DHL’s Mullen To Congress: UPS Deal Doesn’t Violate Antitrust Laws

Sep 10, 2008 3:24 AM  By

DHL Express Global CEO John Mullen today told members of the House Committee on the Judiciary that the company’s proposed union with United Parcel Service for domestic airfreight services is not a violation of U.S. antitrust laws.

“The proposed agreement with UPS, if consummated, would not involve any merger, acquisition or transfer of assets between DHL and UPS,” Mullen said. “It would be a commercial vendor contract for services between two separate companies, limited to DHL’s airlift delivery and certain sorting services in North America. Similar vendor arrangements involving competitors are common in the transportation industry. For these reasons, among others, DHL believes the agreement would be fully consistent with U.S. antitrust laws.”

Deutsche Post, parent company of DHL, announced a major overhaul for its ailing DHL Express business in the U.S. in May — including the proposed 10-year deal with UPS for air uplift.

Providing the deal goes through, DHL will terminate its contracts with current air carriers ABX Air and ASTAR Air Cargo (the former borne from DHL’s acquisition of Airborne Express in 2003), both of which operate out of Wilmington Air Park in Ohio, and will use UPS to handle its domestic and international air shipments within North America.

Parcels will still be picked up by DHL ground crews, but they will be brought to UPS air terminals, will fly on UPS planes, and then DHL will complete delivery on the other end. Deutsche Post says the deal will save DHL about $1 billion a year.

Mullen said the deal with UPS will not decrease competition in any way and emphasized the proposed the contract is a pro-competitive vendor-services agreement for air and related services only.

“DHL would retain complete control over every customer-facing aspect of the business and remain an independent and viable competitor in the U.S. air express delivery sector retaining full control over our ground operations, as we do today,” he said.

Gerard Hempstead, a consultant and former executive at DHL, agrees that the deal with UPS should not be considered a violation of U.S. antitrust laws.

“If DHL tendering its shipments to another airline with which it competes is a violation of antitrust, then the U.S. government will have to send indictments to every air freight forwarder doing business,” he says, pointing out that such deals have been commonplace throughout the history of the parcel business in the U.S.

“Internationally today DHL puts the export parcels on Lufthansa to Europe and Northwest to Asia,” Hempstead says. “For the last 20 years DHL has delivered Purolator’s packages in the USA, as well as TNT’s. Keep in mind that outside the USA the major global competitor to DHL is TNT — not UPS or FedEx.”

“My view is that all that’s happening here is that DHL is going to procure its airport-to-airport service from UPS airways,” he continues. “DHL is still going to compete with UPS. The purchase of the cargo space on the UPS planes is just a means for DHL to move a shippers parcel from airport A to airport B.”

Hempstead says the real irony here is that it was U.S. antitrust law that prevented DHL from flying its customers’ packages on its own planes today.

“DHL would have loved to have had its own airline here in the U.S.,” he says. “It was the legal battle and the political maneuvering of UPS that forced DHL to absolve itself of all airline ownership in this country in 2003 when DHL bought Airborne. Ergo, DHL today does not move a shipper’s packages on any of its own planes. It is forced to give them to ABX Air (the legacy Airborne Airways) and Astar (the legacy DHL airways) — both spun off in 2003 to get the Airborne/DHL merger done.”

The real issue for shippers, Hempstead says, is that now there are only “a few factors that determine pricing competitiveness in the marketplace — excess capacity being one of them.”

“When DHL starts tendering its packages to UPS, there will no longer be excess capacity in the DHL network because they will have to pay for every pound on UPS and that will be a totally variable cost,” he explains. “All excess capacity in the UPS network will be consumed trying to swallow the DHL volumes so they will not have any excess capacity. This will, for at least a year, cause the tightening of pricing — and most likely service issues with UPS and DHL.”

Hempstead says in his view DHL will no longer have the ability to price below UPS for domestic shipments and still earn a profit.

“So for all intents, when the deal is done, the low priced competitor has been eliminated from the game and then the battle in the express wars will be between FedEx and UPS,” he says.

In related news, DHL announced that it will offer $260 million in severance pay and other benefits ($225 million of this voluntarily) to impacted DHL, ABX and ASTAR employees should the UPS deal go through.

DHL has already started consolidating its ground network, so the clock is ticking with regard to its deal with UPS, which it hopes to have finalized before the end of this year.