Reports provide conflicting views of DHL's future in the US

Jeff Berman, Group News Editor -- Logistics Management, 9/17/2008

BONN, Germany—Reports coming out of Europe recently have provided mixed forecasts of the future of DHL Express USA.

A report published by the Financial Times Deutschland earlier this month indicated that Deutsche Post World Net (DPWN), DHL’s parent company, will have to delay its restructuring schedule for DHL Express USA by approximately eight weeks.

This was followed by a Reuters report indicating that DPWN “could pull out of its DHL Express business in the United States, where it is continuing to suffer heavy losses.” (In his Judiciary Committee testimony last week, regarding DHL’s potential service contract with UPS for airlift capacity to reduce its ground infrastructure operations costs, DHL Express CEO John Mullen said DHL is suffering operating losses of about $5 million per day.) Reuters also noted that DPWN was considering tougher restructuring measures for DHL Express USA, with a potential strategy change in the works.

But a Dow Jones report said that DPWN “is not considering a complete pull out from its US operations,” adding that the US is a definitive part of a company’s global postal network and a necessary market.”

In May, DPWN rolled out a restructuring plan for the United States, which included, along with the ten-year, $10 billion UPS contract: rationalizing infrastructure by 34 percent by closing and consolidating US stations in low density and remote areas, low density areas in multiple station locations, and nearby stations in multiple station locations; reducing pickup and linehaul delivery routes by 17 and 18 percent, respectively; and expanding DHL’s partnership with the United States Postal Service, which will enable DHL to continue delivering to more rural parts of the US, among others.

These announcements were made to augment operations in the US market, where DHL has struggled for market share going up against UPS and FedEx despite investing more than $3 billion into the United States since 2003, including $1.2 billion in infrastructure and distribution.

While DPWN previously announced that DHL plans to reduce its US footprint by 34 percent through various measures, an industry source told LM it may be closer to up to 50 percent, according to an industry source.

“It is hard to say exactly what they are looking for,” said the source. “DHL has mentioned talks with UPS are taking longer, because volumes are decreasing greater than anticipated…and may now be exploring more options with UPS.”

DHL, the source said, delivers roughly 40,000 items per day with the USPS through bulk mailing centers (BMC) to non-metropolitan, rural areas, where DHL does not have a presence. From the time these packages are dropped at the BMC, the service standard for customer delivery is typically three days, the source said, with 2.6 percent of DHL’s total volume going through these USPS BMCs.

“If they do something more widespread, they are going to need a more comprehensive solution,” explained the source. “They will need to do pickups, which they cannot do with the present USPS BMC drop, and they will need something more timely.”

Logical choices for DHL to continue pickup and delivery services in rural areas are UPS and the USPS, said the source, adding that UPS is considered to have the best integrated air and ground network in the US, and has the capability to move these packages for DHL depending on how time-sensitive they are.

And if talks occur in which DHL decides it needs UPS to deliver 25 percent or less of its ground packages, the source said that is likely to raise some eyebrows from a regulatory standpoint, especially when compared to the deal being proposed and contested.

And short of leaving the US market entirely, the source said the most likely move for DHL would be to outsource some of its delivery operations.

Courtroom talk:

News regarding DHL’s future in the US is coinciding with hearings held by the House Committee of the Judiciary on “Competition in the Package Delivery Industry” and the House Transportation and Infrastructure Committee on the “Effects of Proposed

Arrangement Between DHL and UPS on Competition, Customer Service, and Employment.”

DHL’s Mullen said at the Judiciary hearing last week that the pending contract between UPS and DHL does not violate anti-trust laws or decrease the competitive landscape in the parcel delivery arena. And UPS President of Corporate Transportation Burt Wallace said that the companies will continue to operate independently, respectively, price and market its own brands and will not share profits, costs, or information about pricing of services to each other’s customers.

But various Ohio-based lawmakers have a different view, due to the potential impact DHL’s partnering on UPS could have throughout the state due to DHL’s current airlift partnership withABX Air and ASTAR Air Cargo, and the Wilmington, Ohio Air Park, which hosts DHL’s domestic air and ground hub, and air ground sorting activity. If the UPS deal goes through, UPS will serve as DHL’s sole airline partner in the US, and up to 8,000 jobs at the Wilmington facility could be lost.

An Associated Press report indicated that that state of Ohio has been trying to get DHL to consider alternatives to taking the airlift business from ABX and ASTAR and giving it to UPS, but that these overtures have been rebuffed.