DHL Reboots in U.S. After $9.6 Billion Bleed: Freight Markets

DHL Reboots in U.S. After $10.6 Billion ‘Bleed’
DHL handles only foreign shipments in the U.S., with sales of about $1 billion a year moving goods such as Dell Inc. computers and Inc. books. Photographer: Brauchitsch/Bloomberg

Deutsche Post AG’s DHL Express unit is rebuilding its U.S. operations around international shipments after a $9.6 billion “disaster” in domestic deliveries.

After firing 15,000 people and closing 75 percent of its outlets in 2008, DHL Express U.S. is expanding and may beat the volume goal it set that year by 15,000 packages a day in 2011, Chief Executive Officer Ian Clough said in an interview.

DHL Express abandoned efforts to challenge United Parcel Service Inc. and FedEx Corp. for deliveries on their home turf. It now handles only foreign shipments in the U.S., with sales of about $1 billion a year moving goods such as Dell Inc. computers and Inc. books. Clough said that toehold in the world’s biggest economy is pivotal for its global network.

“There are countries in the world where you might say ‘That’s not necessary,’” said Per-Ola Hellgren, an analyst with Landesbank Baden-Wuerttemberg in Mainz, Germany, who recommends buying Deutsche Post. “But the U.S. is still a must-have country.”

Routes to and from the U.S. help the unit compete in a global air-cargo market that the International Air Transport Association trade group says will generate $68 billion in 2011. That total, 15 percent more than the tally for 2007 before the recession began, includes cargo flown in passenger jets.

DHL Express U.S. is investing $40 million in its Cincinnati airport hub and improving service by delivering a majority of packages by noon, Clough said. Bonn-based Deutsche Post doesn’t disclose profit by country, said Bea Garcia, a spokeswoman.

Daily Volume

U.S. daily volume of as many as 115,000 international packages exceeds a projection of 100,000 set in 2008 when DHL Express dropped its domestic business, and is now growing at more than 10 percent annually, Clough said in the interview.

That figure compares with a daily load of about 1.2 million parcels before the pullback, which was partly driven by the “massive weakening” in the global economy and mounting losses after DHL Express cut U.S. rates in a bid to win market share, Deutsche Post said in November 2008.

About 40 percent of DHL Express’s top 350 customers worldwide are based in the U.S., making the import and export service “very critical” to the parent company’s global operations, Clough said. Deutsche Post is the world’s third-largest package-delivery company, after UPS and FedEx.

“International is the core strength of DHL,” said Clough, 44, who has been with the company for 18 years and became CEO of the unit in 2009. “It’s the part of the business that we grew from. We turned ourselves back to our roots.”

Buying Airborne

DHL Express jumped into domestic U.S. deliveries after buying assets of Seattle-based Airborne Inc. in 2003 to gain a U.S. network and a vehicle fleet. The 2008 restructuring after that push cost 7.5 billion euros (about $9.6 billion at the time), including the Airborne deal, and contributed to the parent company’s lone annual loss since going public in 2000, Deutsche Post has said.

Buying Airborne to take on UPS and FedEx in the U.S. was a “disaster,” Deutsche Post CEO Frank Appel said last month. DHL Express’s U.S. market share in 2008 was 5 percent, compared with a combined 82 percent for UPS and FedEx, according to SJ Consulting Group in Sewickley, Pennsylvania.

“It was the wrong decision to have entered the U.S. with a poor business concept to begin with,” said Hellgren, the Landesbank analyst. “Since they had gotten in there and started to bleed, there really was no alternative” to leaving.

Deutsche Post didn’t go far enough, said Andre Mulder, an Amsterdam-based analyst with Kepler Capital Markets. DHL Express should have left the U.S. entirely, because keeping the operation remains a drag on its global business, said Mulder, who also recommends buying Deutsche Post.

‘Say Goodbye’

The company could “say goodbye to that without having any negative effect on the client base,” Mulder said.

Deutsche Post advanced 28 percent through yesterday from Nov. 10, 2008, when it announced the U.S. pullback. FedEx gained 41 percent and UPS climbed 35 percent in the same period as the economic recovery buoys package and freight shipping demand.

DHL Express is Deutsche Post’s smallest unit, with about a fifth of revenue. Counting mail, freight, forwarding and supply-chain services, Deutsche Post’s 2010 sales of 51.5 billion euros topped UPS’s $49.5 billion and FedEx’s $34.7 billion.

‘Tickled Pink’

UPS and FedEx are “tickled pink” not to have DHL as a domestic rival, said Kevin Sterling, a Richmond, Virginia-based analyst with BB&T Capital Markets. DHL entered the U.S. with rates lower than those of UPS and FedEx, forcing those companies to reduce theirs to compete, Sterling said in an interview.

“They’re getting that pricing now,” said Sterling, who recommends buying Atlanta-based UPS and FedEx. “A big part of that was the recession, but also I think it’s because DHL has pulled out of the market.”

UPS’s average revenue per domestic package was $8.20 in 2004, the first full year after DHL Express bought Airborne, and that figure rose to $8.85 for 2010.

Norman Black, a spokesman for UPS, declined to comment about competition with DHL Express.

FedEx is “seeing gains in our international business as a result of DHL’s limited presence in the United States,” Jess Bunn, a spokesman, said in an e-mail. “When you take the United States out of a global network, it creates a lot of issues in terms of the value that a company can bring to its customers.”

DHL Express’s U.S. unit won’t try again to compete with UPS and FedEx in the immediate future, Clough said. With about 6,000 people, 2,500 trucks and vans, and about 30 nightly departures at Cincinnati, the division has shrunk to about the same size it was before buying Airborne.

Cincinnati Hub

Investing in Cincinnati to add gates and technology to speed scanning and sorting is “paying for itself,” Clough said. More of those processes were done manually, at greater expense, at DHL Express’s former U.S. hub at a shuttered Air Force base in nearby Wilmington, Ohio, he said.

To boost customer loyalty and win new accounts, DHL Express requires all workers to participate in three- or five-day training programs on customs paperwork and other international shipping documents, Clough said.

With fewer packages to move and loads that are entirely international, drivers also are now able to deliver 70 percent of packages before noon, Clough said.

“All international shippers get better and earlier delivery than before,” he said.

While ceding domestic deliveries in the U.S. dented Deutsche Post’s claim to “worldwide hegemony,” the new focus on international-only shipments ensures that DHL Express keeps a global network, said Hellgren, the Landesbank analyst.

“They lost 7.5 billion euros in the U.S., and it’s still not a profitable business,” he said. “But you can live with a break-even business.”

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