Don't Expect Small Shipment Price War

In announcing the results of its eighth semi-annual Freight Pulse Survey and the separate Parcel Return Survey, North American equity research firm Morgan Stanley commented on various trends by mode. Among his comments on DHL, a subsidiary of Deutsche Post, European-based analyst Menno Sanderse said the company’s North American operations are likely to lose more than Deutsche Post has projected through 2005 and 2006. He estimates the losses will amount to $400 million to $450 million rather than the $350 million the company expects to lose in 2005. Given that scenario, the North American operations won’t be in the black until 2007.

DHL’s recently appointed CEO, John Mullen, has said he will not go for volume in the U.S., allaying analyst concerns that DHL would spark a rate war to win market share from FedEx and UPS. Instead, he wants to get the mix right, commented Sanderse. Mullen wants to close the price gap with FedEx and UPS as much as possible, said Sanderse, and do so as soon as possible.

To achieve its goals, DHL has embarked on a program its CEO dubbed 180 days back to basics. The focus is to deal with shipper perceptions of falling service levels which were clear in the Morgan Stanley survey.

DHL suffered some service problems in the fourth quarter of 2004 when it switched 30% of its volume from air to ground. Mullen admits service quality dropped into the low 80s during that period. It was back up to 95% in March, said Sanderse, but Mullen was freely admitting that reaching the goal of 98% would be difficult and would take time, possibly until its two hubs are combined in October.

The Morgan Stanley survey of parcel shippers showed that only 32% of respondents expected to increase their volumes on DHL. That number had been 42% in September when the last survey was conducted.

DHL in the U.S. will concentrate on its international products where it makes a strong showing. In Europe, where the expedited and express market is roughly $45 billion, DHL is the dominant player with 25% of the market. It is followed by TPG, which has about 12%, and then by UPS with an estimated 6%. FedEx is projected to hold 2% to 3% of the market.

Europe is a very fragmented market, Sanderse pointed out. Each country has its own domestic players.

Regarding the future of DHL in the U.S., Deutsche Post has said it is in the U.S. to stay, even if DHL misses its profit targets for 2005 and 2006. It has also said the group has plenty of cash to finance its ongoing expansion in the U.S.

In separate news, DHL announced a sponsorship agreement with Major League Baseball and Major League Baseball Advanced Media making it the official express delivery and logistics provider for Major League Baseball.

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