U.S. Pullout Will Cost DHL Some International Business

When DHL shuts down its DHL Express business in the U.S., as announced Nov. 10, it stands to lose more than just the revenue from its U.S. operations.

During a conference call with reporters on Monday, DHL Express CEO John Mullen said he anticipates that the company will lose “a considerable percentage” of its international business from U.S.-based customers when it shuts down domestic operations as of Jan. 30.

Mullen said currently a little more than $1 billion of the company’s annual U.S. business (totaling approximately $4.5 billion) comes from international shipments, “and we do expect to lose some of that international business – as customers will want to keep their services bundled.” What’s more, FedEx and United Parcel Service, “will be doing all they can to attract those new customers,” he said.

“That said, we do have quite a few shippers that split out their international and give it to us, as they see that as our core strength – and we have other shippers who use a variety of carriers, maybe because they don’t want all of their eggs in one basket,” he said. “But the big bundled shipper that has extensive ground needs and just a little bit of international, well, we’re going to struggle to keep those – and we have factored that in.”

Deutsch Post, parent company of DHL, announced that DHL will discontinue all domestic air and ground services within the U.S. but will continue to offer international service. As a result, DHL is cutting 9,500 jobs, many of them employees of contracted domestic airfreight providers ABX Air and ASTAR Air Cargo, both of which fly packages for DHL Express and operate out of Wilmington Air Park in Ohio. (For more on DHL’s announcement, click here.)

So how exactly will DHL handle international service in the U.S. after its ground services are discontinued?

“We’ll have five international gateways – obviously being in the big cities, including New York and Los Angeles -- as well as a flights directly into Louisville, KY, from the Asia Pacific,” Mullen explained during the call. “And then, from there, [UPS or whoever wins the air freight contract] will take the domestic piece of air transport, and they would then hand the package over to our stations for end delivery.”

Mullen said despite the fact that DHL is shutting down all ground hubs and reducing the number of stations from 412 to 102, it will still be able to deliver the same level of international service.

“The international footprint is very different from a domestic footprint,” he explained. “To compete domestically, you really need to go to every township, of any size, in the entire United States. But for international, the footprint is much smaller – the concentration of where those international shipments go, is much more dense. Those 15 to 20 major metro areas will cover about 80% to 90% of the volume.”

“We will still have 102 stations across the U.S. – so we will still be able to cover the geography,” he added. “And a very small percentage we will outsource to local contractors or to the USPS under the current contracts. But that’s only in the really remote areas – your Montana’s and Dakotas.”

Despite the plan to shutter U.S. operations, DHL officials say they are moving ahead with the previously announced deal with UPS, in which the parcel carrier would handle DHL’s domestic air lift. Providing the deal with UPS goes through, which is expected to happen before the end of this year, DHL will terminate its contracts with ABX Air and ASTAR Air Cargo and will use UPS to handle international air shipments within North America.

Mullen said if the deal with UPS falls through, DHL will more than likely keep its existing contract with either ABX or ASTAR – however at significantly reduced volumes.

When asked how much DHL’s failure in the U.S. is the result of the recent economic turmoil, and how much it is due to the fact that UPS and FedEx turned out to be tougher rivals than DHL expected, Mullen said, “it’s more the latter.”

“The U.S. is a highly concentrated duopoly market, with two very strong players,” he said. “We invested a massive amount of money in trying to break into that market and become a critical third choice. We have achieved a lot of success operationally in doing that – but the reality of the lack of scale -- and the productivity that they have, the market reach they have, the brand awareness they have -- has made it just impossible for us to stay economically viable.”

The state of the global economy, of course, hasn’t helped either.

“If we had been in boom times, maybe we would have held on for a bit longer – maybe we would have had a chance at attracting enough additional revenue to continue to reduce our losses,” Mullen said. “But the combination of that strategic weakness in the market, and now the very severe economic losses on top, were just too much to go on supporting.”