Editors Note: Parcel has been hearing rumors of possible modifications by Deutsche Post to their DHL Americas operation.  Several leading financial analyst firms (see attached) have recommended changes by Deutsche Post to bolster its stock.  This piece is prepared as a heads-up to our readers.

 

 

What if?

 

Monday there was an analysis published by Morgan Stanley out of Germany (Jan. 7, 2008) regarding its opinion of Deutsche Post as a stock. They are bullish on the DP stock because they believe that Deutsche Post is about to take some radical action here in the USA to reduce the operating losses of its DHL Express operation. Rumors in the marketplace were that DHL Express USA lost close to a billion dollars in 2006 and probably did not make a huge dent in the number in 2007.  A similar train of thought regarding DHL Express was posed by Bear Sterns on December 6, 2007.

 

DHL purchased Airborne Express on August 15 of 2003. Yes, as hard as it is to believe, it's coming up on 5 years since Airborne left the marketplace.

 

Unfortunately, the domestic US business did not mesh well with the DHL operating cost model and the business almost immediately became unprofitable for DHL Express to service. DHL has spent a small fortune adding costs to the network. Its nice to invest in a business if the business is growing and the investment is to maintain or improve the service but profitable domestic shipment growth proved to be elusive for DHL Express USA.

 

To further exacerbate the situation, DHL had a less than successful integration of the DHL legacy hub in Cincinnati with the Airborne hub operation in Wilmington, Ohio. This caused a protracted period of less than competitive service, and then many DHL customers awarded their business to other carriers. DHL was challenged then to go out and sell new customers to replace the shippers it had lost. This is proving to be an uphill battle.

 

The Annual Shipper studies published in PARCEL Magazine have shown graphically what a huge difference there is in the mind of shippers of the DHL domestic service versus that provided by UPS and FedEx. This disparity has caused customer defections, as the price differential between what DHL wanted to charge and the rates FedEx and UPS were willing to offer in the marketplace narrowed. There is elasticity within shippers between price and service. It would appear that DHL has truly tested the tipping point.

 

So what could Bear Sterns and Morgan Stanley be hinting at that will bring radical change to DHL Express USAs general ledger? Does DHL have plans to offer a compelling breakthrough service that will cause shippers to form an orderly line at their door begging DHL to accept their packages at a premium price? I suspect its the opposite. What then is the conclusion if one culls through the public statements of the CEO and the new CFO of Deutsche Post and tries to come up with a scenario that might make sense and can fix the books to the extent that the financial analysts propose? They are talking big numbers which means radical surgery.

 

What the global DHL Express needs, wants and desires is a reliable delivery network into the USA market for the exports coming out of Asia, Europe, South America and so on. The Global business of DHL is very healthy and makes the money that DHL EXPRESS USA is losing. What the global DHL does not need is a network filled with domestic USA parcels upon which they lose money.  DHL had such a network prior to its acquisition of Airborne. It was not a big network, but it was sufficient. International packages came in, got delivered, and international outbound shipments made their way to the Cincinnati hub and were forwarded on to their international destinations.

 

Global DHL Express needs to be in the U.S. market, and that is congruent with the public statements made by their top executives that they are committed to the U.S. market. Well yeah! One has to be if one is going to offer a truly global pick up and delivery service. But where DHL shines and makes its money is when a transaction crosses an international border. Thats where the money is. I suspect if one looks at their operating losses and DHLs book of domestic transactions, they cant point to one customer and say, Thats the package we made money on. Lets say, for argument;s sake, DHL handled 450 million packages in 06 and they lost, say, close to $900 million. Logic would state that they lost $2 on every one. If you were on the Board of Deutsche Post in Germany and you saw this kind of math every quarter for over 4 years, one would say, If you lose $2 on every package you pick up, stop picking up packages! Now I will grant you, that some business is far prettier than others, and in DHLs case that has to be the international. They have some other pieces of business like their @home product that is from high-volume pick ups to high density USPS delivery points that probably makes money. So if these pieces make money, then the remaining business loses even more money than the hypothetical above.

 

So what conclusion could this lead to? A suspicion could be that the radical change alluded to by the financial analysts is that Deutsche Post is going to downsize the domestic system in a significant way and in the not-too-distant future. One could suspect from the Morgan Stanley piece that in order to make their financial goals for 2008, Deutsche Post cant wait very long to fix the loss situation in the US. This could mean a dramatic reduction in the number of flights they operate. It could mean they close terminals. It could mean they lay off a large number of employees. None of this spells improved service for shippers, or DHL lowering the price they offer in exchange for the reduction in service. The unthinkable that I believe the analysts are alluding to is that they (DHL Express USA) file for voluntary reorganization (most people call this bankruptcy). That does not mean that they go away, they just reorganize in a much smaller version of DHL and perhaps go back looking like the DHL of 2003. (Urban legend has it DHL was only losing $200 million a year pre-Airborne)

 

What might this mean to shippers? Well if a shipper is currently using DHL, either the service could be diminished or worse case scenario, the contract voided. If you are forced to go negotiate with an alternative service provider, your negotiating leverage will be mitigated. I suspect in the worst case the alternative carriers could offer no discounts to former customers of their competitor until the shipper earns a discount based on the experienced volume. This comes to me as the meanest outcome I can think of.

 

Earned discounts are not unusual in the marketplace but its usually done with shippers who already have volume with a carrier or where, in a competitive bid situation, the bidder puts in their offer the earned discount formula but then promises a guaranteed discount level for some period of time (usually referred to as the ramp-up period).

 

There was a recent article about what happened to the catalog company, Lillian Vernon, as a result of APX leaving the marketplace. The increased cost to them in shipping resulted in their laying off 25% of their staff. After APX exited, FedEx Smartpost chose which accounts it could adequately absorb and service, and the rest of the shippers had to find a home with the other carriers at a much higher price than they had enjoyed with APX. There may be similar pain for DHL customers if, in fact, it scales back its interest in serving domestic transactions.

 

What might this mean if a shipper is not using DHL Express USA for their domestic parcels? Well one less player in the market then creates a clear duopoly for service (no offense to the USPS, but until we see what discounts regulators allow under the New Law in the competitive price and service world, they are not yet a player). Initially, I think that UPS and FedEx will not have to offer any discounts or modest discounts to DHL customers because they are pretty much going to split up the roughly 1.5 million shipments a day DHL handles. This should make for a pretty good year for those two carriers. The competition will begin a year later when the two will have to be fiercely hunting for each others accounts in order to attain and maintain the growth necessary to feed their increases in operating costs. Organic shipment growth is going to be a function of the economy and new innovative electronic products and, as we all know, the prognosticators are predicting a slowdown. If you currently have a contract with a carrier you are probably okay. Neither carrier should have much of an issue absorbing the DHL shipments into their network and maintaining their guaranteed service levels. If anyone will suffer a potential service interruption, it would be the existing DHL customers as a new carrier may need to do some juggling to accommodate a pick up if its a high volume site.

 

What everyone should do is to make sure you are prepared for such an eventually. There is one constant in life: the only constant is change. You have to take the public information that is out there and be a good steward of your corporations assets and make sure you have a backup plan. The what if in this case says that if you dont have a multi-carrier parcel manifesting solution where you can choose another carrier for a transaction on the fly, you best be talking to manufacturers of multi-carrier shipping systems. If you are not having regular contact with the reps for the four parcel carriers, it is prudent to begin now. If you dont have a backup carrier, perhaps you might consider that. If you have never explored the use of regional carriers, perhaps it's time you invite in the reps and have them look at your profile and shipment history to see if they can service a portion of your business.

 

Since all the carriers just raised your prices, there is no reason that you dont go out to the marketplace, RIGHT NOW, for competitive bids. If you dont have the time or the resources to do that, call in negotiating or one of the other parcel consulting firms that work on a gainshare (if they dont get you savings over what you pay now, they dont make any money). There may be a window of opportunity where there are three players out there to bid, and you can drive a better deal.

 

Our final comment is that in life in general, and transportation in particular, we have seen incredible change in the last decade. Take what you know and plan. If you fail to plan, then you plan to fail.

 

 

We asked DHL for a statement on this report:

 

The U.S. is an important market in our commitment to offer a truly global service network. As the world's leading Express and Logistics company, the U.S. is strategically important to the Group both as a stand-alone market (our domestic services) and as a high-performance extension of our global service platform.

 

Since 2003, we have invested more than $3 billion in the U.S., including over $1.2 billion in infrastructure and distribution, creating a vastly expanded domestic shipping network that allows us to deliver competitive services in the U.S.  Despite tighter economic conditions, our U.S. business continues to demonstrate improvements in its overall service levels and competitiveness (a fact that has been publicly recognized by external stakeholders including leading analysts). 

 

The increasingly high performance in our other regions also depends on strong presence in the U.S.  Because of our U.S. presence, we have to be able to provide the platform that allows Latin America, Canada, Asia and Europe where we have strong market positions to be able to export and import with confidence into the U.S. market.

 

We have also clearly defined the drivers of success for DHL in the U.S., which includes a focus on execution, unmatched customer service and a customer-focused culture that drives success in every aspect of our business.

 

Jonathan Baker, Director, Corporate Communications, DHL US

 

 

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