Airborne Express: The Underdog

held under 5% of the market share.1 DHL however, had a huge presence outside of North America and was in fact the largest small package delivery company in the world. In 2003, after years of struggling to survive in the fiercely competitive small package express delivery industry, Airborne was acquired by DHL, which was itself owned by Deutsche Post, the large German postal, express package, and logistics company.

The evolution of the air express industry and the cur-rent state of competition in the industry were discussed in a companion case to this one, “The Evolution of the Air Express Industry, 1973–2010.” The current case fo-cuses on the operating structure, competitive strategy, or-ganizational structure, and cultures of Airborne Express from its inception until it was acquired by DHL in 2003. It also deals with the aftermath of the DHL acquisition.

History of Airborne expressAirborne Express was originally known as Pacific Air Freight when it was founded in Seattle at the close of World War II by Holt W. Webster, a former Army Air Corps officer. (See Table 1 for a listing of major milestones in the history of Airborne Express.) The company was merged with Airborne Freight Corporation of California in 1968, taking the name of the California company but retaining management direction by the former officers of Pacific Air Freight. Airborne was ini-tially an exclusive airfreight forwarder. Freight forward-ers such as Airborne arrange for the transportation of air cargo between any two destinations. They purchase cargo space from the airlines and retail this in small amounts.

This case was made possible by the generous assistance of Airborne Express. The information given in this case was provided by Airborne Express. Unless otherwise indicated, Airborne Express and Securities and Exchange Commission’s 10–K filings are the sources of all infor-mation contained within this case. The case is based on an earlier case, which was prepared with the assistance of Daniel Bodnar, Laurie Martinelli, Brian McMullen, Lisa Mutty, and Stephen Schmidt. The case is intended as a basis for classroom discussion rather than as an illustration of either effective or ineffective handling of an administrative situation.

introductionAirborne Inc., which operated under the name Airborne Express, was an air-express transportation company, pro-viding express and second-day delivery of small packages (less than 70 pounds) and documents throughout the United States and to and from many foreign countries. The company owned and operates an airline and a fleet of ground-transportation vehicles to provide complete door-to-door service. It was also an airfreight forwarder, moving shipments of any size on a worldwide basis. In 2003 Airborne Express held third place in the U.S. air express industry, with 9% of the market for small package deliveries. Its main domestic competitors were Federal Express, which had 26% of the market; United Parcel Service (UPS), which had 53% of the market. There were several smaller players in the market at the time, including DHL Airways, Consolidated Freight-ways (CF), and the U.S. Postal Service, each of which

Case 7Airborne Express: The UnderdogCharles W.L. Hill, School of BusinessUniversity of Washington,Seattle

This case was prepared by Charles W. L. Hill, University of Washington. Used by permission. Copyright © 2011 by Charles W. L. Hill.

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C-106 Case 7 Airborne Express: The Underdog

1946: Airborne Flower Traffic Association of California is founded to fly fresh flowers from Hawaii to the mainland.

1968: Airborne of California and Pacific Air Freight of Seattle merge to form Airborne Freight Corporation. Headquarters are in Seattle, Washington.

1979–81: Airborne Express is born. After purchasing Midwest Air Charter, Airborne buys Clinton County Air Force Base in Wilmington, Ohio, becoming the only carrier to own and operate an airport. The package sort center opens, creating the “hub” for the hub-and-spoke system.

1984–86: Airborne is first carrier to establish a privately operated Foreign Trade Zone in an air industrial park.

1987: Airborne opens the Airborne Stock Exchange, a third-party inventory management and distribution service. In the same year, service begins to and from more than 8,000 Canadian locations.

1988: Airborne becomes the first air express carrier to provide same-day delivery, through its purchase of Sky Courier.

1990: The International Cargo Forum and Exposition names Airborne the carrier with the most outstanding integrated cargo system over the previous 2 years.

1991: A trio of accolades: Airborne is the first transportation company to receive Volvo-Flyg Motors’ Excellent Performance Award. Computerworld ranks us the “most effective user of information systems in the U.S. transportation industry.” In addi-tion, we receive the “Spread the Word!” Electronic Data Interchange (EDI) award for having the largest number of EDI users worldwide in the air express and freight forwarding industry.

1992: Airborne introduces Flight-ReadySM - the first prepaid Express Letters and Packs.

1993: Airborne introduces Airborne Logistics Services (ALS), a new subsidiary providing outsourced warehousing and distribution services. IBM consolidates its international shipping operation with Airborne.

1994: Airborne opens its Ocean Service Division, becoming the first express carrier to introduce ocean shipping services. Airborne Logistics Services (ALS) establishes the first new film distribution program for the movie industry in 50 years. We also become the first company to provide on-line communication to Vietnam.

1995: Airborne Alliance Group, a consortium of transportation, logistics, third-party customer service operations and high-tech companies providing value-added services, is formed. Airborne opens a second runway at its hub, which is now the United States’ largest privately owned airport. We also expand our fleet, acquiring Boeing 767–200 aircraft.

1996: Airborne Express celebrates 50 years of providing value-added distribution solutions to business.

1997: Airborne Express has its best year ever, with net earnings increasing three-and-a-half-fold over the previous year. Airborne’s stock triples, leading to a two-for-one stock split in February, 1998.

1998: Airborne posts record profits and enters the Fortune 500. The first of 30 Boeing 767s is introduced to our fleet. The Business Consumer Guide rates Airborne as the Best Air Express Carrier for the 4th consecutive year.

1999: Airborne@home, a unique alliance with the United States Postal Service, is introduced. It enables e-tailers, catalog companies and similar businesses to ship quickly and economically to the residential marketplace. Optical Village is created. Part of Airborne Logistics Services, this new division brings together some of the biggest competitors in the optical industry to share many costs and a single location for their assembly, storage, inventory, logistics, and delivery options.

2000: Airborne announces several changes in senior management, including a new President and Chief Operating Officer, Carl Donaway. Several new business initiatives are announced, most notably a ground service scheduled to begin April 1, 2001. Airborne also wins the Brand Keys Customer Loyalty Award, edging out our competition for the second consecutive year.

2001: Airborne launches Ground Delivery Service and 10:30 a.m. Service, giving Airborne a comprehensive, full-service industry competitive capability. Airborne.com launches its Small Business Center, as well as a variety of enhancements to help all business customers speed and simplify the shipping process. We also release the Corporate Exchange shipping applica-tion, simplifying desktop shipping for customers while giving them greater control. Advanced tracking features are added to airborne.com and Airborne eCourier is released, enabling customers to send confidential, signed documents electronically.

2003: Airborne’s ground operations acquired by DHL for $1.1 billion.

Table 1 Major Milestones at Airborne Express4

Source: http://www.airborne.com/Company/History.asp?nav=AboutAirborne/CompanyInfo/History


Case 7 Airborne Express: The Underdog C-107

Air express operAtions

the domestic delivery networkAs of 2002, its last full year as an independent enter-prise, Airborne Express had 305 ground stations within the United States. The stations were the ends of the spokes in Airborne’s hub-and-spoke system and the dis-tribution of stations allows Airborne to reach all major population centers in the country. In each station there were about 50 to 55 or so drivers plus staff. About 80% of Airborne’s 115,300 full-time and 7,200 part-time employees were found at this level. The stations were the basic units in Airborne’s delivery organization. Their primary task was to ferry packages between clients and the local air terminal. Airborne utilized approximately 14,900 radio-dispatch delivery vans and trucks to transport packages, of which 6,000 were owned by the company. Independent contractors under contract with the company provided the balance of the company’s pickup and delivery services.

Airborne’s drivers made their last round of major clients at 5 p.m. The drivers either collected packages di-rectly from clients or from one of the company’s 15,300 plus drop boxes. The drop boxes were placed at strategic locations, such as in the lobbies of major commercial buildings. To give clients a little more time, in most ma-jor cities there were also a few central drop boxes that are not emptied until 6 p.m. If a client needed still more time, so long as the package could be delivered to the airport by 7 p.m. it would make the evening flight.

When a driver picked up a package, he or she read a bar code that is attached to the package with a hand-held scanner. This information was fed directly into Airborne’s proprietary FOCUS (Freight, Online Con-trol and Update System) computer system. The FOCUS system, which had global coverage, records shipment status at key points in the life cycle of a shipment. Thus, a customer could call Airborne on a 24-hour basis to find out where in Airborne’s system their pack-age is. FOCUS also allowed a customer direct access to shipment information through the Internet. All a customer needed to do is access Airborne’s Web site and key the code number assigned to a package, and the FOCUS system would tell the customer where in Airborne’s system the package was.

They deal primarily with small customers, providing pickup and delivery services in most cities, either in their own trucks or through contract agents.

Following the 1977 deregulation of the airline industry, Airborne entered the air express industry by leasing the airplanes and pilots of Midwest Charter, a small airline operating out of its own airport in Wilmington, Ohio. However, Airborne quickly became dissatisfied with the limited amount of control they were able to exercise over Midwest, which made it very difficult to achieve the kind of tight coordination and control of logistics that was necessary to become a suc-cessful air express operator. Instead of continuing to lease Midwest’s planes and facility, in 1980 Airborne decided to buy “the entire bucket of slop; company, planes, pilots, airport and all.”

Among other things, the Midwest acquisition put Airborne in the position of being the only industry par-ticipant to own an airport. Airborne immediately began the job of developing a hub-and-spoke system capable of supporting a nationwide distribution system. An efficient sorting facility was established at the Wilmington hub. Airborne upgraded Midwest’s fleet of prop and propjet aircraft, building a modern fleet of DC-8s, DC-9s, and YS-11 aircraft. These planes left major cities every eve-ning, flying down the spokes carrying letters and pack-ages to the central sort facility in Wilmington, Ohio. There the letters and packages were unloaded, sorted ac-cording to their final destination, and then reloaded and flown to their final destination for delivery before noon the next day.

During the late 1970s and early 1980s, dramatic growth in the industry attracted many competitors. As a consequence, despite a high-growth rate price competi-tion became intense, forcing a number of companies to the sidelines by the late 1980s. Between 1984 and 1990 average revenues per domestic shipment at Airborne fell from around $30 to under $15 (in 2003 they were just under $9).

Airborne was able to survive this period by pursu-ing a number of strategies that increased productivity and drove costs down to the lowest levels in the industry. Airborne’s operating costs per shipment fell from $28 in 1984 to around $14 by 1990, and to $9.79 by 2001. As a consequence, by the late 1980s Airborne had pulled away from a pack of struggling competitors to become one of the top-three companies in the industry, a position it still held when acquired by DHL in 2003.



regional trucking HubsAlthough about 71% of packages were transported by air and passed through Wilmington, Airborne also estab-lished 10 regional trucking hubs that deal with the re-maining 29% of the company’s domestic volume. These hubs sorted shipments that originate and had a destina-tion within approximately a 300-mile radius. The first one opened was in Allentown, Pennsylvania, centrally located on the East Coast. This hub handled packages transported between points within the Washington, D.C., to Boston area. Instead of transporting packages by air, packages to be transported within this area were sorted by the drivers at pickup and delivered from the driver’s home station by scheduled truck runs to the Allentown hub. There they were sorted according to destination and taken to the appropriate station on another scheduled truck run for final delivery.

One advantage of ground-based transportation through trucking hubs is that operating costs are much lower than for air transportation. The average cost of a package trans-ported by air is more than five times greater than the cost of a package transported on the ground. However, this cost differential is transparent to the customer, who assumes that all packages are flown. Thus, Airborne could charge the same price for ground-transported packages as for air-transported packages, but the former yielded a much higher return. The trucking hubs also had the advantage of taking some of the load of the Wilmington sorting facility, which was operating at about 90% capacity by 2003.

international operationsIn addition to its domestic express operations, Airborne was also an international company providing service to more than 200 countries worldwide. International opera-tions accounted for about 11% of total revenues in 2002. Airborne offered two international products: freight products and express products. Freight products were commercial-sized, larger-unit shipments. This service provides door-to-airport service. Goods were picked up domestically from the customer and then shipped to the destination airport. A consignee or an agent of the consignee got the paperwork and cleared the shipment through customs. Express packages are small packages, documents, and letters. This was a door-to-door service, and all shipments were cleared through customs by Air-borne. Most of Airborne’s international revenues come from freight products.

When a driver completed a pickup route, she or he took the load to Airborne’s loading docks at the local airport. (Airborne served all 99 major metropolitan air-ports in the United States.) There the packages were loaded into C-containers (discussed later in this case study). C-containers were then towed by hand or by tractor to a waiting aircraft, where they were loaded onto a conveyor belt and in turn pass through the pas-senger door of the aircraft. Before long the aircraft was loaded and took off. It would either fly directly to the company’s hub at Wilmington, or make one or two stops along the way to pick up more packages.

Sometime between midnight and 2 a.m., most of the aircraft would have landed at Wilmington. An old strategic air command base, Wilmington’s location places it within a 600-mile radius (an overnight drive or 1 hour flying time) of 60% of the U.S. population. Wilmington has the advantage of a good-weather record. In all the years that Airborne op-erated at Wilmington, air operations were “fogged out” on only a handful of days. In 1995 Airborne opened a second runway at Wilmington. Developed at a cost of $60 million, the second runway made Wilmington the largest privately owned airport in the country. The runway expansion was part of a $120 million upgrade of the Wilmington sort facility.

After arrival at Wilmington the plane taxed down the runway and parked alongside a group of aircraft that were already disgorging their load of C-containers. Within minutes the C-containers were unloaded from the plane down a conveyor belt and towed to the sort facility by a tractor. The sort facility had the capacity to handle 1.2 million packages per night. At the end of 2001 the facility handled an average of 1 million pack-ages a night. The bar codes on the packages were read, and then the packages were directed through a labyrinth of conveyor belts and sorted according to final destina-tion. The sorting was partly done by hand and partly automated. At the end of this process, packages were grouped together by final destination and loaded into a C-container. An aircraft bound for the final destination was then loaded with C-containers, and by 5 a.m. most aircraft had taken off.

Upon arrival at the final destination, the plane was unloaded and the packages sorted according to their delivery points within the surrounding area. Airborne couriers then took the packages on the final leg of their journey. Packages had a 75% probability of being deliv-ered to clients by 10:30 a.m., and a 98% probability of being delivered by noon.



with an equivalent new plane cost of $40 million. An additional factor reducing operating costs was that Airborne’s DC-9 aircraft only require a two-person cock-pit crew, as opposed to the three-person crews required in most Federal Express and UPS aircraft at the time.

After conversion, Airborne strove to keep aircraft maintenance costs down by carrying out virtually all of its own fleet repairs. (It was the only all-cargo carrier to do so.) The Wilmington maintenance facility could handle everything except major engine repairs and had the ca-pability to machine critical aircraft parts if needed. The company saw this in-house facility as a major source of cost savings. It estimated that maintenance labor costs were 50–60% below the costs of having the same work performed outside.

In December 1995, Airborne announced a deal to purchase 12 used Boeing 767–200 aircraft between the years 1997 and 2000, and it announced plans to pur-chase a further 10 to 15 used 767–200s between the years 2000 and 2004. These were the first wide-bodied aircraft in Airborne’s fleet. The cost of introducing the first 12 aircraft was about $290 million, and the additional aircraft would cost a further $360 million. The shift to wide-bodied aircraft was promoted by an internal study, which concluded that with growing volume, wide-bodied aircraft would lead to greater operating efficiencies.

During 2001, Airborne was using about 66.6% of its lift capacity on a typical business day. This compares with 76.7% capacity utilization in 1997, and 70% uti-lization in 2000. In late 2001, Airborne reduced its total lift capacity by some 100,000 pounds to about 4 million pounds a day. It did this to try and reduce excess capacity of certain routes and better match supply with demand conditions.

c-containersC-containers are uniquely shaped 60-cubic-foot contain-ers, developed by Airborne Express in 1985 at a cost of $3.5 million. They are designed to fit through the passenger doors of DC-8 and DC-9 aircraft. They re-placed the much larger A-containers widely used in the air cargo business. At six times the size of a C-container, A-containers can only be loaded through specially built cargo doors and require specialized loading equipment. The loading equipment required for C-containers is a modified belt loader, similar to that used for loading bag-gage onto a plane, and about 80% less expensive than the equipment needed to load A-containers. The use of

Airborne did not fly any of its own aircraft overseas. Rather, it contracted for space on all-cargo airlines or in the cargo holds of passenger airlines. Airborne owned fa-cilities overseas in Japan, Taiwan, Hong Kong, Singapore, Australia, New Zealand, and London. These functioned in a manner similar to Airborne’s domestic stations. (That is, they had their own trucks and drivers and were hooked into the FOCUS tracking system.) The majority of foreign distribution, however, was carried out by foreign agents. Foreign agents were large, local, well-established surface delivery companies. Airborne entered into a number of ex-clusive strategic alliances with large foreign agents. It had alliances in Japan, Thailand, Malaysia, and South Africa. The rationale for entering strategic alliances, along with Airborne’s approach to global expansion, is discussed in greater detail later in this case.

Another aspect of Airborne’s international opera-tions was been the creation at its Wilmington hub of the only privately certified Foreign Trade Zone (FTZ) in the United States. While in an FTZ, merchandise is tax free and no customs duty is paid on it until it leaves. Thus, a foreign-based company could store critical inventory in the FTZ and have Airborne deliver it just-in-time to U.S. customers. This allowed the foreign company to hold in-ventory in the United States without having to pay cus-toms duty on it until the need arose.

Aircraft purchase and MaintenanceAs of 2002, Airborne Express owned a fleet of 118 aircraft, including 24 DC-8s, 74 DC-9s, and 20 Boeing 767s. In addition, approximately 70 smaller aircraft were chartered nightly to connect smaller cities with company aircraft that then operate to and from the Wilmington hub. To keep down capital expenditures, Airborne pre-ferred to purchase used planes. Airborne converted the planes to suit its specifications at a maintenance facil-ity based at its Wilmington hub. Once it got a plane, Airborne typically gutted the interior and installed state-of-the-art electronics and avionics equipment. The company’s philosophy was to get all of the upgrades that it could into an aircraft. Although this can cost a lot up front, there is a payback in terms of increased aircraft reliability and a reduction in service downtime. Airborne also standardized cockpits as much as possible. This made it easier for crews to switch from one aircraft to another if the need arose. According to the company, in the early 1990s the total purchase and modification of a secondhand DC-9 cost about $10 million, compared



Airborne’s FOCUS system, where they are captured for shipment tracking and billing. Customer Linkage ben-efited the customer by eliminating repetitive data entry and paperwork. It also lowered the company’s operating costs by eliminating manual data entry. (In essence, both LIBRA II and Customer Linkage pushed off a lot of the data-entry work into the hands of customers.) The EDI system also included electronic invoicing and payment remittance processing. Airborne also offered its custom-ers a program known as Quicklink, which significantly reduced the programming time required by customers to take advantage of linkage benefits.

strAtegy

Market positioningIn the early 1980s Airborne Express tried hard to com-pete head-to-head with Federal Express. This included an attempt to establish broad market coverage, including both frequent and infrequent users. Frequent users are those that generate more than $20,000 of business per month, or more than 1,000 shipments per month. Infre-quent users generate less than $20,000 per month, or less than 1,000 shipments per month.

To build broad market coverage, Airborne followed Federal Express’s lead of funding a television advertis-ing campaign designed to build consumer awareness. However, by the mid 1980s Airborne decided that this was an expensive way of building market share. The advertising campaign bought recognition but little pen-etration. One of the principal problems was that it was expensive to serve infrequent users. Infrequent users demanded the same level of service as frequent users, but Airborne would typically only get one shipment per pickup with an infrequent user, compared with 10 or more shipments per pickup with a frequent user, so far more pickups were required to generate the same volume of business. Given the extremely competitive nature of the industry at this time, such an inefficient utilization of capacity was of great concern to Airborne.

Consequently, in the mid 1980s Airborne decided to become a niche player in the industry and focused on serving the needs of high-volume corporate accounts. The company slashed its advertising expenditure, pulling the plug on its TV ad campaign, and invested more resources in building a direct sales force, which grew to be 460 strong. By focusing upon high-volume corporate accounts, Airborne was able to establish scheduled pickup

C-containers meant that Airborne did not have to bear the $1 million per plane cost required to install cargo doors that would take A-containers. The C-containers are shaped to allow maximum utilization of the planes’ interior loading space. Fifty of the containers fit into a converted DC-9, and about 83 fit into a DC-8-62. More-over, a C-container filled with packages can be moved by a single person, making them easy to load and unload. Airborne Express took out a patent on the design of the C-containers.

information systemsAirborne utilized three information systems to help it boost productivity and improve customer service. The first of these systems was the LIBRA II system. LIBRA II equipment, which included a metering device and PC computer software, was installed in the mailroom of clients. With minimum data entry, the metering device weighed the package, calculated the shipping charges, generated the shipping labels, and provided a daily ship-ping report. By 2002, the system was in use at approxi-mately 9,900 domestic customer locations. The use of LIBRA II not only benefited customers but also lowered Airborne’s operating costs since LIBRA II shipment data were transferred into Airborne’s FOCUS shipment tracking system automatically, thereby avoiding dupli-cate data entry.

FOCUS was the second of Airborne’s three main information systems. As discussed earlier, the FOCUS system was a worldwide tracking system. The bar codes on each package were read at various points (for example, at pickup, at sorting in Wilmington, at arrival, and so forth) using hand-held scanners, and this information was fed into Airborne’s computer system. Using FOCUS, Airborne could track the progress of a shipment through its national and international logis-tics system. The major benefit was in terms of customer service. Through an Internet link, Airborne’s customers could track their own shipment through Airborne’s system on a 24 hour basis.

For its highest-volume corporate customers, Airborne developed Customer Linkage, an electronic data interchange (EDI) program and the third informa-tion system. The EDI system was designed to eliminate the flow of paperwork between Airborne and its major clients. The EDI system allowed customers to create shipping documentation at the same time they were entering orders for their goods. At the end of each day, shipping activities were transmitted electronically to



deferred servicesWith a slowdown in the growth rate of the express mail market toward the end of the 1980s, in 1990 Airborne decided to enter the deferred-delivery business with its Select Delivery Service (SDS) product. The SDS service provides for next-afternoon or second-day delivery. Pack-ages weighing 5 pounds or less are generally delivered on a next-afternoon basis, with packages of more than 5 pounds being delivered on a second-day basis. SDS shipment comprised approximately 42% of total domestic shipments in 1995. They were priced lower than over-night express products, reflecting the less time-sensitive nature of these deliveries. The company utilized any spare capacity on its express flights to carry SDS shipments. In addition, Airborne used other carriers, such as passen-ger carriers with spare cargo capacity in the bellies of their planes, to carry less urgent SDS shipments.

Early in 1996 Airborne began to phase in two new services to replace its SDS service. Next Afternoon Ser-vice was available for shipments weighing 5 pounds or less, and Second Day Service was offered for shipments of all weights. By 2001, deferred shipments accounted for 46% of total domestic shipments.

ground delivery serviceIn April 2001, Airborne launched a Ground delivery Service (GDS) in response to similar offerings from FedEx and UPS. Airborne came to the conclusion that it was very important to offer this service in order to retain parity with its principle competitors, and to be able to offer bundled services to its principle customers (that is, to offer them air, ground, and logistics services for a single bundled price). Airborne also felt that they could add the service with a relatively minor initial investment, $30 million, since it leveraged of existing assets, includ-ing trucks, tracking systems, and regional ground hubs and sorting facilities.

The new service was initially been introduced on a limited basis, and targeted at large corporate customers. GDS was priced less than deferred services, reflecting the less time sensitive nature of the GDS offering. GDS accounted for 1.5% of domestic shipments in 2001, and 4% in the fourth quarter of 2001.

Logistics servicesAlthough small-package express mail remained Airborne’s main business, through its Advanced Logistics Ser-vices Corp. (ALS) subsidiary the company increasingly

routes and use its ground capacity more efficiently. This enabled the company to achieve significant reductions in its unit cost structure. Partly due to this factor, Airborne executives reckoned that their cost structure was as much as $3 per shipment less than that of FedEx. Another es-timate suggested that Airborne’s strategy reduced labor costs by 20% per unit for pickup, and 10% for delivery.

Of course, there was a downside to this strategy. High-volume corporate customers have a great deal more bargaining power than infrequent users, so they can and do demand substantial discounts. For exam-ple, in March 1987 Airborne achieved a major coup when it won an exclusive 3-year contract to handle all of IBM’s express packages weighing less than 150 pounds. However, to win the IBM account, Airborne had to offer rates up to 84% below Federal Express’s list prices! Nevertheless, the strategy does seem to have worked. As of 1995 approximately 80% of Airborne’s revenues came from corporate accounts, most of them secured through competitive bidding. The concentrated volume that this business represents helped Airborne to drive down costs.

delivery time, reliability, and flexibilityA further feature of Airborne’s strategy was the decision not to try to compete with Federal Express on delivery time. Federal Express and UPS have long guaranteed delivery by 10:30 a.m. Airborne guaranteed delivery by midday, although it offered a 10:30 guarantee to some very large corporate customers. Guaranteeing delivery by 10:30 a.m. would mean stretching Airborne’s already tight scheduling system to the limit. To meet its 10:30 a.m. deadline, FedEx has to operate with a deadline for previous days’ pickups of 6:30 p.m. Airborne could af-ford to be a little more flexible and can arrange pickups at 6:00 p.m. if that suited a corporate client’s particular needs. Later pickups clearly benefit the shipper, who is, after all, the paying party.

In addition, Airborne executives felt that a guaranteed 10:30 a.m. delivery was unnecessary. They argued that the extra hour and a half does not make a great deal of difference to most clients, and they are willing to accept the extra time in exchange for lower prices. In addition, Airborne stressed the reliability of its delivery schedules. As one executive put it, “a package delivered consistently at 11:15 a.m. is as good as delivery at 10:30 a.m.” This reliability was enhanced by Airborne’s ability to provide shipment tracking through its FOCUS system.



their domestic service. Many of Airborne’s major corpo-rate clients were becoming ever more global in their own strategic orientation. As this occurred, they were increas-ingly demanding a compatible express mail service. In addition, the rise of companies with globally dispersed manufacturing operations that relied upon just-in-time delivery systems to keep inventory holding costs down created a demand for a global air express services that could transport critical inventory between operations lo-cated in different areas of the globe (consider the exam-ple of Data Products discussed earlier in this case study).

The initial response of FedEx and UPS to this chal-lenge was to undertake massive capital investments to establish international airlift capability and international ground operations based upon the U.S. model. Their ra-tionale was that a wholly owned global delivery network was necessary to establish the tight control, coordina-tion, and scheduling required for a successful air express operation. In the 1990s, however, FedEx pulled out of its European ground operations, while continuing to fly its own aircraft overseas.

Airborne decided upon a quite different strategy. In part born of financial necessity (Airborne lacks the capital necessary to imitate FedEx and UPS), Airborne decided to pursue what they refered to as a variable cost strategy. This involved two main elements: (1) the utiliza-tion of international airlift on existing air cargo operators and passenger aircraft to get their packages overseas, and (2) entry into strategic alliances with foreign companies that already had established ground delivery networks. In these two ways, Airborne hoped to be able to establish global coverage without having to undertake the kind of capital investments that Federal Express and UPS have borne.

Airborne executives defend their decision to continue to purchase space on international flights rather than fly their own aircraft overseas by making a number of points. First, they pointed out that Airborne’s international busi-ness was 70% outbound and 30% inbound. If Airborne were to fly its own aircraft overseas, this would mean flying them back half-empty. Second, on many routes Airborne simply didn’t have the volume necessary to justify flying its own planes. Third, national air carriers were giving Airborne good prices. If Airborne began to fly directly overseas, the company would be seen as a com-petitor and might no longer be given price breaks. Fourth, getting international airlift space was not a problem. While space can be limited in the third and fourth quarters of the year, Airborne was such a big customer that it usually had few problems getting lift.

promoted a range of third-party logistics services. These services provided customers with the ability to maintain inventories in a 1-million-square-foot “stock exchange” facility located at Airborne’s Wilmington hub or at 60 smaller “stock exchange” facilities located around the country. The inventory could be managed either by the company or by the customer’s personnel. Inventory stored at Wilmington could be delivered utilizing either Airborne’s airline system or, if required, commercial airlines on a next-flight-out basis. ALS’s central print computer program allowed information on inventories to be sent electronically to customers’ computers located at Wilmington, where Airborne’s personnel monitored printed output and shiped inventories according to cus-tomers’ instructions.

For example, consider the case of Data Products Corp., a producer of computer printers. Data Products takes ad-vantage of low labor costs to carry out significant assembly operations in Hong Kong. Many of the primary component parts for its printers, however, such as microprocessors, are manufactured in the United States and have to be shipped to Hong Kong. The finished product is then shipped back to the United States for sale. In setting up a global manu-facturing system, Data Products had a decision to make either consolidate the parts from its hundreds of suppliers in-house and then arrange for shipment to Hong Kong, or contract out to someone who could handle the whole logistics process. Data Products decided to contract out, and they picked Airborne Express to consolidate the com-ponent parts and arrange for shipments.

Airborne controlled the consolidation and movement of component parts from the component part suppliers through to the Hong Kong assembly operation in such a way as to minimize inventory-holding costs. The key fea-ture of Airborne’s service was that all of Data Products’ materials were collected at Airborne’s facility at Los Angeles International Airport. Data Products’ Hong Kong assembly plants could then tell Airborne what parts to ship by air as and when they are needed. Airborne was thus able to provide inventory control for Data Products. In addition, by scheduling deliveries so that year-round traffic between Los Angeles and Hong Kong could be guaranteed, Airborne was able to negotiate a better air rate from Japan Air Lines (JAL) for the transportation of component parts.

international strategyOne of the major strategic challenges that Airborne faced (along with the other express mail carriers) was how best to establish an international service that is comparable to



as possible, to shorten lines of communication and allow for a free flow of ideas within the managerial hierarchy. The top managers generally felt that they were open to ideas suggested by lower-level managers. At the same time, the decision-making process was fairly centralized. The view was that interdependence between functions made centralized decision making necessary. To quote one executive, “Coordination is the essence of this busi-ness. We need centralized decision making in order to achieve this.”

Control at Airborne Express was geared toward boosting productivity, lowering costs, and maintaining a reliable high-quality service. This was achieved through a combination of budgetary controls, pay-for-performance incentive systems, and a corporate culture that continually stressed key values.

For example, consider the procedure used to control stations (which contained about 80% of all employees). Station operations were reviewed on a quarterly basis using a budgetary process. Control and evaluation of station effectiveness stressed four cat-egories. The first was service, measured by the time between pickup and delivery. The goal was to achieve 95 to 97% of all deliveries before noon. The second category was productivity, measured by total ship-ments per employee hour. The third category was controllable cost, and the fourth station profitability. Goals for each of these categories were determined each quarter in a bottom-up procedure that involved station managers in the goal-setting process. These goals are then linked to an incentive pay system whereby station managers can earn up to 10% of their quarterly salary just by meeting their goals with no maximum on the upside if they go over the goals.

The direct sales force also had an incentive pay system. The target pay structure for the sales orga-nization was 70% base pay and a 30% commission. There was, however, no cap on the commissions for salespeople. So in theory, there was no limit to what a salesperson could earn. There were also contests that are designed to boost performance. For example, there was a so-called Top Gun competition for the sales force, in which the top salesperson for each quarter won a $20,000 prize.

Incentive pay systems apart, however, Airborne is not known as a high payer. The company’s approach is not to be the compensation leader. Rather, the company tries to set its salary structure to position it in the middle of the labor market. Thus, according to a senior human resource executive, “We target our pay philosophy (total

On the other hand, the long-term viability of this strategy was questionable given the rapid evolution in the international air express business. Flying Tiger was once one of Airborne’s major providers of international lift. However, following the purchase of Flying Tiger by FedEx, Airborne has reduced its business with Flying Tiger. Airborne worried that its packages will be “pushed to the back of the plane” whenever Flying Tiger had problems of capacity overload.

With regard to strategic alliances, Airborne had joint venture operations is Japan, Thailand, Malaysia, and South Africa. The alliance with Mitsui was announced in December 1989. Mitsui is one of the world’s lead-ing trading companies. Together with Tonami Trans-portation Co., Mitsui owns Panther Express, one of the top-five express carriers in Japan and a company with a substantial ground network. The deal called for the es-tablishment of a joint venture between Airborne, Mitsui, and Tonami. To be known as Airborne Express Japan, the joint venture combined Airborne’s existing Japanese operations with Panther Express. Airborne handled all of the shipments to and from Japan. The joint venture was 40% owned by Airborne, 40% by Mitsui, and 20% by Tonami. The agreement specified that board decisions had to be made by consensus between the three partners. A majority of two could not outvote the third. In addi-tion, the deal called for Mitsui to invest $40 million in Airborne Express through the purchase of a new issue of nonvoting 6.9% cumulative convertible preferred stock and a commitment to Airborne from Mitsui of up to $100 million for aircraft financing. There is no doubt that Airborne executives saw the Mitsui deal as a major coup, both financially and in terms of market penetration into the Japanese market. The primary advantage claimed by Airborne executives for expanding via strategic alliances is that the company got an established ground-based de-livery net-work overseas without having to make capital investments.

organizationIn 2001, Carl Donaway became CEO, replacing the long time top management team of Robert Cline, the CEO, and Robert Brazier, the president and COO, both of whom had been with the company since the early 1960s. Prior to becoming CEO, Donaway was responsible the airline operations, included managing the Wilmington hub, the package sorting facility, and all aircraft and flight maintenance operations. The philosophy at Airborne was to keep the organizational structure as flat



in March 2003 DHL made its takeover bid for the com-pany. Under the terms of the deal, which was finalized in 2003, DHL acquired the ground assets of Airborne Express, while the airline continued as an independent entity.

In the late 1990s DHL had been acquired by Deutsche Post, the German postal service. Deutsche Post had been privatized some years earlier. Deutsche Post spent approximately $5 billion to acquire several companies in the logistics business between 1997 and 1999. In November 2000, Deutsche Post went private with an initial public offering that raised $5.5 billion, and announced its intention to build an integrated global delivery and logistics network.

DHL’s goal with the Airborne acquisition was to ex-pand its presence in the United States, where it had long been a marginal player. In 2004–2005 DHL spent some $1.5 billion upgrading Airborne’s network to handle higher volumes. The company also embarked upon an aggressive media advertising campaign, presenting itself as a viable alternative to FedEx and UPS. In doing this, DHL seemed to be departing from Airborne’s highly fo-cused niche strategy.

The results were disappointing. The company report-edly ran into significant “integration problems” and suf-fered from reports of poor customer services and missed delivery deadlines. In 2006, DHL management stated that they now did not see the North American unit turn-ing profitable until 2009. DHL lost some $500 million in the U.S. in 2006.2 In 2007 they lost close to $1 billion. With corporate customers leaving for rivals, and market share sliding, in November 2008, DHL announced that it would exit the U.S. market. DHL shut down its air and ground hubs, laid off 9,600 employees, and took a charge against earnings of some $3.9 billion. In explaining the exit decision, DHL management stated that the underes-timated just how tough it would be to gain share against FedEx and UPS.3

package—compensation plus benefits) to be right at the 50th percentile plus or minus 5%.”

A degree of self-control was also achieved by trying to establish a corporate culture that focused employees’ attention upon the key values required to maintain a competitive edge in the air express industry. The val-ues continually stressed by top managers at Airborne, and communicated throughout the organization by the company’s newspaper and a quarterly video, emphasized serving customers’ needs, maintaining quality, doing it right the first time around, and excellent service. There was also a companywide emphasis on productivity and cost control. One executive, when describing the com-pany’s attitude to expenditures, said, “We challenge everything . . . . We’re the toughest sons of bitches on the block.” Another noted that “among managers I feel that there is a universal agreement on the need to control costs. This is a very tough business, and our people are aware of that. Airborne has an underdog mentality—a desire to be a survivor.”

the dHL Acquisition and its AftermathBy 2002 Airborne Express faced a number of key stra-tegic opportunities and threats. These included (1) the rapid globalization of the air express industry, (2) the de-velopment of logistics services based on rapid air trans-portation, (3) the growth potential for deferred services and ground based delivery services, (4) lower margins associated with the new GDS offering, (5) the superior scale and scope of its two main competitors, FedEx and UPS, (6) an economic slowdown in the United States, and (7) persistently high fuel costs (oil prices rose from $18 a barrel in mid 1995 to $25 a barrel in 2002). The company’s financial performance, which had always been volatile, was poor during 2001, when the company lost $12 million on revenues of $3.2 billion. In 2002, Airborne earned $58 million on revenues of $3.3 billion, even though average revenue per shipment declined to $8.46 from $8.79 a year earlier. Management attributed the improved performance to strong employee produc-tivity, which improved 9.4% over the prior year. In their guidance for 2003, management stated that they would be able to further improve operating performance – then

notes 1. Standard & Poors Industry Survey, Airlines, March, 2002. 2. B. Barnard, “Logistics spurs Deutsche Post”, Journal of

Commerce, November 8, 2006, page 1. 3. A. Roth and M. Esterl, “DHL beats a retreat from the

U.S.”, Wall Street Journal, November 11th, 2008, page B1.


Airborne Express: The Underdog

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