Contract dispute engulfs DHL, ABX Air

Contract dispute engulfs DHL, ABX Air ABX Air notified the U.S. Securities and Exchange Commission Friday that it cannot meet the deadline to file its financial results for the third quarter because its major client, DHL Express (USA), failed to reimburse it for providing air cargo delivery and ground hub staffing.
   ABX Air, one of two companies that provides overnight airlift for DHL’s package delivery network, said DHL has defaulted under its dedicated aircraft lease and carriage contract, and its hub and trucking contract.
   DHL claimed that it withheld amounts related to overhead expenses it disputed during the second and third quarters of 2007. DHL argues that ABX expenses are no longer eligible for reimbursement in full because ABX’s revenues from other customers have exceeded a 10 percent threshold of its total revenues.
   “DHL wholly rejects the assertion that the company is in default of these agreements. The company has exercised valid rights under these contracts that allow DHL to reduce its reimbursement obligation to ABX for certain overhead expenses,” the Miami-based company said.
   ABX countered that DHL has improperly excluded from its calculation certain ABX revenues that stem from reimbursements for fuel expenses that it incurred on behalf of DHL. When such fuel-related revenues are included in the calculation, ABX’s revenues from other customers have not exceeded the threshold level.
   In addition, DHL claims that ABX Air’s costs in maintaining its public company status and certain professional fees incurred dealing with an unsolicited buyout approach from fellow DHL air cargo delivery provider ASTAR Air Cargo are not recoverable under the agreements.
   In July, ABX Air rejected an offer from Astar Air Cargo to buy the company. DHL acquired nearly half of Astar just prior to the buyout bid and uses the two cargo airlines as its primary air transport providers for overnight packages in the United States. A merger would have given DHL more control over what is now a dual network and management team, and increased opportunities to create efficiencies.
   Earlier this month, ABX said it planned to acquire Cargo Holdings International Inc. of Orlando, Fla. for about $350 million.
   Cargo Holdings has annual revenue of about $300 million and operates 32 aircraft for customers such as BAX/Schenker, the U.S. government, DHL, the U.S. Postal Service and UPS.
   ABX, based in Wilmington, Ohio, said DHL appears to be motivated by a need to staunch losses in its U.S. operation, which the company has invested heavily in the past three years to build air hubs and a ground network.
   “We are aware of the disclosures yesterday by the management of DHL's parent company, Deutsche Post World Net, that growth in DHL's U.S. network has slowed considerably in recent months, and that DHL's U.S. operations are ‘the critical issue’ for that company. While we are eager to support DHL in its efforts to build market share, growth, and profitability in the U.S., that process cannot be furthered at the expense of the shareholders of ABX Air,” the company said.
   Deutsche Post reported consolidated third quarter net profit decline to $513 million compared to net profit of $784 million a year earlier.
   The earnings report noted that attempts to break even in the Americas business slowed down in the third quarter, with the domestic air business being particularly affected by weaker demand in the U.S. market.
   ABX said it is reviewing its options while continuing to provide full service to DHL. Those include pursuing the dispute resolution process set forth in the agreements, negotiating with DHL to resolve the disputed issues, or other legal alternatives.
   The dispute may cause ABX Air to be in default under certain of its loan agreements with banks, but it has obtained waivers for those covenants, the airline said, adding it may seek to recover from DHL any damages it occurs from the credit default.
   ABX Air was created following the acquisition by DHL of Airborne Express in 2003. Under U.S. law, foreign investors cannot own majority control of a U.S. airline so Airborne’s airline was split off as a separate company.