Airborne Express case Analysis Essay

1 Company Background: Airborne express is an express delivery company and cargo airline, which by1997 had 16% of the domestic express mail market share. They operate in a niche by targeting business clients located in the United States. Their main service is next morning delivery which is also the flagship of the industry. Airborne are Target Business clients  able to differentiate by holding a position as  primarly with next morning  delivery services  cost leaders while providing high quality  services, equal to that of their competitors. In addition, Airborne Express is perceived  as the flexible, solution orientated express  Provide  carrier. They possess the ability of adapting  Able to offer the  Flexible- solution  lowest price on  needs of business customers, without it  orientated  the market  express service  affecting the price structure of their services. Figure 1 Airborne’s wheel of success Competitive advantage: The mail express industry is characterized by a cost structure with high variable costs and relatively low fixed costs. Firms’ competitive advantage lies mainly in providing their service at the lowest possible cost. Airborn Express’ Infrastructure Marketing  and sales and  offer Inbound  logistics Sorting  operations Package Shipping Delivery services Figure 2: Airborne’s express value chain Marketing, sales and technology: ï‚ · Low advertising costs; sales mainly through a strong sales-force that establishes personal relationships with their clients. ï‚ · No research and developments costs in research and development. Ability to copy and integrate quickly when competitors’ adopt new successful innovations. Inbound logistics: ï‚ · Airborne express own its main hub (purchased at a very low price because of rural location) on which it collects its parcels. ï‚ · No landing fees, because of ownership, which substantially reduce their costs. Sorting operations: ï‚ · Sorting operation rely mostly on labor than machines, compared to competitors. As labor is none-unionized labor, it provides Airborne with cheaper labor force. ï‚ · Operations mainly situated in one location (sorting facility and warehouses), allowing a lower cost structure in addition to some economies of scale. 2 Package shipment: ï‚ · Fleet of 175 aircrafts, mostly McDonnell Douglas type, purchased used at low price. ï‚ · Deliveries mostly concentrated in top 50 US metropolitan areas, as most businesses are located in such areas, allowing high utilization rate of aircrafts (80%), and therefore some economies of scale. Delivery services ï‚ · Pickup and delivery services mostly operated by independent contractors (paid by the mile or parcel), 10% cheaper than company owned pickup and delivery services. ï‚ · More parcels per stop because clients are situated in mostly metropolitan areas. ï‚ · No retail service centers (little need as most clients are business clients), compared to competitors who are dependent on such service centers. Industry Analysis: Exhibit 1 gives an overview of attractiveness of industry. Positive for companies operating in this sector is: market for express deliveries is difficult to access. Capital requirements are high; market is saturated with established companies operating the industry. (To FeDex for example, has become synonym to overnight shipping). In addition there is little supplier power. Main suppliers are pickup and delivery service companies, and these are exposed to high competition which contributes to low bargaining power. On the other hand, it is a very saturated market. The market leaders, FedEx and UPS operate in most of the parcel markets (international, domestic, businesses, private †¦). The remaining companies target niche markets and are either direct competitors of either FedEx or UPS. What differentiates them is usually price and image. In general, the industry is characterized by strong competition between firms, as firms provide similar services, with a high degree of substitu tability. With a sector exposed to such competition, profit margins outsights are relatively low. Generic strategies: 100% 80% Market share 60% Airplane utilization rate Operating margins Price/ Performance – Next morning delivery 40% 20% 0% Fedex UPS Airborne Delivery quality Price/ Performance Next afternoon delivery Figure 3: graphs based on numbers from Exhibit 2 3 Operating Margin 10% 10% 9% 9% 8% Average price (all parcel types) $35 8% 7% $34 7% 6% $33 6% 5% $32 5% $31 4% $30 4% 3% $29 3% Average price (all Operating 2% $28 2% parcel types) – next 97% 98% 99% 100% 1% 96% morning Market deliveries 1% 0% Share 0% $25,00 0% 10% $30,00 20% 30% $35,00 40% 50% Both FedEx and UPS are currently looking for marginal revenue opportunities. History of industry has showed importance of innovation .Currently, UPS has adopted a new pricing strategy that has been followed by FedEx. The question is whether Airborne should adapt same pricing strategy as their competitors. Cost/ Benefit analysis Advantages of adopting new pricing system – Maintain pace of competitors, – Not to lose profitability and market share as a result of competitors’ overtaking shorter distance mail market due to lower pricing. – Market sensible to market innovation. Illustrated by the innovation war between FEDEX and UPS in the 90’s. – Brand known as flexible, so why not adopt a flexible pricing system? Disadvantages of adopting new pricing system – Imposing a new costly system – Increase costs and decrease profits if prices are  still lower than competitors in the overnight  morning delivery and in the lower weight  products. – Businesses are the clients, and services are  probably set by contracts and negotiations on volumes and not per unit. – Distance based pricing mostly influence  decisions of consumers rather than businesses. Maintaining the status quo – lose profitability and markets share; competitors’ overtaking short distance mail market due to lower pricing. – Long term effects: Airborne risks operating only on longer more costly transportation routes, and will largely influence profitability if only operating in specific markets. Airborne Express Adotping Not adopting Competitors Little worse This chart chose us the probable effects  of not adapting new pricing system  given that we already know they have  implemented the changes. Much worse Adopting Much better Same Much worse Not adopting Little worse Much better Same Figure 4: Game theory Recommendation The real risk of not following in competitors footsteps is that Airborne express might lose clients, especially smaller business clients. The effects would be the risk of operating in only long distance deliveries, which are also the most expensive. In addition, Airborne has an image of being flexible and solution orientated. Not implementing distance based pricing can dilute their brand image, especially in an industry where innovation is important. Given the risks, recommendations for Airborne Express (in order not to lose paste to competitors), is to implement distance based pricing. 4 Exhibit 1: Porter’s five forces analysis Threat of new Entrants (low) – Saturated markets – High capital requirements – Established brands – Some economies of scale – Low product differentiation Determinants of Supplier Power (Low) -Input, little dependent on suppliers: * aircraft carriers bought used *Pickup and delivery services companies are exposed to high competition, and therefore have little bargaining power. Rivalry among firms (high) – 3 big competitors and 6 second players: * Ups operate in all markets, * Remaining operate in niche markets. – Provide similar services. Fedex Determinants of buyer power (high) – Many suppliers – Low product differentiation – Low switching cost – High variable costs – Some brand loyalty – Low buyer switching costs – Competitive advantage through innovation – Discounts with volume – Price sensitive Threat of substitute products (High) – Low switching costs, unless contracts have been negotiated. – Similar product quality,(99% of package on time with UPS, FED and 97% with Airborne – Prices are similar, except Airborne has lower price for the industries flagship product – Other products such as electronic mail Exhibit 2: Numbers for radar Graph Companies Utilization rate Avg price overnight morning delivery, 1-10 lbs Avg price overnight next afternoon delivery 1-10 lbs Delivery quality Operating Margins (19961997) Domestic market share Fedex 65-70% 20,53 UPS 65-70% 21,54 Airborne 80% 18,55 21,65 18,52 16,63 99% 6.1% 99% 9.1% 97% 7.9% 45% 25% 16% 5