DPWN rolls out plans for DHL Express U.S. restructuring

DHL expected to partner up with UPS for U.S. domestic and international shipments from airport to airport within North America

Jeff Berman, Group News Editor -- Logistics Management, 5/28/2008

BONN, Germany and Plantation, Fla.—After months of speculation regarding the future of DHL Express’ U.S. operations, parent company Deutsche Post World Net said today that it plans to significantly reduce DHL Express’ domestic footprint, although there are no plans to exit the U.S. market altogether.

In a press conference held at DPWN headquarters in Bonn, Germany earlier today, DPWN rolled out a series of initiatives for DHL Express U.S. operations, with the chief one being a plan to work with UPS on a ten-year, $10 billion contract for airlift capacity, and reducing costs in its ground infrastructure operations, which is expected to commence later this year. This contract is not yet finalized.

DPWN said that DHL and UPS have agreed to develop a plan in which UPS will provide airlift for DHL Express U.S. domestic and international shipments from airport-to-airport within North America. DHL currently uses ABX Air and Astar Air Cargo for these services. DPWN said this contract will provide DHL with a single airline partner in the U.S., and it added that it will continue to operate its courier and ground network, as well as pickup and delivery services within the U.S.

DPWN also said that its U.S. restructuring plan for DHL Express will: materially reduce aviation costs through outsourcing to UPS; rationalize infrastructure by 34 percent by closing and consolidating U.S. stations in low density and remote areas—and low density areas in multiple station locations—and nearby stations in multiple station locations; and reducing pick up and linehaul delivery routes and ground linehaul sectors by 17 percent and 18 percent, respectively.

Another component of the restructuring will include an expansion of DHL’s partnership with the United States Postal Service, which DPWN said will enable DHL to continue delivering to more rural parts of the U.S. This is expected to have a minimal impact on delivery services capabilities, according to DPWN, with less than four percent of pick up and delivery volumes expected to be affected despite a significant cost reduction. 

“There are not going to be any changes with our product offerings,” said DPWN CEO Frank Appel. “We are going to continue to provide domestic air, domestic ground, and global shipments…we will also use partners like the USPS for last-mile deliveries. This is a ripe path for our businesses, which will significantly reduce overall costs.”

The main relationship between DHL and the USPS is DHL@home, which dates back to 1999 when it was known as Airborne@home. DHL@home is successful volume-wise in the U.S. and does not have a direct competitor in this market. DHL@home is geared for business-to-residence shippers and provides secure and cost-effective shipping services, in which shipments are picked up by DHL and delivered directly to consignees by the local post office.

An industry source told LM that the additional number of DHL packages that will be handed over to the USPS for delivery is between 35,000-45,000 packages per day, which amounts to roughly three percent of DHL’s current daily U.S. volume. This figure, said the source, is in addition to the DHL@home packages that the USPS already delivers.

Financial improvements: In terms of costs, DPWN expects to see overall profits for DHL Express US improve by $1 billion in 2011, with expected losses of $1.8 billion in 2008, $900 million in 2009, $500 million in 2010, and $300 million in 2011.

Although this restructuring is expected to have a significant material impact on DHL’s cost base and overall infrastructure, it is expected to have a smaller impact on customers, said DHL Express CEO John Mullen. DPWN said it expects to spend up to $2 billion to finance the restructuring plan, which will go towards termination costs, leases, severance, aviation assets, and pickup and delivery optimization. And DPWN noted that it anticipates these restructuring efforts will result in annual savings of $1 billion per year (in earnings before taxes), with key changes expected to be completed by the end of 2009 and full plan implementation taking hold by 2010.

 “As a result of this, we will have a less complicated ground and air network than we had before, which should deliver more reliability across the whole platform of our combined operations,” said Mullen. “Most importantly, we believe this plan will protect our international network franchise and our global coverage, which is critical to a global player such as us. It is essential that we have a continuing presence in the U.S.”

Industry analysts suggest that there are pros and cons in terms of the type of impact today’s news may have for shippers.

“DHL has stated in the past that its customers pay less than its competitors on many occasions,” said Doug Caldwell, executive vice president of ParcelPool, a small parcel delivery consultancy and services provider. “So now you have a situation where current DHL shippers with good rates can think this is a positive, because it says DHL is clearly staying in the U.S. and they don’t have to worry about DHL shipments down the line.”

But shippers will want to see a smooth transition for DHL’s U.S. restructuring, noted Caldwell, and he said they don’t necessarily need to be exploring other options. Instead, shippers using DHL should be looking to hold onto those rates for as long as they can for two reasons: one being that DHL’s rates are by and large better than what the competition offers, and the second point being the reliability of UPS airlift.

“Why would a shipper want to switch from DHL to UPS, when UPS is already handling the linehaul for airfreight on shipments right now? Also, UPS operationally is second to none linehaul with very few service failures. This is a plus for DHL shippers, except for those with a lot of rural shipments, and for those in rural areas normally have a different service expectation.”

While ParcelPool’s Caldwell, said that DHL’s probable agreement with UPS is largely favorable for shippers, Jerry Hempstead, president of Hempstead Consulting in Orlando, Fla., said that today’s announcement overlooks some important points for shippers. One point being that this deal with UPS leaves DHL bound to the UPS flight schedule.

DHL, said Hempstead, has a large number of shippers that use DHL, because it has been flexible over the years with its flight scheduling to accommodate the special needs of specific shippers.

As an example, he said DHL has a special flight into Memphis that allows it to deliver as early as 4 a.m. to a company that repairs laptops. This gives the laptop repair company the ability to extend its repair window so that laptops can be turned in the same day and shipped out to the customer. He also pointed out that other businesses have special flights into certain cities via these specific DHL flights.

“I am not sure how the new arrangement with UPS is going to address the special situations DHL has developed over the years,” said Hempstead. “In addition large shippers, by way of the announcement, will see, by DHL's admission at least a 3.3 percent decline in the service performance, and the delivery will be through a hand-off to the USPS. DHL was already struggling with its service image in the marketplace. You can’t price poor service low enough to keep many of the large shippers upon which DHL built its domestic business.”

He also cautioned that there are a lot of unknowns in this announcement, with the most disconcerting one being that they announced a deal with UPS without having a definitive contract in hand with UPS, leaving UPS in the driver’s seat in negotiating the final agreement.

“This is going to leave DHL very vulnerable,” said Hempstead. “Obviously, UPS is going to mark up the lift to make a profit on it, therefore the underlying cost of that portion of the transit is going to be higher for DHL than for UPS packages. When planes are loaded, UPS packages will go on before DHL packages go on, and conversely UPS packages will be unloaded before DHL at destination. UPS is not going to sacrifice the service it offers its commercial clients to make DHL more competitive.”

Also included in the restructuring of U.S. operations are 1,500-to-1,800 job eliminations in the U.S., according to Mullen. When asked about how many domestic DHL stations would be shuttered, he declined to comment, instead referring to the announced 34 percent reduction through closing and consolidating stations.

These job eliminations follow a February announcement in which DHL Express USA reduced its workforce by approximately 600 positions. At the time of these reductions, Hans Hickler, former CEO of DHL Express USA, said that it was one of several measures the company was taking to augment its competitive position in the US market, which he said was a core strategic component of the company’s growth plan. Earlier this month, Hickler was replaced by Ken Allen, whom formerly served as CEO of DHL Express, Canada and Eastern Europe, Middle East, and Africa.

Today’s news, which had been expected and anticipated for weeks, comes at a time when it has been widely reported that DPWN had been leaning towards re-evaluating its strategy for DHL Express USA. In recent years, the company has struggled for market share, competing against UPS, FedEx, and the USPS.

And prior to today’s announcement, the future of DHL Express USA received a fair amount of attention for various reasons: a difficult integration of Airborne Express since its $1 billion acquisition of Airborne in 2003; the February news mentioned above regarding the 600 eliminated positions; investment bank reports calling for a major restructuring of US operations, and DPWN writing down $874 million on DHL US operations earlier this year. On top of these developments, the Financial Times Deutschland erroneously reported in January that DPWN was in talks with FedEx to sell DHL Express’ US operations to FedEx, with FedEx assuming control of FedEx’ European services. This rumor was squashed by a DHL spokesman who told LM at the time that the report was pure speculation and that DHL has no intention of exiting its US operations.

DHL has invested more than $3 billion into the US since 2003, including $1.2 billion in infrastructure and distribution. But to date, it appears this investment has not paid off, as it has lost $3 billion over the last four years, according to a Dow Jones report.