Two years after DHL Express made its splashy entry into the U.S. market with its $1 billion acquisition of Seattle-based Airborne Express, the integrated carrier has elbowed its way to a 6 percent share of the domestic parcel business.

DHL has a long way to go before it will make a substantial dent in the domestic parcel market, where UPS is still the dominant player on the ground. According to The Colography Group, an Atlanta-based transportation research firm, UPS carries 50.8 percent of express packages weighing less than 70 pounds. FedEx continues to gain on UPS and now has a 21 percent market share. The U.S. Postal Service follows right behind with 20.3 percent. (See chart, Page 64.)

Although it lost $625 million in this country last year, largely because of service failures that even its CEO says were "totally unacceptable," DHL is spending $1.2 billion to continue its aggressive competition against dominant players UPS and FedEx.

Clearly, DHL is willing to spend plenty of money to play the domestic parcel game. The biggest questions on many shippers' minds: Will DHL's investments and ubiquitous advertising provide entree into its rivals' cozy "club"? And how will the newcomer affect pricing?

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DHL's parent is Deutsche Post World Net (DPWN), the German mail, express, and logistics conglomerate. DPWN, with annual revenues of $45 billion, is partly underwritten by the German government. That financial support may come in handy: In the first couple of years since its acquisition of Airborne Express, DHL could well have stood for "Does Have Losses."

DHL Joint CEO John Mullen recently said his company's U.S. operation is not expected to break even until the fourth quarter of 2006 at the earliest. In the face of such losses, DHL has made some strategic decisions that may help the carrier dig its way out of its North American hole.

Mullen, an Australian who ran DHL Asia for several years, said that he's no longer chasing an acquisition that would flesh out the carrier's U.S. domestic coverage. Instead, he's concentrating on creating a "one-stop shop" for international and domestic shipments by leveraging DHL's extensive and well-established overseas capabilities. And, he said, DHL will not go after every pound of parcel business in this country at any cost.

"We're not driven by market-share gains," Mullen said at the recent Bear Stearns global transportation conference in New York. "We want to get more value out of the volume we have, rather than chase more volume."

But the carrier is unlikely to achieve that objective until it convinces shippers that its service woes are behind it. That could be a tough sell, at least for now. "No matter how you slice it, DHL still does not have the service to go head-to-head with FedEx and UPS," asserts Donald Broughton, transportation analyst and vice president at A.G. Edwards & Sons in St. Louis. For one thing, DHL's ZIP code coverage is still not as complete as that of UPS and FedEx, he says. More importantly, he adds, many shippers perceive that when it comes to speed and reliability, DHL's service is not as good as what FedEx and UPS offer. "Whether it is or it isn't is irrelevant," Broughton says. "The perception is that DHL can't match FedEx and UPS service."

DHL officials vigorously dispute that opinion. "We've always been on the right track," says Director of Corporate Communications Jonathan Baker. "There was a period of time when service levels suffered last year, but our service levels now and for quite some time are at historically high levels of 97 and 98 percent, in raw measures." Continued...

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