Simon Keeble

Addressing the U.S. House of Representatives Committee on the Judiciary, DHL CEO John Mullen cited constraints on foreign investment in U.S. airlines as a reason for the express operator's $3 billion losses since 2003.

Currently, U.S. law limits foreign ownership of American air carriers to a 49% equity interest and a 25% voting interest and with DHL losing $5 million a day Mullen said the situation had become "unsustainable."

In an attempt to integrate the unusual structure of DHL - U.S. ownership of the domestic lift and foreign control of the international operations - Deutsche Post World Net (DPWN) acquired DHL International in 2002 and Airborne Express in 2003.

In order to comply with U.S. law, DHL was then required to divest itself of Airborne's air operations (ABX), leaving DHL Express to operate ground operations only in the U.S.

So while it may have been one brand, the new DHL has remained several distinct components - including air capacity provided by ABX and ASTAR. Mullen acknowledges that the inability to control its U.S. capacity has resulted in a "substantial cost disadvantage" compared to FedEx and UPS.

In the five years since acquiring Airborne, DHL has invested $0.9 billion in its Wilmington, Ohio hub in order to integrate the ground operations of the former DHL and Airborne into a single air express provider.

Mullen admitted it has not been a smooth flight: "To be sure, DHL made strategic and operating mistakes in the integration of the DHL and Airborne businesses. The 2005 integration of our two main U.S. air cargo and hub sorting operations (of former Airborne and DHL) into a single facility at Wilmington, Ohio did not go well, impacting service to our customers and costing us a number of accounts. Other aspects of the integration of Airborne and DHL gave rise to unanticipated service issues, which also eroded our customer base and market share."

So when UPS came calling with a more cost-effective solution to DHL's domestic lift, Mullen and DPWN CEO Frank Appel decided to call "time" on the Wilmington hub operation and its capacity contracts with ABX and ASTAR.

However Mullen denied as "false" claims that DHL is abandoning its Wilmington Air Park facility after accepting more than $400 million in incentive benefits from the State of Ohio: "DHL was induced to consolidate operations at the Air Park, rather than in Northern Kentucky, in part by the offer of incentives that the State has valued in excess of $400 million.

"However, DHL has received less than $6 million in incentives.

"Moreover, DHL is fully liable for all principle and interest related to the $270 million in bonds issued for the Air Park improvements. No governmental entity is liable for payment of any amount of the $270 million because it is solely DHL's obligation."

DHL says it will provide more than $260 million in severance, retention, and health benefits for the workforce in Wilmington, including funding the severance and benefits programs of the ABX and ASTAR Employees.

According to the U.S. House of Representatives Committee on Transportation and Infrastructure, nearly 9,000 jobs will be lost as a result of the closure - including 7,000 ABX employees, 725 from ASTAR and 1,200 from DHL. Earlier in the year, DHL cut its U.S. workforce by 600.

If approved, the contract with UPS will replace ABX and ASTAR for the carriage of DHL U.S. package volumes and allow for the move of the sort facility from Wilmington to the UPS hub in Louisville, Kentucky. Mullen said DHL would retain complete control over the rest of its business and remain an independent competitor in the U.S. air express delivery sector.

He noted that similar vendor arrangements involving competitors are not uncommon, citing FedEx and UPS airlift for the U.S. Postal Service.

Mullen, with a nod to the environment, added: "Finally, and though certainly not a motivation for the agreement with UPS, one other result of our plans worth noting is that by eliminating duplicate air systems the contract with UPS would reduce carbon emissions (since there would be 50,000 fewer aircraft take-off and landing operations per year) and contribute to energy conservation by saving over 150,000,000 gallons of jet fuel annually."

Pilots Question DHL/UPS Deal

Testifying before the U.S. House of Representatives Committee Committee on Transportation and Infrastructure, John Prater, president of the U.S. Air Line Pilots Association claimed DHL's choice of UPS to replace ABX and ASTAR "will ensure both will be put out of business, with their employees on the street during one of the worst job markets in our lifetimes.

"There has to be more to this than meets the eye. After all, both ASTAR and ABX have met all performance targets set by DHL. The pilots at both carriers, while reasonably compensated, earn less than pilots at UPS or FedEx.

"The bottom line is that DHL's problem in North America is not the cost or effectiveness of its air operations. Its problem is that it cannot compete with UPS and FedEx on the ground. They can't restructure their way out of that and they can't solve it by switching to another provider of lift, much less by handing their operations to the competition."

Commenting on DHL's assertion that it had no intention of withdrawing from the U.S. domestic market, Prater suggested the House and the U.S. Department of Justice should ensure the DHL/UPS deal is not a "mere cover for giving the bulk of DHL's North American business to UPS." At the same hearing, DHL CEO John Mullen denied the charge: "DHL will remain fiercely competitive with UPS and FedEx."