U.S. Senators call for antitrust investigation into proposed UPS-DHL deal

Deal is considered anti-competitive by politicians, may cause 'economic disruption'

Jeff Berman, Group News Editor -- Logistics Management, 8/6/2008

WASHINGTON—A tentative agreement between DHL and UPS is hitting some bumps in the road due to possible antitrust issues raised by two United States senators.

Under the terms of the deal announced in May, DHL Express would work with UPS on a 10-year, $10 billion contract for airlift capacity in an effort to reduce its ground infrastructure operations costs. UPS would 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.UPS said at its July second quarter earnings call that the deal is expected to be completed later this year.

But the deal may take longer to consummate than that, based on the contents of the letter sent to the Department of Justice and the Federal Trade Commission by Senators Herb Kohl (D-WI) and Orrin Hatch (R-UT), Chairman and Ranking Member of the Senate Antitrust Subcommittee, which is calling for a federal review of the proposed arrangement between UPS and DHL, the second and third largest overnight package delivery services in the U.S.

“If consummated, DHL will become reliant for air transportation on one of its two major competitors,” the senators wrote. “This raises the question if DHL will still be able to effectively compete against UPS, since UPS will now have a large role in determining the cost and quality of DHL’s services.

The senators added that some critics of this proposed agreement contend that DHL will become a captive of UPS, rather than and independent contractor. They also said that having only two airlines providing national airlift capacity for overnight delivery could raise the risk of serious economic disruption should service be reduced due to unforeseen difficulties like a strike, maintenance issues, weather disruptions, or other similar events.

UPS spokesman Malcolm Berkley told LM that UPS is still in negotiations with DHL, making it premature to talk about antitrust hearings.

“There is no agreement yet, however, as we stated in the May announcement, we expect that when an agreement is reached this will still be a customer-vendor contract, which from our perspectives don’t pose any anti-trust issues,” said Berkley. “You would not call what DHL currently has with ABX or ASTAR antitrust issues, [so] why would you with this? It is changing vendors. The agreement will be similar to what we and others in the industry have with the United States Postal Service. The nature of the vendor-customer relationship we are pursuing historically has not posed any antitrust issues. We are still in negotiations and will have to wait and see as a result.”

Should the deal go through, there are reasons for DHL customers to think this deal will be beneficial, said Doug Caldwell, executive vice president of ParcelPool, a small parcel delivery consultancy and services provider, in an interview earlier this year.

“DHL has stated in the past that its customers pay less than its competitors on many occasions,” said Caldwell. “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.David Ross, a transportation analyst at Stifel Nicolaus in Baltimore, told Purchasing.com (a corporate sibling of LM) that the service level impact of the deal could drive more shippers to UPS and FedEx but the market overall will remain competitive.

“I don’t think DHL’s service levels will get any better through this deal,” Ross said, but adding that he still sees the small parcel market as competitive, especially on the air side where he says FedEx and UPS currently have a lot of overcapacity. “On ground, a lot of shippers are downgrading to lower service levels to cut costs. But if you have a decent amount of air volume you should be able to get good rates from carriers.”

The call for antitrust investigation is not the lone obstacle this deal is up against. DHL currently uses ABX Air and Astar Air Cargo for its U.S. domestic and international shipments from airport to airport within North America. If the deal between UPS and DHL goes through, it will provide DHL with a single airline partner in the U.S., and DHL Express CEO John Mullen told LM in a May interview that DHL’s U.S. operations with ABX and ASTAR would wind down, as it has ongoing contracts with both operators, along with other related expenses for service and air crew operations, leases, buildings, and terminals. But a union representing ASTAR pilots is suing DHL Holdings USA on the grounds of violating its contract promising its pilots years of work flying DHL cargo, according to the Dayton Daily News. The report added that ABX had not yet decided if it would file a lawsuit.