Airborne Freight Corporation

1946–1999

Airborne Freight Corporation is the third largest express delivery company in the United States. Better known as 'Airborne Express,' the company keeps a lower profile than rivals FedEx and United Parcel Service of America Inc. (UPS). Airborne boasts the lowest cost structure and targets high-volume corporate customers. A deal with the U.S. Postal Service in 1999 has brought Airborne into the low-margin market of residential deliveries.

1940s Pacific Origins

Airborne Express originated in two companies based on the West Coast--Pacific Air Freight, Inc. and Airborne Freight Corporation. Pacific Air Freight, an air freight forwarder, was founded in Seattle in 1947 by former Army Air Corps officer Holt W. Webster. Airborne Freight began in San Francisco in 1946 as the Airborne Flower Traffic Association of California, concerned with shipping fresh tropical flowers from Hawaii to the Mainland. It also provided freight forwarding services to Seattle and Alaska. In 1968, the two companies merged, keeping the California company's name and the Washington-based company's management. John D. McPherson, the chairperson of Airborne Freight, kept his position; Holt W. Webster, the president of Pacific Air Freight, became president and chief executive of the new company. Stock in this company was divided equally between shareholders in the former companies.

During the 1970s Airborne Express maintained the role of air freight forwarder. In the last half of the decade, however, the company became interested in the air express business and began expanding operations in that direction. Deregulation of the airline industry occurred in 1977-78, giving air carriers the liberty to fly anywhere in the United States using any size aircraft. A carrier could purchase a fleet of larger aircraft and operate cost effectively in the air express field. For this purpose, in 1980 Airborne purchased both Midwest Air Charter, a fleet of propeller and propeller-jet airplanes, and Wilmington Airport in Wilmington, Ohio, a former Strategic Air Force Command base.

The first air carrier to buy its own airport, the company developed its property into Airborne Air Park, which became the central sorting facility for Airborne's air express services. A nationwide distribution system in which packages and letters were flown into the Wilmington center, sorted, and flown out for next-day delivery, operated from this location. The operation was supported by nearby Airborne Commerce Park which housed such services as a customs and brokerage operation; a Central Printing Center; the Airborne Stock Exchange, a parts warehouse with overnight shipping capacity; warehouse facilities available to companies wishing to ship their goods quickly from a centralized location; and an animal quarantine and exotic plant isolation and inspection center.

Airborne's shipping capacity was also enhanced by the convenient flight schedules of airports in Dayton, Columbus, and Cincinnati, Ohio. While upgrading the airport into a modern sorting and delivery center, the company developed its fleet of aircraft to include more than 60 DC-8s, DC-9s, and YS-lls. A regional stock exchange system with centers in 40 U.S. cities to service customers with same-day shipping needs was initiated. Sky Courier, a subsidiary of Airborne Express, provided 29 Stock Exchange locations for their customer St. Jude Medical, Inc., which manufactured artificial heart valves needing rapid delivery.

Consolidation in the 1980s

market and earning approximately $12 million in profits.

1980–1989

Airborne faced tough competition in launching air courier services during the 1980s. The industry leader, Federal Express, dictated market conditions, and such companies as Emery Air Freight, the U.S. Postal Service's Express Mail, and Purolator Courier Corporation, battled with Airborne for second place in the market and a share of the profits. Survival depended on providing consumers with the fastest possible service.

As a newcomer to the air courier business Airborne was initially unable to compete. In 1984, Tom Rooney, a vice-president of marketing at Airborne, remarked in Advertising Age that the company had originally, in 1980, presented a product not up to industry standards and had 'considered the market, the product, the category, to be simply next-day. Not until we got into focus groups did we find out it was really before noon. We just had to understand, and the market told us very clearly that if you're not a before-noon service, forget it, get out.' Airborne aggressively pursued this goal, and in 1982, began to exhibit growth exceeding Emery Air Freight's shipment volume.

In 1983 and 1984 Airborne laid siege to Federal Express's undisputed position as number one by employing advertising campaigns--including national television spots--designed to emphasize the impersonal nature of Federal Express's handling of shipment tracing and Airborne's speedy delivery time. As Kent W. Freudenberger, an executive vice-president in marketing at Airborne, stated in Advertising Age, 'There's no room in this industry for the meek. Competition is probably stronger now than at any time in our history. We cannot wait for the marketplace to come to us. We have to go out aggressively and communicate to the marketplace how good we are.' The pitch worked. During one three-month period in 1983, the company averaged 29,800 shipments per day, compared to 22,000 during the same period in 1982. While revenues fluctuated from a high of $295.2 million in 1982 to $243.4 million in the first half of 1983, earnings grew steadily between 1982 and 1984, showing a particularly dramatic 104 percent increase between 1982 and 1983.

Although in 1983 Wall Street skeptics predicted that Airborne could not survive the cutthroat competition of the air freight industry, the company demonstrated consistent growth over the next eight-year period. By 1987, with revenues of approximately $630 million, Airborne was ranked third; UPS, with revenues of $8.6 billion, captured second place behind Federal Express, whose revenues reached $3.2 billion that year. Airborne shipped approximately 35 million packages in 1987 compared to 5.7 million in 1982, constituting 12 percent of the U.S. market and earning approximately $12 million in profits.

Robert S. Cline, named chair and chief executive officer of Airborne in 1984, described Airborne's successful business strategy in Forbes magazine: 'Federal Express is the Cadillac of this business. High profile, lots of bells and whistles. UPS is the Chevrolet. Less dramatic, less service-oriented, less expensive for the infrequent user. We've tried to position ourselves in between.' To accomplish this, Airborne targeted the corporate client, tailoring discounts and special services to each customer as incentives for using the company. Airborne also provided inexpensive pickup on demand and next-day delivery before noon. These tactics paid off early in 1987, when Airborne received a three-year contract to ship all of IBM's air express mail weighing less than 150 pounds. The prominent account became instrumental in attracting other corporate customers such as Xerox.

Meanwhile, impressed by Airborne's growth rate and assets, an Australian transport company, TNT Limited, attempted to buy out the company in 1986. Though TNT amassed 15 percent of Airborne's stock, no further negotiations between the companies followed after Airborne rejected the bid.

Competition among air express companies remained strong during the latter part of the 1980s due to several consolidation moves. In 1986 Emery Air Freight bought Purolator Courier Corporation; in 1989 Federal Express purchased Tiger International for $880 million. Both acquisitions caused concern that Airborne's position in the industry might be under threat. Airborne did, however, maintain a high growth pattern, with shipments up approximately 40 percent in 1989.

1986–1996

During the same year, the company began negotiations to consolidate Airborne's Japanese interests with those of Japanese transport giant Mitsui & Company. Under the terms of the agreement, Airborne's operations in Japan would merge with Panther Express International, which was owned by Mitsui and Tonami Transportation Co.--also based in Japan. Airborne would receive $100 million for aircraft financing and Mitsui and Tonami would invest $40 million in Airborne stock, allowing one member from each company to sit on Airborne's board. Negotiations were successful and Airborne Express Japan became a reality in 1990, with Airborne owning 40 percent, Mitsui possessing 40 percent, and Tonami holding 20 percent of the new company. The company shipped freight, packages, and letters worldwide, providing Airborne, now the fourth largest air courier in Japan, with a solid Asian base of operations in a market growing 25 percent yearly and anticipating doubled growth by 1996.

Early 1990s Price Wars

Joint ventures became typical of Airborne's international expansion strategy during the 1990s, allowing the company to maximize its U.S. distribution system and capitalize on its strong base of international companies already in place. Chairman Cline elaborated in Forbes magazine: 'The Japanese market is very nationalistic, and having a local partner is key to having better penetration. That, in a nutshell, is our philosophy for overseas expansion.' Joint operating agreements were also negotiated with Purolator Courier Ltd. of Canada and with Thailand. In addition to Japanese and Canadian interests, Airborne had offices in the Far East, Australia, New Zealand, and the United Kingdom. In 1991 Airborne reached 90 percent of the world's markets, yet international sales accounted for only 20 percent of the overall profits and the corporation's market share was only 1 percent. The air carrier hoped that foreign expansion would increase these profits in the 1990s.

Between the mid-1980s and mid-1990s, Airborne created several innovative customer services. The PACE program, geared toward small to medium-sized businesses, offered the mid-range customer the same discounts usually offered only to larger companies with a higher volume of shipments. Such services as next-morning delivery, pickup on demand, computer tracking, free shipping supplies and preprinted airbills, and a flat worldwide delivery rate made Airborne a viable choice for consumers. The communications network, able to track shipment status anywhere in the world at any time, was designed to facilitate customer access to the progress of parcels. In 1986 Airborne introduced Electronic Data Interchange (EDI), a computer system that allowed customers to view Airborne shipping data on their own mainframe computers.

Increasingly during the 1990s, Airborne was recognized for contributions to the air carrier industry by businesses and professional organizations. In 1990 the International Cargo Forum, an organization that awards excellence in the transportation industry, presented Airborne with an award for performance and service. The following year Glaxo, a pharmaceutical manufacturer, honored Airborne with an Air Express Carrier Award, and Computerworld Magazine cited the company as one of the top 100 information systems users in the United States. A consulting firm for EDI users presented Airborne with an award for excellent usage of the data system in implementing service to customers in 1992.

Airborne's foreign expansion program and uniquely innovative services positioned the air carrier strongly in the fiercely competitive business atmosphere of the 1990s. Sales for 1991 hit the $1 billion mark and Airborne's 108,996 shipments reflected a 20 percent increase from the 88,220 parcel figure of 1990. Federal Express's estimated growth during the same period was only 5 percent, while UPS's growth was estimated at 10 percent. Industry analysts cautioned, however, that Airborne's fleet of aircraft was mostly second hand, jet fuel was expensive, and the company relied heavily upon major corporate customers prone to recession difficulties--all factors that might slow growth in future markets. Although revenues rose nine percent to $1.48 billion in 1992, net earnings fell from $27.2 million to $2.4 million.

Cutthroat competition in the early 1990s reduced industry prices 20 percent in the early 1990s. Unable to reduce costs any more, Airborne focused on finding new business. International markets were particularly strong, although, along with other U.S. shippers, the company complained of biased treatment in Mexico in spite of the NAFTA trade accord. In 1996, Airborne posted net earnings of $27.2 million on revenues of $2.5 billion, up 11 percent.

1996–1999

New Markets in the Late 1990s

A strike at UPS in August 1997 may have seemed like a boon for Airborne. However, the low-margin ground shipments involved were not an attractive business to express shippers, and Airborne itself suffered some labor discord. Specifically, in 1998, the Teamsters protested the firing of a pilot who refused to fly a test flight. They had complained three years earlier of Airborne's use of more part-time and nonunionized labor.

When the United States Postal Service announced a discount program for private shippers in 1999, Airborne was one of the first to sign up. This effectively meant mail carriers would deliver Airborne's packages from local post offices to residential addresses; the company had entered a segment traditionally dominated by UPS, just as e-commerce shipments were heating up.

After UPS banned handguns on its ground delivery system, seeking to reduce liability due to loss and theft, Airborne banned all firearms and ammunition deliveries. While UPS had been the gun industry's preferred shipper, Airborne had traditionally carried few firearms anyway.

Third-party logistics were an important source of new revenues. Airborne Logistics Services doubled in size between 1996 and 1999, when it accounted for $150 million in revenues. Online retailing fueled much of the growth. Overall revenues increased two percent in 1999 to $3.1 billion; earnings fell to $17 million from $38 million in 1998.