UPS, FedEx battle Post Office for parcels


The world’s largest national economy is not large enough, it appears, for three private parcel carriers.  DHL’s announcement two weeks ago that it will scrap its domestic air and ground delivery business in the U.S. ended a five-year, $10 billion effort to mount a new competitive challenge to FedEx and UPS. That sent shippers looking for alternatives at the busiest period of the year and toward a new competitive landscape. Although the end of DHL’s domestic operation isn’t scheduled until Jan. 30, there is already a fight for thousands of daily parcel shipments and, according to experts, a growing chance of a bigger battle for air express business outside of the U.S.

“What this means is that UPS and FedEx are going to get a lot of business,” said Satish Jindel, a principal of research and consulting firm SJ Consulting.

Some $3 billion in fees and hundreds of thousands of daily expedited shipments may be up for grabs after the most dramatic restructuring in the parcel industry since DHL five years ago attempted to break up what it called the “duopoly” control of the world’s largest domestic express shipping market.

The withdrawal announced on Nov. 8 takes the place of a more limited restructuring that DHL announced in May, one that sought to cut DHL’s operations by about a third, replace

its existing air service operations with a $1 billion annual contract to rival UPS but maintain the basic framework of its U.S. business.

That effort collapsed, however, as shippers left DHL and the larger economic downturn sent DHL’s already heavy losses in the U.S. soaring past $1 billion.

“This is the right move for our U.S. Express operations given the current economic climate and for the long run,” John Mullen, chief executive of DHL Express, said in Frankfurt, Germany, where DHL’s parent company, Deutsche Post is located. “Focusing our U.S. Express efforts on what we do better than anyone else — international shipping — serves the best interests of our customers, employees and shareholders around the world.”

The move does not affect DHL’s large forwarding and logistics division and the DHL Global Mail sent its U.S. customers a notice last week that service changes are occurring only at DHL Express and there is no impact on the “financially strong and stable” Global Mail division.

Mullen, joined by Deutsche Post Chief Executive Frank Appel, said DHL will close all of its ground hubs in the U.S. and take its station count from 412 to 103. Some 9,500 workers at DHL Express will be laid off, bringing to about 15,000 the number of jobs eliminated in the U.S. since the company began scaling back at the start of 2008.
The moves will cut operating costs some 80 percent, from $5.4 billion to $1 billion.

The ground services will end first, phasing out by the end of the year, and the ground hubs will shut down by late January. DHL had already dropped several specific services this year and was telling shippers even before the withdrawal announcement that certain pickup and delivery operations were being dropped.

Air express service will end on Jan. 30, 2009, and stations will be closed in January and early February.

News of the job cuts reverberated most loudly in Ohio, a state that has lost thousands of manufacturing and service jobs in the economic downturn and where DHL’s main hub in Wilmington has been a major source of employment.

Public officials who had decried DHL’s earlier cutbacks, including some who had suggested the company had reneged on investment commitments, appeared resigned to the market realities DHL faced in withdrawing.

“We are disappointed by DHL’s inability to avoid the pitfalls that have led to this decision,” Bill Hamilton, the Teamsters union’s express division director, said in a statement. “We will do everything within our power to assist our members through this difficult time.”

For shippers, DHL’s withdrawal raises the potential for higher costs in a market without a major competitor.

“First, the customers who are going to switch are not going to get the same pricing they might have gotten a couple of years ago,” Jindel said. “Others who already had UPS or FedEx contracts probably should stick with what they had. UPS and FedEx are going to be less inclined to change pricing to get this business.”

But DHL had a relatively small share of a market entirely dominated by UPS and FedEx and so its impact on rates likely was limited. SJ Consulting estimated DHL had less than 5 percent of the domestic parcel market, including ground and air express.

Several shippers said privately that DHL’s presence generally kept the larger competitors from pushing rates up but that FedEx and UPS didn’t necessarily cut rates to lure DHL customers.

“I don’t see it (DHL’s exit) having a significant impact on the competition,” said Gary Bentle, director of logistics and transportation at Cengage Learning, an educational books distributor. “They were a small player to begin with. They didn’t have the concentration and the scope to place themselves in the market in a very competitive way.”

UPS and FedEx have been aggressively going after DHL customers. UPS even put up a “welcome center” box on its Web site for DHL customers looking to switch.

Some prominent customers have been up for grabs. Unishippers, one of the country’s largest parcel consolidators, told its small business customers two weeks before the DHL announcement that it had switched to UPS. Major shippers such as Apple were looking at dropping DHL domestic service, sources said, even as many others made the move.
“We had a limited number of our customers who requested that we ship DHL domestic,” Bentle said. “About six weeks ago, I made a decision that we would not honor their routing requests and that we would not ship any outbound parcel by DHL domestic because I was concerned about the viability of their domestic network.

“I did not want to subject the product we are selling to that network. I wanted our product to be in the best network it could be in. We only get paid if our books get on the shelves of our customers.”

But with perhaps 1.1 million daily domestic shipments up for grabs, other players also come into the picture.

Going postal

“UPS and FedEx will gain market share, but it’s possible the U.S. Postal Service wins outsized share as the only remaining low-cost carrier,” said William J. Greene, an investment analyst with Morgan Stanley.

In fact, with DHL generally priced below its private competitors, “we wonder how much of DHL’s U.S. domestic traffic FedEx and UPS will actually want to win, given the substantially lower price point,” he wrote in a research report.

“We’ve never stopped competing,” said UPS spokesman Norman Black. “We’re going to be extremely aggressive in the marketplace going after this business. You’ve got a large number of customers that are going to be looking for effective service.”

But Black also said DHL’s restructuring and exit has not figured into UPS’s rate strategy, including an aggressive price increase the carrier announced for 2009. “The rate increase is not based on what DHL does. Our approach to pricing is based on the value of what we provide to our customers. Nothing has changed the fact that this remains an extremely competitive industry,” he said.

FedEx also is going after the DHL customers, and although the Memphis-based carrier hasn’t matched UPS with public lures on its Web site, FedEx suggested DHL’s withdrawal in the U.S. could reverberate in the competition for shippers around the world. 

“Customers in the U.S. and around the world are taking advantage of the speed and reliability offered by FedEx,” FedEx spokesman Maury Lane said in a statement. “Global shippers have told us they are looking for unparalleled global reach and FedEx is the global leader in express transportation. Our strength in pickup and delivery, reliability and customer satisfaction remains unchallenged and we look forward to further providing that world-class service that our customers have come to know and rely on.”

That international market may be where the larger battle is fought over the long term.

Mullen said DHL has about $4.5 billion in revenue in the U.S., and about $1 billion of that is tied to its international operations.

“We obviously will seek to keep every last cent of that,” Mullen said. “Outside the U.S., we see little reason that we will lose revenue.”

Nearly half of DHL’s top 200 customers are based in the U.S. and, according to Mullen, U.S. trade lanes hold nearly half the company’s global volume. He conceded, however, that as domestic U.S. shippers have left DHL’s fold some have dropped the company as an international express provider, “although those have been very few. Overwhelmingly it has been domestic only.”

Fighting the duopoly

Mullen said Deutsche Post World Net spent “close to” $10 billion in the U.S., including its $1.05 billion purchase of Airborne Express in August 2003.

“The reality of the lack of scale … made it impossible to make a go of it,” he said.

DHL had a number of missteps along the way, including a highly troubled integration of its two air hubs into a single operation in Wilmington that cost the company millions of dollars and may have sent the U.S. business into a unsolvable tailspin.

“There were execution errors along the way,” Mullen said, but the broad array of actions and the dynamics of the market led to the failure.

This year’s economic downturn put DHL’s precarious place in the market under tougher scrutiny, he said, but did not cause the carrier’s problems in the United States. “If it had been boom times maybe we would have soldiered on a bit longer,” he said.

But he also pointed to the purchase of Airborne in 2003 for $1.05 billion as a mistake. “We were trying to enter a very concentrated, very efficient market with the acquisition of a loss-making, small, niche player of low quality,” Mullen said. “We were never big enough, we never had enough scale to compete.”

Airborne earned a $14.8 million net profit in 2002, the last full year of its existence, on $3.3 billion in revenue and held between 8 and 13 percent of the market when it was folded into DHL. Industry observers believed the No. 3 express carrier in the U.S. was in a poor strategic position but the company’s hold on its corner of the market still had potential for expansion if DHL had retained more of the Airborne leadership.

“Deutsche Post and its leaders were directing strategy in the U.S. while not having a full understanding of how the U.S. was different from the rest of the world,” Jindel said. “Most other places have higher variable-cost operations while the U.S. requires higher fixed costs. You can’t manage your customers and your costs as easily in the United States.”  

Reported by Traffic World Associate Editor William Hoffman,
Executive Editor William Cassidy and Editor Paul Page