DHL plans major U.S. pullback, analysts say
Deutsche Post World Net's supervisory board is scheduled to announce May 28 its plan for downsizing its struggling DHL Express division in the United States, essentially abandoning its goal of catching up to established players FedEx and UPS in the domestic air and ground parcel market.
Stock analyst Ed Wolfe predicted on May 16 in a research note that DHL could close as many as 90 to 100 of its U.S. terminals, return to its previous life focusing on international service and outsource local deliveries to trucking firms and the U.S. Postal Service.
A Deutsche Post official on Tuesday foreshadowed a major restructuring of DHL Express USA, but appeared to support earlier company denials that it would sell the division and exit the U.S. market.
“A full retreat is not in the offing,” said Martin Ziegenbalg, managing director of investor relations, at a transportation investor conference in New York organized by Wolfe Research, an independent firm created by Wolfe following the collapse of Bear Stearns this year.
The change will be “more of a structural nature and not just a try harder approach,” Ziegenbalg said.
Deutsche Post entered the U.S. domestic market in 2002 with the purchase of DHL as a platform for ground operations, and acquired Airborne Express in 2003 as an overnight air express unit. Since 2005 DHL has invested more than $1.2 billion to expand its delivery network with new regional sort centers and improve service with upgraded information technology systems. DHL experienced major integration challenges trying to graft its intercontinental express business with the Airborne air network and expanding the DHL intercity ground network. The company experienced severe service failures in late 2004 and 2005 as it tried to overcome its limited network, high-cost air subcontractors and aging planes while launching an aggressive marketing campaign for new business. The troubles led to significant hemorrhaging of large customers to FedEx and UPS.
The company has bled hundreds of millions of dollars each of the past four years, especially early on as it tried to compete as a low-cost provider of express delivery service.
Earlier this year DHL’s parent took a 600 million euro ($875 million) non-cash write off on Express Americas assets and announced a U.S. workforce reduction of about 600 positions.
In November, the German postal and logistics group abandoned a 2009 breakeven target for DHL Express due to the softening U.S. economy and tough competition from FedEx, UPS and USPS.
Deutsche Post has repeatedly denied media speculation that it was discussing the sale of the U.S. express unit to FedEx.
Ziegenbalg reiterated that a strong U.S. presence is important for express and freight forwarding business, and that any pruning of the U.S. operation to stem losses had to be done carefully so as not to impact its dominant global delivery network.
Wolfe reported that as early as July DHL could begin closing sort and distribution terminals, which tend to combine ground and air products. DHL’s big air hub in Wilmington, Ohio, is likely to survive the cutback.
William Flynn, chief executive officer of Atlas Air Worldwide, noted that Wilmington is part of the distribution network that subsidiary Polar Air Cargo is operating for DHL in the transpacific market. DHL bought a 49 percent stake in Polar last summer. And ABX Air, one of DHL’s two primary domestic airfreight carriers, announced earlier this week a one-year renewal of the contract to operate the hub and provide airlift for DHL.
The analyst also forecast that DHL is likely to partner with USPS for last-mile delivery for small ground shipments, and may rely on YRC Worldwide (parent of Yellow Transportation and Roadway among others), FedEx Freight or other motor carriers for line haul delivery between its remaining terminals and USPS local drop-off centers, known as Destination Delivery Units, or bulk regional centers.
“All of these changes should make DHL look more like it did before the Airborne acquisition, with a focus on its import/export business which we estimate represented just over half of DHL Americas total Express revenue in 2008,” Wolfe wrote.
Satish Jindel, president of Pittsburgh-based SJ Consulting Group, agreed in an interview that DHL would prune its domestic network to concentrate on dense markets and use other established networks to reach outlying areas where it is expensive to operate.
The logical place for DHL to outsource is USPS, he said, because it has the lowest cost and they already have a relationship through the DHL @Home Service to do residential last-mile delivery.
Under such a scenario, DHL could concentrate delivery operations in large cities, leaving to its partner smaller cities and rural areas where there is limited business but lots of territory to cover.
That strategy would go beyond the type of relationships FedEx and UPS have with USPS. Those companies use Priority Mail for business-to-consumer deliveries to provide a lower cost alternative for Internet retailers and compete with parcel consolidators. FedEx’s product, SmartPost, is similar to DHL’s @Home service. UPS also has a service called “UPS Basic,” but uses USPS much less than FedEx because its labor contract with Teamsters union precludes shifting work to other parties except for a limited number of pre-arranged ZIP codes.
While FedEx and UPS use USPS for their lowest priced residential offering, analysts expect DHL to also hand over business-to-business deliveries to the Postal Service.
Wolfe warned that DHL could soon run into service problems with its most demanding customers. “We believe these restructurings will likely lead to untenable service levels for many current DHL Express and Ground customers, and a material amount of existing DHL Air Express and Ground business will likely move to UPS and FedEx,” he wrote May 16.
FedEx and UPS package trucks are already making their rounds early in the morning while the USPS doesn’t hit the streets until after 9 a.m., which means that business customers could see a lag of several hours receiving their packages, he told American Shipper.
USPS Treasurer Bob Pedersen told investors at the conference that the Postal Service expects to absorb the extra volumes through higher productivity rather than adding resources, if DHL opts to dump more packages into the postal system.
As it prepares to trim its domestic U.S. network, DHL has recently begun to selectively ask some of its largest customers, who previously negotiated deep discounts, for 10 percent to 15 percent annual rate increases or drop non-profitable accounts that decline to do so, Wolfe said in his research note.
FedEx, he said, has been aggressively pursuing DHL customers even before DHL asked for rate increases or notified customers of the pending network changes.
Wolfe said customer diversions would have limited material impact on FedEx and UPS. Under a scenario in which DHL loses 30 percent of its estimated $686 million domestic air express revenue, FedEx would pick up $333 million, UPS would take $269 million and the USPS would capture the remaining $85 million. On the ground delivery side, the figures are $171 million, with $128 million going to UPS, $37 million to FedEx and $6 million to USPS.
UPS would gain about $397 million in combined revenue and FedEx would gain $369 million, according to Wolfe’s estimate, based on DHL’s one-third market share loss.
“DHL’s departure from the domestic U.S. business could add some initial price competitiveness between FedEx and UPS vying for that business,” but over the long term the move likely means higher prices for shippers, Wolfe said. ' Eric Kulisch
