DHL faces reality: Global air express giant finally concedes the US market is a lost cause
November 24, 2008--For five years, DHL and its parent Deutsche Post World Net talked a strong game regarding DHL's US venture: Even though it was bleeding money as it struggled to take away market share from UPS and FedEx in the world's largest and most lucrative express market, it was committed to becoming the "third alternative" and would grind through difficult years to gain a foothold in the one major global market where it isn't the leading player. But this month it decided the time had come to cut its losses, announcing that it will withdraw entirely from domestic US express operations on Jan. 30 and cede the market
(ATWOnline, Nov. 11). DPWN cited three key factors that drove the decision to focus only on international shipping to and from the US, a move that means DHL's daily air volume in the country will drop from 1.2 million shipments to just 100,000. First, it simply had to "face reality," DPWN CEO Frank Appel said at a recent press conference in Germany, explaining that the company had to acknowledge it could not figure out a way to operate profitably in the US. Its annual costs in the market averaged more than $5 billion and it could not generate enough revenue to earn money, losing an average of $1.3 billion per year. UPS and FedEx have long-entrenched, integrated networks in the US as well as tremendous brand awareness among American consumers and shippers, advantages that proved too significant for DHL to overcome.
Second, its business in other parts of the world, particularly Asia, has grown enough in the last five years that it no longer believes the US market holds the same strategic importance. Finally, the global economic downturn makes pouring money into a loss-making market prohibitive. DHL estimates it has lost $10 billion in the US since it purchased Airborne Express in 2003 and tried to battle UPS and FedEx on their home turf
(ATW, January 2008).
"From a perspective of risk, we are entering unprecedented economic times," DHL Express CEO John Mullen said. "We see risk everywhere. The main way we can de-risk our US business is to significantly lower the costs."
Its new US model will be able to be operated at a cost of "below $1 billion" annually, he noted, more than $4 billion less than current annual costs in the market. The international portion of its US business generates about $1 billion in revenue annually, meaning that theoretically it should be able to earn a profit, or at least break even. Mullen commented that even if the US recession is severe, "we're structurally dedicated to a far lower loss" there.
He added that DHL will be able to shed "complex legacy systems from Airborne" as well as focus on a "much more concentrated market," as about 90% of US international shipments are to/from just 15-20 metropolitan areas in the nation. "To cover these areas is far less of a task" than providing blanket US coverage, he explained. In fact, he claimed, 71% of international shippers that continue to use DHL in the US will see "improved service levels" because these shipments to/from the US's biggest markets no longer will be tangled with the stressed domestic network.
International express carriage is DHL's "core strength," Appel said. "You shouldn't forget that our international business is highly profitable outside the US. . .The acquisition of Airborne was five years ago and the relative significance of the [US] market has dramatically changed. Today we have a much stronger China and Asia business and an integrated European network. That wasn't the case five years ago. So let's face reality. If we can't [serve the domestic US express market] on a profitable basis, we have to withdraw and spend money on areas [of the world] where we are clearly stronger than our competitors."
He added that DHL's reputation throughout much of the world as a top-notch service provider operating a well-run, profitable enterprise has been damaged somewhat by its troubled US business. "We are always working on our brand and we don't like that it's being heavily criticized at the moment in the US," he said.
DHL's move will have a significant impact on several US players. For starters, there will be more than 1 million daily domestic air shipments for which UPS and FedEx will fight. DHL subservice airlines ABX Air and Astar Air Cargo, which currently carry those shipments, are teetering on the edge of survival and, even if they manage to pull through, will be forced to cut thousands of workers and jettison dozens of aircraft. As for the 100,000 remaining shipments, representing the US line-haul portion of international shipments, DHL hopes to negotiate a deal with UPS under which its rival will ferry those packages airport-to-airport.
But it is an open question whether DHL will be able to remain a serious international player in the US market once it shuts down its domestic business. Mullen conceded that "we're not naive and we realize we could lose a considerable percentage [of current US international business] from those [shippers] that want to bundle [domestic and international] services with one provider."
He insisted, however, that DHL "can still offer a very credible service in and out [of the US]. . .Of course there will be some level of transition disruption, but we're very confident we'll be able to maintain the same level of service." Appel added, "We are not withdrawing from the US. We are concentrating on cross-border express."--
Aaron Karp