DHL Executive Testifies on UPS Deal

Sept. 17, 2008
A slowdown in the air express delivery industry requires innovative business models, suggests John Mullen, CEO of DHL Express Global

A slowdown in the air express delivery industry requires innovative business models, suggests John Mullen, CEO of DHL Express Global. DHL Express Global CEO John Mullen testified before the House Committee on Transportation and Infrastructure regarding the company’s potential contract with UPS for domestic airlift and related services.

According to DHL, this pending agreement comes at a particularly difficult time – for the overall aviation industry including the air express delivery sector. The air cargo market has experienced increasing levels of excess air lift capacity, the impact of which has been substantially exacerbated by record increases in fuel prices. These record fuel prices, along with a significant slowdown in the US economy, have hit the domestic air express sector particularly hard. As a result, DHL has experienced a slowdown in overnight air volumes, as have its competitors. These facts, in combination with increasing costs, will result in an expected $1.3 billion loss in DHL U.S. Express operations in 2008. (See: DHL Plans to Ease Its $1.3 Billion Headache)

DHL points out it has analyzed all realistic options and the proposed agreement with UPS is part of DHL Express’ US restructuring aimed at enabling the company to remain a viable competitor in the US market while continuing to service its customers. This type of airlift arrangement is common in the transportation industry.

During the hearing, Mullen stated: "Customers will see no difference as DHL will continue to pick-up and deliver packages as well provide customer service just as we do today. The exchange of information between DHL and UPS will only provide data necessary for transportation from point A to point B.”

Mullen again emphasized that the pending agreement would not involve any merger, acquisition, alliance, or transfer of assets between DHL and UPS. “DHL will remain fiercely competitive with UPS and FedEx.”

He stressed that as DHL has cooperated and provided information to the House Committee on Transportation and Infrastructure and the House Committee on Judiciary, they will continue to cooperate with all such requests. DHL informed the Antitrust Division informally of the proposed agreement on May 28, and would cooperate fully in any investigation the Division might choose to undertake. DHL's international network links more than 225 countries and territories worldwide with some 300,000 employees, including more than 40,000 employees in the US. Founded in San Francisco in 1969, DHL is a Deutsche Post World Net brand. The group generated revenues of more than €63 billion (more than $93 billion) in 2007.

DHL Testimony - Excerpts

In his testimony on September 16, 2008, John Mullen, CEO of DHL Express Global, told House committee members DHL does not take its decision to outsource air lift to UPS lightly. It has already invested $5 billion building a presence in the US.

“Despite DHL's heavy investment and determined efforts to build credibility in the US market, its air express volumes have declined over this period [since 2003], due in part to the generally deteriorating market conditions in the US overnight air sector,” Mullen told the committee. Meanwhile, DHL's operating costs increased dramatically. Even with a long-term view of the US market, DHL cannot ignore operating losses of $5 million per day, said Mullen.

The restructuring announced on May 28 had two goals. One was to consolidate the domestic ground network and the other to shift domestic airlift and sorting activity from its current providers ABX and Astar to one provider, UPS. The ground restructuring is underway, and DHL has entered negotiations with UPS on the air lift and sortation services.

“DHL is sensitive to the impact this decision will have on its employees,” said Mullen. “and on the employees of its current air services vendors ABX Air Inc. and Astar Air Cargo Inc. and on the southwest Ohio communities in the Wilmington area.”

He said DHL is committed to working with the state of Ohio and community official to assist employees. DHL has already committed to provide over $260 million in severance, retention and health benefits for the workforce in Wilmington. Mullen pointed out that $35 million of this is pursuant to contractual or benefit plan obligations DHL has while the balance (about $225 million) represents DHL's effort to go beyond what would otherwise be required.

“The proposed agreement with UPS, if consummated, would not involve any merger, acquisition or transfer of assets between DHL and UPS. It would be a commercial vendor contract for services between two separate companies, limited to DHL's airlift delivery and certain sorting services in North America.”

Mullen pointed out that similar vendor arrangements involving competitors are common in the transportation industry.

Mullen also sought to address the perception that DHL was abandoning the Wilmington facility after accepting $400 million in incentive benefits from the state of Ohio. “DHL was induced to consolidate operations at the Wilmington Air Park in part by the offer of incentives that the State has valued in excell of $400 million. DHL has received less than $4 million in incentives,” he said.
Included in the testimony is a breakdown of the incentives.

Ohio offered an estimated $13 million in job creation tax credits in an agreement that was not executed and for which DHL realized no benefit.

A job retention tax credit estimated by the state to be worth $66 million was submitted to ABX and, if the vendor services contract is consummated, DHL will realize no benefit.

DHL did receive a $2 million business development grant and $2 million for an Ohio Investment in Training program.

A $300 million volume cap allocation (estimated) for tax exempt financing will not be required and neither the Dayton-Montgomery County Port Authority nor DHl applied for or received any volume cap for the bonds issued by the Dayton Port, says DHL. DHL is obligated to pay rent sufficient to pay all of the debt charges on the bonds issued by the Dayton Port, it said. No governmental entity is liable for payment of this debt from its own resources.

An estimated $729,760 for employment pre-screening test and recruitment services relate to the state of Ohio reimbursement to local government agencies for those costs and its value to DHL was indirect and cannot be calculated precisely because the amount expended by the state is unknown.

DHL received an estimated $600,000 abatement on real property taxes in 2007 of an estimated $17 million community reinvestment area benefit. It does not expect to realize more than $1 million of a $9.6 million Ohio Enterprise Zone Program benefit.

Runway fee savings on landing fees that DHL realized by consolidating operations at the Wilmington Air park rather than the Cincinnati/Northern Kentucky Airport in Covington, KY was a function of DHL's acquisition, expansion and improvement of and consolidation of operations at the Air Park, said DHL. The state of Ohio did not provide DHL with either casy or credit against any payments that would otherwise be owing to the state, it added.

An OWDA Local Economic Development Loan was received by the City of Wilmington for public improvements with no cash benefit to DHL.
Of the total estimated incentives offered by the State of Ohio or $422,389,760, DHL realized $5.6 million.

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