Airborne Express: The Underdog
Charles W.L. Hill, School of Business
University of Washington,
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 information 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.
Airborne Inc., which operated under the name Airborne
Express, was an air-express transportation company, providing 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 Freightways (CF), and the U.S. Postal Service, each of which
This case was prepared by Charles W. L. Hill, University of Washington.
Used by permission. Copyright © 2011 by Charles W. L. Hill.
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 current 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 focuses on the operating structure, competitive strategy, organizational 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
Airborne 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 initially an exclusive airfreight forwarder. Freight forwarders 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.
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Case 7 Airborne Express: The Underdog
Major Milestones at Airborne Express4
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 addition, 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 application, 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.
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Case 7 Airborne Express: The Underdog
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 successful 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 participant 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 evening, flying down the spokes carrying letters and packages to the central sort facility in Wilmington, Ohio.
There the letters and packages were unloaded, sorted according 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 competition 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
Airborne was able to survive this period by pursuing 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.
The Domestic Delivery Network
As of 2002, its last full year as an independent enterprise, 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 distribution 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 directly 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 major 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 handheld scanner. This information was fed directly into
Airborne’s proprietary FOCUS (Freight, Online Control 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 package 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.
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Case 7 Airborne Express: The Underdog
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 airports 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 passenger 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 operated 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
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 packages 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 destination. 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 delivered to clients by 10:30 a.m., and a 98% probability of
being delivered by noon.
Regional Trucking Hubs
Although about 71% of packages were transported by
air and passed through Wilmington, Airborne also established 10 regional trucking hubs that deal with the remaining 29% of the company’s domestic volume. These
hubs sorted shipments that originate and had a destination 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 transported 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.
In addition to its domestic express operations, Airborne
was also an international company providing service to
more than 200 countries worldwide. International operations 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 Airborne. Most of Airborne’s international revenues come
from freight products.
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Case 7 Airborne Express: The Underdog
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 facilities 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 exclusive 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 operations 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 inventory in the United States without having to pay customs duty on it until the need arose.
Aircraft Purchase and Maintenance
As of 2002, Airborne Express owned a fleet of 118
aircraft, including 24 DC-8s, 74 DC-9s, and 20 Boeing
767s. In addition, approximatel ...
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