DPWN writes down $874 million on DHL Express U.S. operations

Jeff Berman, Senior Editor -- Logistics Management, 1/24/2008

BONN, Germany and PLANTATION, Fla.—Sending the message that they are still committed to the United States market, Deutsche Post World Net (DPWN), the parent company of express services and logistics services provider DHL, said yesterday it is taking an $874 million non-cash writedown on DHL Express operations in the U.S.

An AFX news report said this writedown includes adjustments on the value of some of DHL’s fixed assets, such as aircraft, trucks, property leases and office equipment.

This news follows recent research reports from investment banks Morgan Stanley and Bears Stearns, which indicated that pulling out of the U.S. market and scaling down domestic operations may be the optimal move for DHL. In 2003, DHL purchased Seattle-based Airborne Express for $1 billion. Since that time it has faced a largely uphill battle for market share, competing against industry bellwethers UPS and FedEx, as well as the United States Postal Service (USPS). DHL said it has invested more than $3 billion into the United States since 2003, including $1.2 billion in infrastructure and distribution.

“The U.S. Express business is a key management priority, and we are looking at a variety of options to improve performance,” said DPWN Chief Financial Officer John Allan in a statement. “In doing so, we are committed to maintaining a significant presence in the U.S. market, which remains of significant interest to the Group.”

Allan’s stance differs significantly from the Bear Stearns report, which said the acquisition of Airborne has financially been “a disaster” and that the strategic rationale for the acquisition remains unproven almost five years later. The report added that the best strategy for DHL would be to pull out of the U.S. domestic express market.

And the Morgan Stanley report suggested some of the following possibilities: arranging a transaction with FedEx, UPS or the USPS for all of DHL Express or just its U.S. business to get the required market share and scale to reach profitability; or to withdraw physical operations and enter into a contract of delivery of imports into the U.S., where DHL would fly parcels into the U.S. but would ink a long-term deal with FedEx, UPS, or USPS for parcel delivery.

But Morgan’s third scenario, it concluded, may be the most viable one for DHL. That would be for DHL to reduce the size and scope of its controlled network with two variations: withdraw to metropolitan areas and offer both domestic and international services, with pick up and delivery being outsourced to FedEx, UPS, and USPS or regional players; or withdraw to metropolitan areas and offer just international services.

Making changes to its domestic network appears to be the most plausible option, according to Doug Caldwell, executive vice president of ParcelPool, an Orem, Utah-based small parcel delivery consultancy and services provider.

“They are not leaving the market as far as I can see, but if you are having a writedown of that size it won’t be business as usual in the U.S. market,” Caldwell told LM. I think what they are going to probably do is scale back. They wouldn’t have announced the Walgreens deal if they were planning to pull out of the market entirely.”

DHL and Walgreens, a national pharmacy chain, announced a strategic partnership earlier this month, which will provide small businesses and consumers with access to DHL’s overnight, ground, and international delivery services at Walgreens locations.

Other possible options for DHL in the U.S., said Caldwell, may be a thinning of the sales ranks and sub-contracting out sales in some smaller markets to make operations leaner. Another possibility he cited was to cut back on some flights. DHL currently has 10:30 a.m., noon, and 3 p.m. overnight and two-day service, and going forward there may be fewer points in the system with next-day service and more remote points may have two-day service.

The possibility of focusing strictly on international business in the U.S. market may be the best route for DHL to take, according to Richard Armstrong, chairman of supply chain consultancy Armstrong and Associates.

“DHL would like to have the quality of operations that UPS has in its North American operations, but they did not inherit those from Airborne,” said Armstrong. “It is a very difficult market right now, and DHL has the unfortunate situation of going against an oligopoly that is entrenched and very strong with a big [footprint] and an awful lot of service capabilities. DHL is having problems getting the scale it needs to really be a major player in the U.S. market.”

Despite its current situation, DHL’s domestic performance has been particularly good of late, which is consistent with the commitment it has made to improve domestic operations, explained Michael A. Regan, CEO of transportation rate analysts TranzAct Technologies.

And an industry source told LM that DHL said its 2007 Peak Season performance was in line—and performed slightly better than its original expectations.

But DHL’s real problem, said Regan, is that it is competing against UPS and FedEx, both whom have very deep pockets.

“The question I have is: at what point in time does DHL’s forecast show the market has turned?” said Regan. “At some level, if you come to the conclusion that the market is not going to turn in the next 3-5 year, then it obviously has an impact on its thought process.”

From a shipper perspective, Regan said shippers need to really hope DHL makes it in the domestic U.S. market. If it were to cease operations, he said, that would have a very favorable impact on UPS and FedEx’ surface ground operations, and it would also be easier for them to raise future

“If you subtract out DHL, I don’t think it is unreasonable to assume that shippers could see their parcel costs increase by anywhere from 3-10 percent within the two years after that occurs,” said Regan. “And that is after netting their GRI (general rate increase) and their accessorial charges.”

ParcelPool’s Caldwell agrees with Regan, in that if DHL makes significant changes in the U.S, it may have a major impact on shippers and rates.

“As far as shippers go, if DHL does scale back a bit it is going to likely be in business preservation mode and may not be as aggressive in growing its [U.S.] business as it has have in the past,” said Caldwell. “This means shipping costs may go up regardless of what carrier a shipper uses. If a shipper has good rates with DHL right now they should do whatever they can to hold on to them. If and when major changes are announced they won’t necessarily make or break a shipper’s relationship with DHL. In most cases it won’t. If a shipper were to panic and look elsewhere, other carriers are going to recognize this and shippers may end up paying considerably more for their shipments.”