UPS supplants ABX, Astar in DHL restructuring
ABX Air and Astar Air Cargo are scrambling to figure out their survival after DHL Express said Wednesday it will transfer its outsourced airlift within North America to UPS as part of a major restructuring to stem heavy losses in the U.S. market.
The express package courier will close or consolidate ground terminals and sort facilities, and trim its pickup and delivery routes and its line-haul routes between stations.
Streamlining its ground infrastructure and aviation operations would amount to a 30 percent reduction in overall network capacity, DHL USA spokesman Jonathan Baker said. The cutbacks would also slash ground facility capacity by one-third, pickup and delivery capacity by 17 percent, and line-haul capacity by 18 percent.
DHL operates hundreds of ground stations, but the company would not disclose how many actual locations are being shuttered or merged into a larger facility. Independent stock analyst Ed Wolfe recently speculated the express carrier would close 90 to 100 terminals.
Officials for parent company Deutsche Post World Net said DHL would still cover the entire country, but expand its relationship with the U.S. Postal Service to handle pickup and delivery in remote areas while concentrating its activity in large metropolitan areas and cross-border operations. The ground network changes will only impact about 4 percent of DHL’s shipments, but the minimal coverage reduction is justified by the huge cost reductions DHL expects to realize, they said.
“For the vast majority of customers this has very little impact at all,” said John Mullen, head of DHL Express, during a press conference Webcast from Deutsche Post headquarters in Bonn.
DHL plans to eliminate about 1,500 to 1,800 positions, or about 4 percent of its total direct workforce of 18,000, in conjunction with the facility closures, not including any layoffs that outside contractors separately may be forced to take as contracts are terminated.
Independent contractors operate about 60 percent of the ground package delivery facilities.
The company also expects to take out $130 million per year in overhead expenses during the next three years.
The combined moves would save the company an estimated $1 billion per year.
DHL projected it would post a 2008 operating loss of $1.3 billion in the U.S. express unit (up from $1 billion in 2007), and shave that to $300 million by 2011 by downsizing its asset-based network. The increased losses are partly due to customers holding back on shipping with DHL until it cleared up uncertainty about its future, Mullen said.
The drastic move is an acknowledgement that DHL failed in its effort to unseat FedEx and UPS as the entrenched overnight parcel carriers in the United States. DHL invested in excess of $1.2 billion to build up its infrastructure — regional air hubs, ground package terminals, equipment and delivery routes — and position itself as the low-cost alternative in the U.S. express market.
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.
DHL is now retrenching to instead provide value service to its core customer base.
“While in the past management strived for an expansion of DHL’s market share with the necessary costs attached to it, we are now looking at improving our bottom-line performance while at the same time maintaining service quality where it’s needed,” said Frank Appel, Deutsche Post World Net’s chief executive, on the company’s Web site.
DHL expects to conclude within the next three months a 10-year contract with UPS worth $1 billion per year to provide air transport within the United States for DHL domestic and international shipments, Mullen said. UPS will also fly DHL packages between the United States, Canada and Mexico. The arrangement is strictly for airport-to-airport service, with DHL continuing to provide pickup and delivery of customer packages. DHL uses its own planes as well as outside providers such as Lufthansa on international routes and has an agreement with Polar Air Cargo, in which it owns a large stake, to provide air transport between Asia and the United States. Cooperation with UPS is subject to antitrust approval by the U.S. Justice Department.
The move means DHL will terminate its existing relationship with ABX Air and Astar Air Cargo, both of which have provided U.S. airlift ever since DHL entered the domestic parcel market in 2003 with the acquisition of Airborne Express.
Mullen said DHL expects to spend up to $2 billion to finance the restructuring, including costs to terminate contracts, exit leases, meet obligations to ABX and Astar, and run parallel networks while transitioning cargo flows to UPS.
“I am confident we have found a sustainable way forward for U.S. Express in the best interest of customers, employees and investors,” Appel said in a statement.
Deutsche Post officials said the smaller DHL footprint would result in better reliability and service performance. Maintaining a U.S. presence was an important goal to support DHL’s global express and freight forwarding networks, and provide customers access to the world’s largest express market.
“Almost half of total DHL shipments touch the U.S. and half of our 200 largest customers are based there. Offering a high performance range of products and services in that market guarantees the business success of other regions so it’s part of our strategy to become first choice for customers worldwide,” Appel said.
He suggested that DHL may not break even for some time in the U.S. market, which may serve as a loss leader.
“It’s part of our new realistic approach to accept the fact that we may be posting a limited loss in the future. While our goal is to be profitable in all of our operations, in certain situations such as the U.S. — where despite local challenges, the existence of the operation adds to the overall profitability — we know our customers and shareholders are better off with it than without it. Our U.S. operation plays an important roll in us maintaining our position as the world’s No. 1 express shipper,” said Appel, who took the helm of Deutsche Post earlier this year after Klaus Zumwinkel was snared in a tax evasion scandal.
DHL will begin realigning its package sort facilities this week. It will only start to transfer a limited amount of volume to UPS this year, with full implementation expected take 12 to 18 months, DHL officials said.
UPS said it will be able to handle much of the extra volume from DHL in its existing air network, but that some capacity expansion may still be necessary. It noted that a previously planned fleet augmentation is underway with the receipt this year of seven new aircraft and five more in 2009. The Atlanta-based carrier is also in the midst of a $1 billion expansion of its Worldport hub in Louisville, Ky.
“We want to emphasize that this would be a relatively straightforward air lift agreement and that UPS and DHL will continue to compete in the marketplace under their own brands,” said David Abney, UPS’ chief operating officer, in a statement. “UPS brings to customers its own unique value proposition. By providing these services to DHL, UPS will not be diminishing its competitive position or ability to differentiate itself with customers.”
The air transport agreement will help DHL reduce aviation costs in the tough U.S. market, where company officials acknowledged their air network is uncompetitive compared to FedEx and UPS. DHL has been hampered by restrictions on foreign ownership of U.S. airlines that have forced the use of third parties, and experienced higher expenses and excess capacity due to having duplicate air freight vendors that operated ageing, fuel-guzzling fleets, and a multiplicity of aircraft types. UPS operates a more modern and fuel-efficient fleet than ABX and Astar, as well as highly automated air hubs.
DHL hinted at its desire for a single air freight operator last summer when it acquired a 49 percent stake in Astar, which subsequently made an unsuccessful bid to buy ABX Air. A merger would have given DHL more control over what is now a dual network and management team, and increased opportunities to create efficiencies.
Meanwhile, ABX Air, the main operating unit of Air Transport Services Group (ATSG) Inc., faces a substantial loss of business.
“DHL informed us last night that, starting in the third quarter, it intends, as part of a series of cost-reduction programs, to remove from its U.S. air network 39 of the 55 DC-9 aircraft that ABX Air has dedicated to DHL,” said Joe Hete, group chief executive officer.
Astar Air Cargo officials refused to take calls about their response to the DHL cutbacks.
Hete said ABX will continue to perform under its current agreements with DHL, while aggressively pursuing a strategy of expanding its business with other customers.
ABX Air has been DHL’s principal business partner in the United States since August 2003, when it became an independent publicly held company to comply with foreign ownership rules for airlines following the acquisition of former parent company Airborne by DHL.
ABX’s contract to operate the Wilmington, Ohio, air hub for DHL automatically renewed in mid-May for one year through August 2009, and its contract to provide dedicated air carriage extends through August 2010.
Together, those agreements provided about $280.8 million, or 74 percent, of ATSG's consolidated revenues, and $4 million, or 64 percent, of its pretax earnings, for the first quarter of 2008. The removal of 39 DC-9s from DHL service would reduce ATSG's annual revenues from expenses subject to markup, and pretax income, by about $80 million and $2.5 million, respectively. ATSG, the new name for the former ABX Holdings, estimated that not more than 500 flight, aircraft maintenance, and support positions of the estimated 10,000 total positions at ABX Air would be affected by the time the fleet reduction is completed.
The lease agreement with DHL includes a provision that gives ABX Air the option to retain or to sell back to DHL any aircraft removed from DHL’s network, at the lower of book or fair market value. All 55 DC-9 aircraft have a net book value of about $19 million, ATSG said.
ABX Air said DHL has expressed interest in operating some of ABX Air’s Boeing 767 widebody aircraft in its network for an extended period. ABX flies 31 767s for DHL in addition to the 55 DC-9s.
The company said it would continue to serve DHL outside the United States through its three air cargo subsidiaries, including Capital Cargo International Airlines.
'We are disappointed that DHL has chosen not to pursue alternative means to improve its competitive position in the U.S. overnight delivery market,' Hete added. 'While we look forward to further discussions with DHL about its plans, at the same time, we reserve the right to pursue all means at our disposal to assure that, at minimum, DHL fully honors its obligations under our existing commercial agreements with them.'
Hete said ABX is exploring alternatives for deploying its DHL aircraft with other customers and other business options around the world.
Another complication for ABX Air is that DHL owns the Wilmington, Ohio, airport that serves as its main U.S. air hub. ABX leases space from DHL to operate and maintain its aircraft there. ABX Air spokeswoman Beth Huber said DHL has not indicated what its plans are for the Wilmington facility.
DHL is taking advantage of more flexible work rules in the recent agreement with the Teamsters union allowing the use of part-time workers for the first time, using better route optimization technology, and modernizing package terminals and sorting facilities to shrink its ground infrastructure and improve performance, officials said. Intercity transport is being streamlined by eliminating runs to remote locations and using more efficient trucks that allow more territory to be covered with fewer assets.
The changes will cause 3.3 percent of total delivery volume to be affected by longer transit times, with time definite products arriving later in the day and day-definite products arriving one day later, Baker said.
Another 0.6 percent of volume will no longer be picked up.
Of the total current volume handled by DHL, 2.4 percent will be shifted to the U.S. Postal Service for final mile pickup and delivery, primarily in low volume, sparsely populated areas that are expensive to serve, Baker said.
Deutsche Post said it was also revising downward by 100 million euros to 400 million euros ($630 million) its corporate Express earnings guidance due to uncertainty in the U.S. economy and the restructuring. ' Eric Kulisch