Deutsche Post Plans U.S. Withdrawal, Cedes Market to UPS, FedEx

By Andreas Cremer and Mary Jane Credeur

Nov. 10 (Bloomberg) -- DHL Express, Deutsche Post AG's overnight-delivery unit, will abandon efforts to compete with United Parcel Service Inc. and FedEx Corp. in the U.S., firing 14,900 workers and closing three-fourths of its outlets.

Deutsche Post's spending on U.S. express operations, including the unit's losses, reorganization costs and the price of acquiring the former Airborne Inc.'s ground unit in 2003, will total 7.5 billion euros ($9.6 billion) by the end of next year, Chief Executive Officer Frank Appel told reporters at the company's Bonn headquarters today.

DHL's retreat may enable UPS and FedEx to expand their U.S. market share, estimated at a combined 80 percent of package deliveries, according to Sewickley, Pennsylvania-based SJ Consulting Group. Deutsche Post, Europe's biggest postal service, said it's poised to report a net loss for 2008, the first full- year deficit since its stock began trading in 2000, because of the U.S. withdrawal.

``FedEx and UPS have literally spent decades developing a quite formidable position in the U.S. with extremely reliable networks,'' Dan Ortwerth, an analyst at Edward Jones in St. Louis, who recommends buying shares of both companies, said in a telephone interview. ``DHL underestimated this challenge from the start,'' and was ``a languishing competitor in the U.S. that was flailing even in boom times.''

Deutsche Post rose 65 cents, or 6.9 percent, to 10 euros in Frankfurt trading. That pared the stock's decline this year to 57 percent, valuing the company at 12.1 billion euros.

9,500 Fewer Jobs

DHL Express will eliminate 9,500 jobs in the U.S. in addition to 5,400 positions cut since the beginning of the year, Deutsche Post said today. The combined figure amounts to about 3.1 percent of Deutsche Post's average global workforce of 477,394 employees in the first half of 2008.

The division will also drop domestic truck operations on top of a handover of internal U.S. air routes to Atlanta-based UPS that was announced in May. DHL Express's remaining U.S. business will focus on international deliveries, with 4,000 employees and 103 outlets.

Deutsche Post bought Brussels- and Redwood City, California- based DHL in 2002, adding a global express-delivery service to its network and later expanding the brand to include some cargo operations. The company hasn't made a profit from U.S. express operations since buying Seattle-based Airborne.

Reorganization costs over two years will total $3.9 billion, most of which will be booked in 2008, Deutsche Post said. DHL's ``successful'' U.S. cargo, freight-forwarding and bulk-mail businesses will be unaffected by the express-unit cutbacks, the company said.

`Need for Action'

Appel, saying an economic decline in the U.S. ``generated considerable need for action,'' wouldn't specify the net loss he's predicting for this year. Deutsche Post stuck to a forecast announced Oct. 27 of 2008 earnings before interest and taxes, excluding one-time gains or costs, of about 2.4 billion euros.

``The market wanted the company to get its performance and profitability under control a long time ago,'' Axel Funhoff, a Brussels-based analyst at ING Groep NV, said in a report, adding that he's reviewing a ``hold'' recommendation on Deutsche Post stock. ``They will be in better shape'' after the U.S. express withdrawal.

DHL Express ranked fourth in U.S. express deliveries with 5 percent of the market, behind UPS, Memphis, Tennessee-based FedEx and the United States Postal Service, which is No. 3 with 13 percent, according to SJ Consulting.

Shift to UPS

The company unveiled plans in May to limit losses at DHL in the U.S. by closing express-delivery sorting centers and shifting air deliveries to UPS. A slowing U.S. economy led Deutsche Post to cut its 2008 Ebit outlook from 2.9 billion euros, excluding one-time items. Four days earlier, UPS said earnings will be at the low end of its forecast.

DHL remains in talks on the UPS proposal and, ``while the scope of these discussions will now reflect our change in strategic direction, we are working toward contract completion by year end,'' Jonathan Baker, a DHL spokesman in Plantation, Florida, said today in an e-mail.

Third-quarter net income more than doubled to 805 million euros from 350 million euros, Deutsche Post said today. Sales increased 4.1 percent to 13.8 billion euros. Ebit in 2009 will probably rise, the company said, without specifying a number. DHL Express's U.S. unit will report a full-year loss of $1.5 billion.

DHL's U.S. turnaround was hampered by delivery delays at a package-sorting hub in Wilmington, Ohio, that opened in 2005. Deutsche Post scrapped a 2009 breakeven target for the U.S. division last year and wrote down the unit's value by 594 million euros in the fourth quarter. Appel declined to talk today about the Wilmington base until an agreement with UPS is reached.

UPS's takeover of DHL's U.S. routes may cost 10,000 jobs at Air Transport Services Group Inc.'s ABX unit and Astar Air Cargo Inc., which handle the flights, Air Line Pilots Association President John Prater said in U.S. congressional testimony Sept. 9. UPS countered at the hearing that its cooperation with DHL would preserve 40,000 jobs industrywide.

To contact the reporter on this story: Andreas Cremer in Bonn via acremer@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.