Tuesday, November 11, 2008


In a move that could greatly scale back a possible venture between UPS and Deutsche Post‘s DHL, the German company said Monday that it will significantly reduce its air and ground operations in the United States and cut 9,500 jobs within the country. The DHL-UPS deal was expected to last up to 10 years and infuse Atlanta-based UPS with up to $1 billion in annual revenue, if completed as first proposed in May.

UPS, the world’s largest shipping carrier, has said the contract with DHL, which it has been working to finalize, would mostly involve the transport of DHL packages between airports in North America - not the pickup or delivery of DHL packages to customers.

If DHL made significant cuts to its ground operations in the United States, it wouldn’t necessarily affect UPS and DHL reaching a deal because their talks have solely involved air delivery of packages, not ground delivery. But Deutsche Post’s announcement Monday went well beyond the elimination of ground products within the United States. Deutsche Post said it will discontinue U.S. domestic-only air and ground products on Jan. 30 to focus entirely on its international offering.

Deutsche Post, which cited heavy losses and fierce competition for its decision to curtail U.S. operations, noted it is not pulling out of the market entirely. It said its international shipping services to and from the U.S. would continue.

DHL competes with rivals UPS and Memphis, Tenn.-based FedEx Corp.

UPS spokesman Norman Black said his company would continue to work on an air-haul-vendor contract with DHL. But, he added, “Today’s announcement by DHL certainly could affect the size and scope of that contract. We’ll go back into talks and see what develops.”

Mr. Black cited the part of the Deutsche Post announcement in which it said it plans to stop offering air service between U.S. cities.

“By stopping that service, the only thing that’s left is moving international packages once they get to the U.S. border,” Mr. Black said. “That’s a dramatically lower amount of volume than what they were originally talking to us about.”

Currently, the company’s total air volume for shipments from points between U.S. and international destinations and between points within the United States is about 1.2 million shipments a day. Deutsche Post said that figure will drop to about 100,000 shipments a day after the changes are made. The air-volume figures do not include packages that do not start or end in the United States.

Avondale Partners analyst Donald Broughton noted that while DHL’s announcement does not directly kill the deal with UPS, he thinks termination will be the result.

“I think a lot of observers, myself included, knew the largest value of that contract [between DHL and UPS] was going to be on the first day, and it was going to dwindle very quickly thereafter,” Mr. Broughton said. “This just accelerates that process.”

Edward Jones analyst Dan Ortwerth said Deutsche Post’s decision changes the scope of a potential DHL-UPS deal, but doesn’t necessarily kill it.

“I don’t see any motivation for UPS to outright walk away,” Mr. Ortwerth said. “UPS is in the stronger position, and I’m sure at the bargaining table they will protect their own interests plenty well.”

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