Airborne Looks to the Ground for Much-Needed Lift

Airborne Freight Corp.’s chief executive, Robert Cline, is working on several fronts to get his company’s weak growth airborne again. One of his plans: Take to the ground.

The Seattle-based shipper’s profit and stock price have slumped badly during the last 18 months, mainly because the company--which operates as Airborne Express--has suffered lackluster volume gains in U.S. package deliveries.

Just last week Airborne warned that its second-quarter profit would be far below analysts’ forecasts because of “the lack of growth in domestic shipments,” which rose less than 1% from a year earlier. The shortfall in good part reflects business Airborne is losing to shipping giant United Parcel Service Inc.

So Airborne, among other steps, is “looking very closely at developing a ground [shipping] system” of its own that would vie directly with UPS’ industry-leading ground service and thus “go a long way toward offsetting” the advantage UPS enjoys by being able to offer clients both ground and air deliveries, Cline said in an interview.

Airborne hasn’t yet publicly announced these plans, because it’s still negotiating contracts with outside trucking firms that would move shipments between adjacent cities, he said. But Airborne hopes to have the system in place within nine to 12 months.

Besides using its own branded trucks for pickups and deliveries, Airborne already is using outside trucking firms to handle more than 1,200 trips per night that complement its core 120-jet air service, and “that would be the backbone of the [new ground] system,” Cline said.

“We feel that with very little incremental capital investment . . . we can have a competitive system in a short time,” he said.

And Cline doesn’t have a lot of time. As Airborne’s stock has languished--it’s plummeted 60% from the $43-a-share peak it reached in February 1999--some of the company’s major investors are growing increasingly impatient. The stock closed Thursday at $16.88 a share, down 13 cents for the day, in composite trading on the New York Stock Exchange.

To be sure, the entire overnight-delivery sector has struggled in the last two years because the Internet and e-mail have replaced much of the need to have documents delivered by air.

It’s an especially harmful shift for Airborne, which has always focused on business-to-business deliveries. But even FedEx Corp., the king of overnight delivery, has felt the impact, and two years ago it acquired the ground-delivery company Caliber System Inc. that’s helped reduce its reliance on overnight shipments.

In Airborne’s case, “the problems are company specific,” asserted James Kaplan, president of J.L. Kaplan Associates, a Boston money management firm that owns about 1.5 million Airborne shares. “The overall industry numbers, judging by FedEx and UPS, have been pretty good lately, and it appears they’re growing at Airborne’s expense.

“They simply don’t have enough volume to amortize all their fixed costs, and the problem is getting worse rather than better,” Kaplan said.

Arthur Hatfield, an analyst at investment firm Morgan Keegan & Co. in Memphis, Tenn., said Airborne “is dying a slow death staying in the niche it’s in,” and that the company “has to look for other avenues of growth.”

Airborne traces its roots to 1946, when a predecessor company began flying fresh flowers from Hawaii to California. Today, the vast majority of its parcels are documents and other items that weigh less than 25 pounds. And the company’s primary service is its “overnight express” product, which accounted for 59% of Airborne’s U.S. shipments last year.

Cline said Airborne is suffering from two main problems. First, UPS is leveraging its enormous ground-shipping business to persuade more customers to use its air-shipping line as well, at the expense of Airborne. Asked if UPS was in fact taking market share from Airborne, Cline replied, “I don’t think there’s any doubt about it.”

Second, Airborne had maintained a flat-rate structure, in which its prices were based on weight no matter how far the item was shipped, whereas FedEx and UPS two years ago began using “zone-based” prices that are pegged to the length of the trip.

The result: “Customers are cherry-picking us” by using FedEx and UPS for short-haul deliveries and Airborne--with its flat rates--for long destinations, he said. “We know we’ve lost a fair amount of our short-haul traffic to competitors,” he said.

So Airborne has just rolled out zone-based pricing to address that problem.

The company also is building up a new venture with the U.S. Postal Service, in which the Postal Service makes residential deliveries of packages shipped by Airborne. That venture, announced a year ago, was aimed directly at UPS and its longtime dominant role in delivering packages to residential customers. It’s also meant to reduce Airborne’s reliance on business clients.

However, “the verdict is still out” on the venture’s success and its contribution to Airborne’s growth, said money manager Kaplan. “We’re waiting a lot longer than expected to see any numbers,” he said.

Cline said the venture “is working extremely well,” but he acknowledged that “we’re only handling 20,000 shipments a night” so far because Airborne and the Postal Service are still setting up the electronic infrastructure needed to ensure that the two parties, and key Airborne customers such as catalog firms and Internet retailers, are seamlessly connected.

But the system will be much stronger in time for the holiday season this year, and “we would hope by year-end to handle 80,000 to 100,000 shipments a night,” Cline said.

Moreover, all these steps mean that “hopefully we would start to see some earnings improvement in this year’s fourth quarter,” he said. In 1999, Airborne’s profit tumbled 34% from the previous year, to $91 million, on virtually flat revenue of $3.1 billion.

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Shipper’s Slump

Airborne Freight Corp.’s earnings and stock price have languished because the parcel delivery company is suffering from flat volume growth in U.S. shipments:

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Domestic shipments (in millions): 1st Quarter 2000: 81.8 million

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Monthly stock closes and latest on NYSE (ticker ABF): Thursday: $16.88, down 13 cents

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Sources: Airborne Freight Corp., Bloomberg News