The Issue: DHL Turns to Rival UPS

DHL Express entered the U.S. aiming to shake up the UPS-FedEx duopoly. After losing billions, it hatched a new plan: hold hands with UPS
Shortly after DHL Express was purchased in 2002 by privatized German postal service Deutsche Post World Net (DPWGN.F), the yellow-clad global delivery service launched an ambitious assault on United Parcel Service (UPS) and Federal Express (now officially FedEx) (FDX), the two mainstays of the U.S. express-delivery market. DHL acquired Seattle-based Airborne, the third-largest player, for a little more than $1 billion in 2003. And DHL made explicit appeals to customers of the more established competitors with marketing slogans such as "Yellow. It's the new Brown": a challenge to UPS' highly recognizable brown trucks. DHL has made impressive strides in the past six years. It raised awareness of its brand. It built an impressive air and ground network covering the U.S. And it made a significant impact on the market's dynamics. "We've created a third choice which was not there before, a real threat to the competition," says John Mullen, chief executive of DHL's global business. Perhaps more important for DHL—a global giant with a presence in some 225 countries—the expansion represented a bigger footprint in the U.S.—the largest market in the industry by far.

But going head-to-head with the go-everywhere, do-everything models of UPS and FedEx proved costly. "They are so strong we have to maintain almost a similar scale of network to them, but with only 6% or 7% market share," admits Mullen. "Hence the reason for financial pain." DHL's U.S. business lost $3 billion over the past four years, according to a Dow Jones report, while market share never surpassed 10%. Much of the losses stem from DHL's low load rate, or inability to fill planes to capacity. "The problem has been that DHL wasn't flying full. If the plane isn't full you can't just say 'I'm sorry those packages are going to be delayed for a day or two until we fill up the plane,'" says Doug Caldwell, executive vice-president of, an Orem (Utah) logistics provider. "I've heard some numbers that suggest that they were well under 70% of capacity." By contrast, UPS and FedEx will typically fill planes to around 80% to 85% of capacity. For every light load DHL flew, it lost money in labor and fuel costs. The skyrocketing cost of fuel itself has become an impediment to DHL's growth in the U.S. in two ways. "It's keeping market growth down because as the fuel surcharges climb to these exorbitant rates, customers are looking to go from air service to ground service. And it increases air costs at the same time," says Caldwell.

And the U. And [with this deal] they better utilize that capacity.000 jobs." But that move. "We're a global network. to a new partner. because they [would have seen] the loss eradicated straight away. it will cut about 17% of its ground delivery routes and implement a new management structure that holds one person accountable for both sales and operations in each of four regions in the U. As part of the restructuring. WINNER. but we can't help you in your home country. The company said it had begun talks to outsource all of DHL's airlift operations in the U. Every country in the network trades with every other country every day. the company began to mull a more drastic shift in strategy. Personnel changes did little to appease: Four different leaders have been hired for DHL's top U. most important market in the world.3 billion this year to $300 million by 2011—and put it back on the road to profitability in the U. market? What pressure will a DHL-UPS partnership put on prices across the market? And how will the alliance play out in international markets such as Europe and Asia. pick up. other aspects of the deal are more opaque.S.S.THE STRUGGLE TO BE GLOBAL Deutsche Post shareholders grew impatient. are we going to get the volumes in Asia? We think probably not." says Mullen. The most obvious option was to sell the unit completely. with [excess] capacity. who was promoted to lead DHL's global operations in 2006).S. would deliver a severe blow to the company's attempts to bill itself as a global player. If we say to our U.S." says CEO Mullen. "The customer doesn't actually see a difference at all.S." A BIG WIN FOR BROWN In May." says Mullen. customers that we want your volume in Asia. AND QUESTIONS For Wilmington (Ohio) ABX Air (ATSG)—the company DHL spun off from Airborne to operate a majority of its yellow-painted aircraft—the deal will likely mean the loss of more than 6. and track all cargo to and from the aircraft as usual. LOSERS. and slash costs. management decided. DHL plans to pay UPS $1 billion annually to deliver its air freight. which DHL expects will help it to reduce annual losses from an expected $1. which would allow it to both retain its presence in the U.S. DHL plans to deliver. Explains Mullen.S. But while clear winners and losers have emerged. Deutsche Post announced a compromise solution.S. post in the past four years (including Mullen. Will the substantial cost-cutting help DHL become a more competitive force in the tough U. "UPS had a very sophisticated network in the U. That is. is the largest. "The markets would have applauded us. it's a huge win.S. For UPS. where DHL has more of the upper hand in the rivalry? . "The easiest decision would have been just pack up and go home. In recent years. unless they pay attention to the color of the partner's planes: UPS brown.

" It's less clear what effect the arrangement will have on prices across the industry." GOING GREENER It could also be an environmentally beneficial move." says John Mullen." says Caldwell. they sort on time—they're very efficient. and it may also set a precedent for similar partnerships in the express delivery market. FedEx placed drop-off boxes in some 38. He believes the extra freight from DHL customers will help UPS fill its planes to near-capacity. "You're going to be moving from essentially a DHL air network to a UPS air network. an Orem (Utah) logistics provider. "DHL was a downside pressure on the market. building efficiency and ultimately lowering costs. it's bound to raise concerns. Federal Express () forged a longterm agreement to carry U. "It makes sense anywhere where you can generate productivity and a better use of assets." says Dan O'Rourke. And yet "co-opetition"— the sharing of resources amongst competitors—has a successful track record in dozens of industries." says Doug Caldwell. it's not the first such move in the industry.S. "It was . Many critics believe the deal is a win for DHL customers because of the strong reputation of UPS. and there's really nobody better operationally than UPS. "With fuel prices unlikely to ever come back down materially and with ever-increasing costs of maintaining these networks. The deal currently being negotiated between DHL and UPS is similar. cars. and trucks that go to the same places—so perhaps this is a twist on a [green initiative] as well. executive vicepresident of ParcelPool. according to industry analysts. In return. you are reducing the amount of planes. according to Jim LeRose. Postal Service packages through its air network. it makes sense that you will see competitive sharing arrangements around the world.The Analysis: DHL Saves Face Partnering with a competitor may help DHL salvage its business reputation in the U. editor of trade magazine Parcel. "I think it's a brilliant stroke for both DHL and UPS. but it would be the first of its kind between two private players.000 retail postal outlets across the CEO of DHL's global business. In 2000. To be sure. "If you share capacity." he says. from shipping to financial services to telecommunications. "They run on time. Anytime a company joins hands with a rival. principal of logistics consultancy Agile Network.S. DHL's proposal to outsource its air shipments to UPS () is likely to benefit both companies.

S. DHL's German parent." . market. who have suffered billions of dollars in losses while DHL waited to make a major strategy shift in the U. so that kept some pressure on the other major private carriers. much less expand it.S.another major's Caldwell." The clearest beneficiaries of the deal are shareholders of Deutsche Post World Net. it's possible that they could increase their market share in the future. Obviously that pressure has dwindled quite a bit now. "This stops the bleeding as far as their situation in the U. If they perform the transition well." says ParcelPool..S. "The question has been up until now whether DHL is even going to be able to maintain a presence in the U.

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