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DHL Seeks Lift From UPS With Air Transport Deal

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The Associated Press

Published: May 29, 2008

ATLANTA - DHL, the struggling U.S.-based express shipping unit of German postal service Deutsche Post AG, wants UPS to carry some of its air packages. The collaboration between rivals with past legal battles would give UPS a hefty new revenue stream and help DHL cut costs.

It remains to be seen whether Deutsche Post's restructuring of its operations in the United States will only be a Band-Aid for its problems or provide a long-term solution.

In March, Deutsche Post said its fourth-quarter profit slid by more than 60 percent after it wrote down the value of its DHL unit. DHL is slashing network capacity in the United States by 30 percent, which includes closing and consolidating sorting facilities and streamlining pickup and delivery routes.

"The real problem was they tried to match UPS and FedEx, 'We go everywhere, we offer every ground product, point-to-point,' and built out their network to do that, but never had the density to make it profitable," Stifel Nicolaus analyst David Ross said of DHL.

Maury Lane, a spokesman for Memphis, Tenn.-based FedEx Corp., declined to say whether his company sought the air transport arrangement with DHL. DHL announced Wednesday it is negotiating with Atlanta-based UPS, also known as United Parcel Service.

"The reason they chose UPS over FedEx - we don't know this - but UPS probably gave them a better price," Ross said.
UPS predicted Wednesday that the deal, when completed, will add up to $1 billion in annual revenue. The agreement is expected to last up to 10 years and covers express, deferred and international packages, but not freight. UPS also will transport DHL air packages between the United States, Canada and Mexico.
UPS said it will begin phasing in a limited amount of DHL business this year, with ramp-up expected in the second half of 2009. UPS and DHL will retain their own brands under the deal.
UPS said the contract, which is still being worked out, will mostly involve the transport of DHL packages between airports in North America - not the pickup or delivery of DHL packages to customers. UPS said the deal is similar to its existing agreement with the U.S. Postal Service.

For example, a DHL air package being sent from someone in Boston to someone in Los Angeles would be picked up from the customer by DHL, delivered to a UPS air facility in Boston, flown on a UPS plane to a UPS air facility in Los Angeles, picked up there by DHL and delivered by DHL to the recipient.
UPS said it will be able to handle much of the new package volume through its existing network, but plans to add additional capacity once the deal is completed. The total amount of capacity isn't yet known, but UPS is slated to take delivery of seven new aircraft this year and another five in 2009. The company is also in the midst of a $1 billion expansion of its UPS Worldport air hub in Louisville, Ky.

The arrangement between UPS and DHL comes after the two companies fought in the past.

In 2004, UPS and FedEx contended that Astar Air Cargo Inc., a Miami-based air cargo company, was controlled by Deutsche Post. It is illegal in the United States for foreign companies to own more than 25 percent or hold controlling interest in a domestic air carrier.

The dispute involved a DHL subsidiary and the citizenship of a man who at one time owned a 55 percent stake in the subsidiary.
UPS and FedEx eventually lost the dispute.

The previous year, UPS and FedEx were involved in a dispute with Seattle-based Airborne Inc., which eventually sold its ground operations to DHL. Airborne accused UPS and FedEx of trying to delay the transaction.

Under the deal that was later completed, Airborne's air operations were renamed ABX Air and remained in the hands of its existing shareholders.

"We have had strong opinions on parts of their business, but this is a terrific business opportunity for UPS, bottom-line," UPS spokesman Ken Sternad said Wednesday of the deal being worked out with DHL.

The deal, meanwhile, could deal a significant blow to ABX Air and Astar, which are DHL's current vendors for the air shipments UPS is seeking to take over.

Shares of UPS rose $2.14, or 3.1 percent, to $70.54. FedEx shares rose $1.15, or 1.3 percent, to $90.82.

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