Airborne Case Study

UTKARSH SINGH

(19IB358)

1. INTRODUCTION
Airborne Express, has been inherited by two professional air freight companies which are the
California Airborne Flower Traffic Association and the Pacific Air Freight Association. Such
two businesses combined into the Airborne Freight Company in 1968. Airborne barely received
much attention, unlike UPS and Federal Express, which always made headlines. Airborne,
however, had grown much faster than either of the two big express mail companies, holding 16
percent of the domestic express mail market by 1997. Looking at the example of Airborne
Express, Airborne is facing a situation that requires action to succeed. UPS and Federal Express
unleashed a barrage of new services and price schemes that could threaten Airborne's business.

Such new movements by both "honchos" like firms can sweep the corners of the market that
some industry experts describe. The company has been raising rates for years without
acknowledging scope, ensuring that a letter of the same duration from New York to New Jersey
has the same expense as if the letter were sent from New York to California. UPS switched to
distance-based pricing publicly in 1996, and in 1997 Federal Express took the same measure.
There is no doubt that what Airborne acts are doing is greatly influencing the company's
growth when confronting this major industry transition.

2. PROBLEM
In the industry, Airborne Express has long established itself by structuring itself as a single
carrier big business. They also advanced across metropolitan areas in broad unit sales. Wherever
feasible, all they do is directed at improving the delivery process and cut costs. Airborne is now
facing a huge decision, however. They have to consider whether to move away from their
differentiation approach and suit the market's current UPS and FedEx pricing strategies or to
follow the old distribution pricing model. Airborne's consistent pricing strategy is threatened by
the new distance-based pricing strategy. Clients should try the cheapest cost of shipping
products. UPS and FedEx will dominate the short distance delivery as they are the one-time
deliverers currently providing the cheapest rates for those distances. Airborne must determine
whether they want to maintain the standard minimum price for all distances or move towards
distance based pricing methods. If they comply, they will suffer further expenses, but if they do
not, they will only become a long distance business, and they will have to turn to airlines more
often and also incur costs. Both options seem to distance Airborne from what has enabled them
to compete this long with UPS and FedEx. They have to decide to stay or match.

3. PROBLEM ANALYSIS
The biggest problem confronting Airborne is whether they should switch to a new pricing system
to suit industry leaders UPS and FedEx. The choice to do so is challenged by both the shipping
business creative design and the reality that the new pricing structure may not match the niche
market character of Airborne Express. The benefits in adjusting the pricing system are the
picture of the versatility of the company as well as the concern that UPS and FedEx, businesses
with large market share, will be able to meet the competitive advantage of Airborne's low price
when they move to the new method. Experience of the industry demonstrates that creativity is
highly valued by customers, and the competitive pricing system aligns closely with brand image
rendering swapping schemes an attractive choice. Implementing the new program, though, would
be an expensive task. In fact, large portions of Airborne's clients are small businesses that would
not benefit from a distance-based system because of contract pricing.

4. COST BENEFIT ANALYSIS

 Advantages of adopting Distance based Pricing Strategy:

1. Giving a neck to neck competition to other competitors.

2. The consequence of new pricing strategy is that competitors do not lose
profitability and market share because of the lower prices.
3. More responsive to competition in the market. The war between FedEx and UPS
was illustrated by innovation in the 1990s.
 COST STRUCTURE

Items Cost Drivers FedEx Airborne

Pickup      
Labor 20% Saving on labor charges $1.09 $0.80
Fuel Assumed equal to FedEx $0.07 $0.07
Maintenance & Depreciation   $0.21 $0.20
Subtotal   $1.37 $1.07
Long/Haul Transport Airborne ships 15% more by truck    
Flight/trucking & 85% aircraft utilization $2.44 $1.88
Hub Labor Less automation so high labor $0.30 $0.00
Hub Depreciation Lower Depreciation $0.25 $0.55
Subtotal   $2.99 $2.43
Delivery      
Labor 10% savings on labor $1.64 $1.37
Fuel Assumed equal to FedEx $0.10 $0.10
Maintenance & Depreciation 10% savings on both $0.31 $0.29
Subtotal   $2.05 $1.76
Advertising No advertising $0.22 $0.00
45% sales reps for 32% as much
Sales volume $0.21 $0.30
Information Technology Lower investment but widely spread $0.54 $0.54
Customer Service Comparable Service $0.20 $0.20
Corporate Overhead Assumed overhead/Revenue of 8% $0.97 $0.58
Total Cost   $8.55 $6.88
Margin   $0.45 $0.32
Price 20% discount $9.00 $7.20
CONCLUSION

Airborne Express wants to gain a competitive advantage so they need to go with Distance
based pricing which will decrease the price for shorter deliveries and increase the price of
longer deliveries. This method will not increase the margin of Airborne but will also help
them retain their existing customer base. As this strategy is currently in trend and being
followed by FedEx & UPS both have been really successful while following this strategy.
As we can see in the above diagram Airborne is able to maintain lower cost structure by
following this strategy then their competitors. In addition to this Airborne should also tie
with RPS. A tie up between airborne and RPS will make them a strong competition as
compare to FedEx and UPS..