Rev. May 23, 2007
The officers of Airborne Express could hardly be more pleased.1 Results for the third quarter, 1997, were spectacular. Revenues for the quarter were up by 29% over the previous year, and yearto-date net earnings had increased by more than 500%. Airborne’s management team knew that the great results were, in part, fleeting. As the third largest player in the express mail industry, Airborne had gotten a boost from the recent strike at rival UPS. But that seemed to account for only a small portion of the earnings gain, perhaps one-fifth. Roy Liljebeck, the company’s chief financial officer, commented: While the UPS strike was the headline news in the quarter, Company operations outside the strike window were steady, trending higher than performance in the second quarter of 1997. Productivity gains remain strong and the overall operating cost per shipment continues to improve.2 Airborne had been the fastest growing company in the industry for years, but its margins had been anemic. Now, efforts to fatten those margins finally seemed to be taking hold. Of course, it didn’t hurt that Federal Express, the industry leader, had raised its prices. Prospects seemed much brighter than they had a year earlier. At that time, Federal Express and UPS were unleashing a flurry of new services and pricing schemes. One industry analyst interpreted their moves as an effort “to sweep the corners of the market…. Fedex and UPS tower over [Airborne]. They have saturated the core market and are looking for marginal revenue opportunities.” Airborne could easily “be hammered...between the two 900-pound gorillas.”3 One move by the “gorillas” required an immediate decision. For years, the industry had set prices without regard to distance. An overnight letter sent from Boston to New York carried the same price as one from Boston to Los Angeles. In 1996, UPS moved to distance-based pricing; prices were raised on long-distance shipments and lowered on short shipments. Federal Express followed suit in July, 1997. Now customers were asking Airborne’s sales people whether they too would adjust prices to reflect shipping distance.
The Express Mail Industry in the United States
Businesses and individuals spent $16-17 billion on expedited shipments within the United States in 1996. The flagship service of the industry promised overnight shipping with next-morning Professor Jan W. Rivkin prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
delivery. Services had proliferated, however, with some companies offering next-afternoon delivery (for a price 10-20% lower than next-morning service), second-day service (40-50% less), third-day delivery, and same-day or early-next-morning delivery (for several times more than next-morning service). Physical delivery of the package was only part of the service offered to customers. Major delivery companies made it possible for customers to track shipments en route. They provided consolidated information on shipments to major customers. Many offered extensive customer service and guarantees of on-time service. For international shipments, delivery companies expedited customs clearance. Some companies also offered warehousing services and logistics consulting services. Shipment volumes had risen 15-20% per year for the past decade, but, because prices...