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Harvard Business School

Re\'. May 23, 2007

Airborne Express
The officers of Airborne Express could hardly be more pleased.' 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 resllltswere, in part, fleeting. As the third largest player in the express mail indllstry, 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,
While the UPS strike was the headline news in the quarter, Company operations
olltside thestrike 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.'

. Airborne

had been the fastest growing company in the indllstry for years, but its margins had been
anemic. Now, efforts to fatten those margins finally seemed to be taking hold. Of course, it didn'thurt that Federal Express, the industry leader, had raised its prices.

Prospects seemed mllch brighter than they had ayear earlier. At that time, Federal Express
and UPS were unleashing a flurry of new services and pricing schemes.
One industry émalyst
interpreted their moves as an effort "to sweep the corners of the market
Fedex and UPS tower
over [AirborneJ.
They have saturated thecore market and are looking for marginal revenue
Airborne could easily "be hammered...between
the two 900-pound gorillas.,,3

One move by the "gorillas" required an immediate decision. For years, the indllstry had set
prices without regard to distance. An overnight letter sent from Boston to New York carried the
same price as one fram Boston to Los Angeles. In 1996, UPS movedto distance-based pricing; prices
were raised on long-distance shipments and lowered on short shipments. Federal Express followed
suit in JlIly, 1997. Now customers were asking Airborne's sales people whether they too would
adjust prices to reflect shipping distance.

The Express Maillndustry in the United States
Businesses and individuals spent $16-17 billion on expedited shipments withinthe United
States in 1996. The flagship service of the industry promised overnight shipping with next-morning
P/"Ofessol' W. Rivkil1 pl'epnl'edthis cnseas the bnsis
fol' c1nssdisCllssioll rnther thml lo il/lIslrate either effective or
illeffective halldlil1g Oflllllldlllil1istrntive Sitlllltioll.
Copyright @ 1998 by the President and Fellows of Harvard College. To order copies or reguestpermission to
reproduce materials, call 1-800-545-7685 or write Harvard Business Schoo] Publishing, Boston, MA 02163. No
part of this publication may be reproduced, sto red in a retrieval system, used in a spreadsheet, or lransmitted in
any form 01' by any means-electronic,
mechanical, photocopying,
recol'ding, 01' otherwise-without
permission of Harvard Business Schoo!.

1 798-070

Alrborne Express

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
Physical delivery of the package was only part of the serviceoffered 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 ánd guarantees of on-time service. For international shipments, delivery companies
expedited customs clearance. Some companies also offered warehousing services and logistics...
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