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Harvard Business School

9-798-070
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 reslllts were, 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, commented: While the UPS strike was the headline news in the quarter, Company operations olltside 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.'

. 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't hurt 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 the core market and are looking for marginal revenue opportllnities." 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 moved