)x handles 288 letters daily, >< of which travel by air N 2@88 Therefore aircraft depreciation per letter runs at 6@788 $ 2@88 N 617@ per letter transported by air !irborne )xpress handles 988 letters daily, ?< of which travel by air N =@88 Therefore aircraft depreciation per letter runs at 67=88 $ =@88 N 6?@ per letter transported by air 2 Calculation of Bong Laul (light 4 Truc"ing advantage In addition to aircraft depreciation, we must also factor in long haul truc"ing &for non air deliveries' as well as operational expenses for the aircraft (ed)x rea"down Ae "now that; • • • • •
the Bong Laul (light 4 Truc"ing costs for (ed)x runs at 6277 $ Better >< of (ed)x deliveries use aircraft for long haul 1>< use vans only an transport is approximately 1$@ the cost of aircraft !ircraft cost N 617@ $ letter O fuel $ maintenance
Ae can then solve; 6277 N > x &617@ O fuel' O 1> x &1$@ x &617@ O fuel'' 6277 N 6121> O > fuel O 6?1> O > fuel N 612? O 9 x (uel Pielding the (ed)x !ircraft fuel $ maintenance costs N 612 per letter transported by air, and
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(ed)x long haul van costs N &612 O 617@'$@ N 69 $ letter delivered by van !irborne rea"down Ae "now that; • • • • • • •
(ed)x long haul van transport N 69 per letter delivered by air (ed)x aircraft fuel 4 maintenance N 612 $ letter delivered by air ?< of !irborne deliveries use aircraft for long haul @< use vans only !irborne aircraft run < full vs ?< full for (ed)x !irborne van transport using contractors is approximately 1< less than the mar"et !pproximately =< of !irborne vans are contract
!irborne long haul van costs N 69 x &1 – &1 x ='' N 6> $ letter transported by van !irborne long haul aircraft fuel 4 maintenance N 612 x ?< $ < N 6112 $ letter transported by air &simply a ratio to account for the higher aircraft utili0ation that !irborne achieve' Therefore Bong Laul (light 4 Truc"ing costs for !irborne runs at &? x &6?@ depreciation O 6112 (uel'' O &@ x 6>' N 61>> &vs 6277 for (ed)x'
3. Cop!ete o"ernig#t !etter $ost $oparison
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#i(ure 1 - )evenue per s*ipment
#i(ure ! - +ei(*t per s*ipment
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#i(ure , - List prices o' Express mai Carriers
#i(ure 4 - Company et ncomes /0
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#i(ure " - ormai2ed )evenue 3rot*
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