BONN, Germany and PLANTATION, Fla.—Following months of speculation regarding the future of DHL Express’ U.S. operations, parent company Deutsche Post World Net (DPWN) has released a plan that finds the provider continuing operations in the U.S. but with a reduced footprint.

On May 28, DPWN unveiled its plan for DHL Express to work with UPS on a 10-year, $10 billion contract for airlift capacity in an effort to reduce its ground infrastructure operations costs. The plan is expected to go into action later this year. At press time, the contract was not yet finalized.

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

As part of the cost cutting plan, UPS will provide all airlift services for DHL Express U.S. domestic and international shipments from airport to airport within North America, giving DHL a single airline partner in the U.S. In the meantime, DHL will continue to operate its domestic courier and ground network.

According to DPWN, the plan will reduce aviation costs through outsourcing to UPS; rationalize infrastructure by 34 percent by closing and consolidating U.S. stations; and reduce pick up and linehaul delivery routes and ground linehaul sectors by 17 percent and 18 percent, respectively.

As Appel noted, DHL will also expand its partnership with the USPS, 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.

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, amounting to roughly three percent of DHL’s current daily U.S. volume.

In terms of financials, DPWN expects to see overall profits for DHL Express U.S. 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 affect on DHL’s cost base and overall infrastructure, it should have a smaller impact on customers, said DHL Express CEO John Mullen. DPWN 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. DPWN anticipates these restructuring efforts will result in annual savings of $1 billion per year.

“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 [shippers] pay less than its competitor’s customers do on many occasions,” said Doug Caldwell, executive vice president of ParcelPool, a 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.”

Shippers will want to see a smooth transition for DHL’s U.S. restructuring, noted Caldwell, but he said they don’t necessarily need to explore other options. Instead, shippers using DHL should be looking to hold on to current rates.

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

According to Hempstead, DHL has a large customer base that has used the provider over the years due to the flexibility of its flight scheduling. “I am not sure how the new arrangement is going to address the special situations DHL has developed over the years,” said Hempstead.

“In addition, large shippers will see, by DHL’s admission, at least a 3.3 percent decline in service performance, and the delivery will be through a hand-off to the USPS. DHL was already struggling with its service image,” adds Hempstead