DHL Plans to Ease Its $1.3 Billion Headache

July 10, 2008
Entry into the US domestic market cost more than anticipated, causing the delivery giant to take dramatic measures to staunch a gushing loss.

Facts facing DHL: In 2007 came a loss of $1 Billion and for 2008 an EBIT (earnings before interest and tax) loss of $1.3 Billion is projected. Outside of the US, the company is the major provider of express and logistics services. Within the US, it is the third largest player in the market, trailing FedEx and UPS. It’s a serious understatement to say that investors are upset with the performance. Since 2003, when DHL bought Airborne Express for $1.05 Billion as a stepping-stone to entering the US market, expectations have not been met.

Despite rumors that DHL would abandon the US entirely, sell off its operations or merge with another supplier, none of that has happened. Dr. Frank Appel, CEO of Deutsche Post World Net, DHL’s parent company, has reaffirmed the company’s commitment to sustaining its US business. Consider that, as DHL notes, in the Americas the US represents the largest express market and is connected to the world’s principal trade lanes. Further, the company says that 47% of all its domestic and international shipments are billed in the US where half of its 200 largest customers are based. “The US business is accretive in value to our global network,” explains John Mullen, CEO of DHL Express.

“That’s because if we didn’t have the US, then we would firstly lose all of the profit we make in the rest of the world on shipments to and from the US, which is quite substantial. Secondly, the US pays a proportion of global costs. It pays for a piece of the Hong Kong hub, the Leipzig hub, the air networks and so forth. If we didn’t have a US then those costs don’t go away.”

So much attention had been given to the strategic plan announced by DHL to restructure its US business, that it overshadowed news of the opening of its new air hub at Leipzig/Halle in Germany some two days earlier. The hub is a significant part of the backbone of DHL’s worldwide coverage that joins one at Hong Kong, and had included a hub at Wilmington in Ohio in the US.

The DHL strategic plan contains two principal elements: outsourcing North American airlift and reorganizing its infrastructure. The first of these two is garnering most attention as DHL intends to pay UPS $1 billion a year for the next 10 years to move its freight from airport-toairport only. DHL will retain its ground network, pickup and delivery functions and Customs clearance.

Previously DHL acquired a 49% stake in the Atlas Air Worldwide Holding subsidiary, Polar Air Cargo. Under terms of the agreement, DHL Express gained a 20-year commitment for guaranteed capacity on Transpacific air routes. The agreement remains in force.

DHL and UPS are working aggressively to reach agreement. Noting that it will begin transporting a small portion of DHL this year then feed the rest into its network next year, UPS Spokesperson Ken Sternad, says that, “We are compelled to get a contract completed before we can begin.”

Keeping track. Monitoring all flights, worldwide, at the Global Quality Control Center at DHL Express Global’s Head Office in Bonn, Germany.

As a consequence of moving airlift to UPS, the Wilmington hub will no longer be part of the global DHL backbone. In effect the UPS WorldPort Air Hub at Louisville International Airport becomes the North American hub for DHL.

Even before talks with DHL began, WorldPort has been growing. “We will have additional capacity with aircraft coming into the fleet that we are committed to,” claims Sternad. “We also have a rather large expansion of WorldPort. A lot of that capacity will come on by next summer. Adding efficiency and density is what our business is all about. This move is very good for us and good for our business.”

On hindsight, looking at the Wilmington facility, Mullen reflects that it was an under-mechanized hub. In order to keep it up and running, he says it would have been necessary to upgrade it and improve its ramp facilities to handle DHL intercontinental flights with Polar and its Transatlantic carriers. “We would have had to mechanize the parcel sort and to gradually replace all of the aging aircraft,” he notes. “All of those costs disappear now with this arrangement. Going forward we avoid all of the capital expenditure we would have had to incur on our own if we kept going with our old business model.”

As characterized by Sternad the agreement covers shipments from origin gateway to destination gateway. The only aircraft UPS would not operate are those coming into WorldPort on international inbound flights. For shipments within the US, or anything going to and from UPS gateways in Canada and Mexico, DHL will deliver the volume to a UPS gateway location. The freight will then move to the destination gateway. At that point DHL will pick it up and move it to its final customer. “At the same time, out there on the street, in front of the customer, we’re still ardent competitors,” notes Sternad.

DHL is also changing the way it conducts business on the ground with modifications to the infrastructure in its station network, pickup and delivery routes and ground line haul. The company expects to reduce the size of its network by 34% through consolidation and closure of service centers. It will close facilities in what it terms are low-density areas as well as closing low-density stations in a number of areas. It will also consolidate facilities located in close proximity to each other in a number of locations. It will replace its current partially automated hub and spoke network with what it terms is a more fully developed multi-hub network supported by more advanced automation.

Using newer technology solutions, the company intends to re-engineer its basic pickup and delivery route structure. It will also change the structure of its routes with the aim of boosting premium international and express product service. It anticipates a 17% reduction based on the routing rationalization. To save 18% in its ground line haul network, DHL is cutting out runs to more remote locations while upgrading its fleet with more efficient equipment.

While DHL is expanding its use of the US Postal Service to serve for last mile delivery in certain locations, there will be some impact on customers in areas affected by closures and consolidation. DHL characterizes the customer impact as “minimal,” translating into 3.3% fewer deliveries and 0.06% less pickups.

For DHL for the time being the bottom line is the bottom line. Implementation of its new strategy is expected to cost $2 Billion. The company anticipates decreasing losses in US Express business over the next three years at $900 Million in 2009, $500 Million in 2010 and $300 Million in 2011.

“If we can get it to the area of a $300 million loss that we’ve targeted, that’s our step one,” claims Mullen. “We picked that figure because we wanted to be able to walk before we ran but also because at that level, we’re actually better off having the US with those losses than not having the US with those losses. That said, nobody wants to lose money. If we can get there in the time frame that we’ve scoped, the next plan will be how to get the $300 million down to zero.”

DHL Creates a Major Hub

Each night, freight arrives, is sorted and departs from the new Leipzig/Halle hub.

The new Leipzig/Halle Airport facility is an important cog in the company’s global commerce backbone that includes its major hub in Hong Kong. Two days before announcing plans for changing its market approach in the US, the international delivery giant opened this € 300 million facility to enhance its global express network. For the company, this hub transfers flights previously going to its Cologne gateway and its previous European air freight hub in Brussels.

Some 60 planes per day arrive at the new hub from 46 destinations across the globe. In addition to freight arriving from the US and Hong Kong, cargo moves between Leipzig/Halle and such points as Sharjahj in the UAE, Delhi, Istanbul, Sofia, Warsaw and Ostrava, to name a few. These sites are mentioned here to provide a sense of why this particular location was chosen by DHL for creation of the new hub.

At the formal opening of the facility, Frank Appel, Chairman of the Managing Board of Deutsche Post World Net, spoke of a shift in global commerce increasingly toward the east, not only with freight moving from China and India, but with emerging markets that include the Mideast, the Baltic States and Russia. Appel explained that this location in Germany is central to DHL’s continuing business with western destinations as well as to serving markets to its north and south and the growing markets to the east.

John Mullen, CEO of DHL Express, observed that, “Demand for Express services is growing worldwide and we took the decision to invest in our international network in order to meet this need. The state-of-the-art new hub will enable us to continue to offer the best possible service, quality and reach for our customers. It is not only one of the industry’s most technically advanced hubs, with some of the world’s most sophisticated sorting equipment, but it will also protect and strengthen our leading position in the European, and indeed global, express market.”

The hub’s sorting line is fully automatic and has been designed to minimize sound levels as it operates. Its main sorter is 6,500 meters long. There is a 900-meter document sorter and 260 loading and unloading slots for air containers. At present it is capable of handling 1,500 tons per day, anticipated to grow to 2,000 tons per day by 2012. The line can handle 60,000 parcels and 36,000 documents per hour.

The facility is environmentally sensitive with, for example, the use of natural gas powered cogeneration technology for electricity, heating and cooling. The hub has 1,000 square meters of solar cells on the roof of its workshop used for generating electricity. The hub catches and stores rainwater that it then uses for drinking water and cleaning aircraft.

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