DHL Wants to Change U.S. Express Market
American Shipper, February, 2001
by Satish Jindel

DHL's majority ownership by Deutsche Post WorldNet (DPWN) has some major implications for the global and U.S. domestic express and parcel industry:

• DHL will simplify its operating units into one company and brand name.
  While DHL is a well-recognized brand in the express industry worldwide, the company providing the service could be one of many DHL companies. DPWN has initiated integration of these operations under one corporate entity and brand name. Last month, DPWN announced several high level management changes to facilitate expansion of U.S. operations and integration of all DHL operations into DHL Worldwide Express Inc.
  
• DHL will expand its domestic network in the U.S. market.
  DHL has been present in the U.S. market since 1969 when its founders created DHL to handle express shipping between the West Coast and Hawaii. During the 1980s, FedEx Corp. and United Parcel Service not only expanded the U.S. domestic network, but also started investing in the highly profitable international express business. While UPS and FedEx were becoming a major competitor of DHL in its core international market, DHL was unable to respond to the opportunities in the U.S. market as a result of several factors:
  • Ownership structure of DHL companies.
  • Claims from the several heirs of Larry Hillblom (who had 65 percent ownership of the U.S. operating entity) with his death in 1995.
  • Transfer pricing litigation with the IRS.
  • DHL management's willingness to overlook importance of the domestic U.S. market to growth in international sector.

DPWN's aggressive growth plans for DHL will bring new focus on the domestic U.S. market. That is already being felt with the changes in DHL leadership. The changes are accompanied by DHL's intent to seek approval from the U.S. Department of Transportation to split the U.S. based company so the airline unit can continue to operate as a U.S.-flag carrier while DPWN makes significant investments in expanding the domestic operation.

There are several industry developments that favor DHL's move to expand its presence in the U.S. domestic market.

The U.S. domestic express/parcel industry, with more than $30 billion in annual revenue, has only three large private carriers for express service (UPS, FedEx Express and Airborne Express) and two nationwide ground parcel carriers (UPS and FedEx Ground). Moreover, there are only a handful of very small regional carriers.

In spite of USPS's role during the Teamsters strike at UPS during August 1997, there are questions being raised as to the relevance of USPS competing with private carriers in the parcel- express market. DHL's entry will provide more support to those opposed to USPS offering parcel services.

The heavy-freight or less-than-truckload industry, with annual revenues of $20 billion, has five large nationwide carriers and some 30 regional carriers with several exceeding $500 million in annual revenue.

The domestic passenger airline industry with $75 billion in annual revenue has 10 large national carriers and many regional carriers generating more than $200 million in annual revenue.

DHL also has strong name recognition among business-to-business shipping and a reputation for excellent service on international packages.

Deutsche Post will bundle various services of its operating companies on a global scale.

DP will link its logistics and air freight forwarding services with DHL to bundle logistics, air freight and express services on a global scale.

The importance of UPS's bundling of its express and parcel services has not been limited to FedEx and Airborne Express in the domestic market. The concept has global potential, and its importance has not been lost on DPWN and its operating and affiliated companies. With Danzas AEI and DHL, DPWN can offer a suite of services that includes fully integrated logistics, air freight forwarding, ocean freight forwarding, customers clearance, express parcel and document delivery, public warehousing on a global scale that few competitors can match.

The expansion of DHL's network in the U.S. domestic market will further enhance the capabilities of this group of operating companies to become a major competitor to UPS and FedEx in the world's largest express/parcel market.

What are implications for the express industry?

DHL's recent executive changes have particular importance for the U.S. market, as does DHL's filing with the DOT to split its U.S. operations.

This split may be viewed as an attempt to circumvent the U.S. aviation laws, which limit foreign companies from owning more than 25 percent of a U.S.-flag airline. However, the limitation of foreign ownership appears to have been established to keep foreign entity from controlling passenger airlines since there were no all cargo airlines 50 years ago. Retaining this limitation has many implications.

Why should the ownership limitation apply to air cargo carriers and not other carriers that move cargo, whether via air, ground or water?

Some may argue that express carriers are more important to the economy than ground carriers because they handle more time-sensitive and life-dependent products. This position is not sustainable as most express shipments of UPS and FedEx may never travel on an aircraft, even though they may be labeled as such.

Protecting U.S. air cargo from foreign ownership would justify other nations in doing the same, which would limit UPS and FedEx with the flexibility they enjoy with their air express operations in Europe.

DHL's entry into the domestic U.S. market will dramatically impact the express-parcel industry and will change the options for the shipping public and affect future offerings and services from the existing carriers. A  look at what RPS's entry into the ground parcel business did for UPS and the shipping public is one example of how competition will enhance the prospects of all participants.

Finally, USPS's role in the parcel industry may be questioned once there are sufficient competitors. Considering the extent of rivalry between UPS and USPS, UPS should welcome DHL and Airborne entry in the ground parcel market so that USPS can be limited from subsidizing its parcel services with its protected first class business.