ATW Daily News

DHL undertakes major US restructuring, shifts air lift to rival UPS

Thursday May 29, 2008

DHL yesterday unveiled a $2 billion restructuring of its loss-making US express business that includes shifting its air lift capacity in the market to rival UPS, a potentially devastating blow to ABX Air and Astar Air Cargo, which currently provide the German express giant's US lift.

Parent Deutsche Post World Net said it no longer can tolerate massive annual losses in DHL's US business, which it estimates will post negative EBIT of $1.3 billion in 2008. While DHL's signature yellow ground delivery vehicles still will operate in the US, its airport-to-airport flying will be handled by UPS Airlines beginning later this year, DPWN said. Additionally, it will close 34% of its package sorting facilities, particularly those in smaller markets, relinquishing blanket US coverage in favor of higher-yield major markets.

The US restructuring is expected to generate cost savings of $800 million in 2010 and around $1 billion annually going forward from 2011, DPWN said. A finalized DHL-UPS contract will be signed later this year, the companies said.

The fate of ABX and Astar is unclear, but DHL air hub activities presumably will be shifted from Wilmington, Ohio, to Louisville, where UPS's WorldPort sorting facility is undergoing a $1 billion expansion to be completed in 2010.

ABX President and CEO Joe Hete said DHL has informed it that UPS likely will take over "substantially all of the services that ABX Air currently provides to DHL," adding: "We are disappointed that DHL has chosen not to pursue alternative means to improve its competitive position in the US." ABX generates about 75% of its revenue from DHL operations. Astar did not comment.

The DHL-UPS announcement marks a stark contrast from 2004, when DHL entered the US market following a lengthy regulatory battle in which DPWN and UPS exchanged heated public barbs. DHL has been unable to gain more than a 6% share of the US express delivery market (ATW, January 2008). DPWN CEO Frank Appel said it was time to take "a more pragmatic approach. . .to be a smarter player in the challenging US express market."

UPS said the contract with DHL is expected to last 10 years and will produce up to $1 billion in annual revenue. The deal, however, is not a cease-and-desist between the longtime global rivals, COO David Abney said, explaining that it "would be a relatively straightforward air lift agreement and that UPS and DHL will continue to compete."

by Aaron Karp

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