DHL interested in smaller outsourcing deal with UPS

DHL Express, which Monday announced it was discontinuing domestic-only air and ground delivery service in the United States, is still negotiating with rival UPS to provide airport-to-airport line haul for its international shipments, officials for both companies said.

The express delivery unit of Deutsche Post has been in talks since late May with Atlanta-based UPS to take over its U.S. airlift for domestic and international packages as part of a significant downsizing effort to reduce the cost structure of its domestic ground and air network. Those talks will now focus on a contract to handle the smaller international volume DHL plans to concentrate on after Jan. 30.

Any arrangement would involve DHL aircraft, as well as contracted airlift providers such as Polar Air or Lufthansa, transferring shipments to UPS at five international gateways, including Los Angeles International Airport, John F. Kennedy International Airport in New York and UPS's Worldport hub in Louisville, DHL Express Chief Executive John Mullen said in a conference call with reporters. UPS's fleet would transport the shipments to other large cities where one of the 102 remaining DHL stations would handle final delivery to the customer, as well as pick up service.

Mullen said DHL would still be able to provide national coverage because up to 90 percent of its international business is concentrated in urban areas. It will subcontract to the U.S. Postal Service and other couriers for pick up and delivery to remote areas such as Montana.

Our preference is to conclude negotiations underway (with UPS), albeit with different volumes, by the end of the year. If we're not successful for whatever reason, then, of course, we have the option to fall back on our existing contracts with either ABX Air or Astar Air Cargo, Mullen said.

ABX Air and Astar provide domestic overnight line haul for DHL and face uncertain futures if, as expected, they lose their largest customer.

As a result of the restructuring, DHL's U.S. daily package volume will go from 1.2 million per day to less than 100,000.

DHL Express said it plans to close its 18 ground hubs, main air hub in Wilmington, Ohio, and 309 local package stations, and layoff 9,500 employees to stop bleeding red ink from its U.S. operations. The impact on communities around the nation is actually more extensive because DHL relied heavily on subcontractors for its air transport and ground delivery. DHL officials said those companies will make separate decisions about their workforce levels. The job losses come at a difficult time for many areas of the country already reeling from a recession.

The $1.3 billion in annual operating losses were not sustainable without damaging the rest of DHL and Deutsche Post, Mullen said.

The move is an acknowledgement that DHL failed in its bid to elbow its way into the full-service U.S. express delivery market controlled by FedEx and UPS.

DHL invested nearly $10 billion in the domestic ground and air operation since 2003, including the acquisition of Airborne Express, hub infrastructure construction and shutdown costs.

The recent global economic woes accelerated DHL's decision to completely shut down U.S. domestic operations, but Mullen said the entrenched power of the two domestic express package carriers was the main reason for the pullout.

The United States is a highly concentrated duopoly market. We invested a massive amount of money to try and break into that market to create a third choice, but the lack of scale (on our part), and the productivity and brand awareness they have has made it impossible for us to make it economically viable,Mullen said.

Maybe if we had been in boom times we might have tried to soldier on and attract enough revenue to overcome losses, so the combination was too much to go on supporting. As for lessons learned, Mullen said: There were execution errors along the way of course, but none of them in themselves made a difference between success and strategic failure. The lesson is that trying to enter a highly concentrated efficient market like the U.S. without being able to acquire a high performing company is difficult. Airborne was a small, low-quality niche player -- a loss-making company. We tried to make it high quality. It never was big enough and never had the presence of coverage to compete with the two incumbents.

UPS and FedEx immediately served notice that they are working hard to quickly capture DHL customers.

We think that a lot of these customers are going to want to join UPS and we're going aggressively after them, UPS spokesman Norman Black said.

The world's largest package delivery company has already won over a number of DHL customers during the past couple of months as uncertainty swirled around DHL.

We think that's going to increase. We've gotten a lot of DHL customers contacting us today,Black said.

FedEx said in a statement, We welcome the opportunity to provide domestic U.S. Ground and Express services to all DHL customers as DHL exits these markets. Customers in the United States and around the world are taking advantage of the speed and reliability offered by FedEx, the world's largest cargo airline and our unparalleled international route structure.   UPS is only offering to collaborate with DHL on the backend air transport to help fill its planes and is not directly serving DHL customers it hopes to win over.

Mullen said DHL is intent on trying to hold onto customers for the international portion of their business, but admitted that considerable losses are inevitable as many U.S. shippers prefer to bundle their package services with one carrier.

The big bundled shipper with extensive ground needs we'll probably struggle to keep, he said.

He expressed confidence that DHL would retain most overseas customers that ship to the United States.

Wall Street analyst Ed Wolfe estimated that UPS and FedEx would split about 80 percent of DHL's domestic air and 70 percent of its domestic ground revenue, as well as 5 percent of its import/export revenue.

The demise of low-cost provider DHL is expected to give FedEx and UPS more pricing power in the U.S. domestic market.

Source: American Shipper