What You Need to Know About DHL Deal

By now you’ve probably heard that DHL is making radical changes to try to stem its escalating operating losses in the U.S.

The courier announced a few weeks ago it would discontinue flying its own dedicated airline network, and instead outsource its "uplift" to United Parcel Service.

DHL posed that it is just replacing two ACMI cargo carriers with one. But shippers need to understand that the two airlines currently used by DHL operate exclusively for the company and fly at the direction of DHL’s operating schedule. When DHL transitions to UPS, it will become just another forwarder customer. (UPS already has existing relationships where they sell heavyweight and container space to forwarders.)

This new arrangement is quite different. This is not simply container space between two points: It’s about the comingling of DHL and UPS packages within the UPS air network. It’s about DHL buying an airport-to-airport service from UPS and then providing the pick-up and/or delivery on DHL trucks.

The issue for shippers will be the delivery time DHL will be able to provide in the future -- and the pick-up time that a shipper is going to be able to receive from DHL.

Assuming the deal goes through, and it looks like it will, DHL will now obtain service from UPS at the pleasure of UPS' schedule. DHL will have no control over the departure and arrival times of UPS aircraft, as it does today with ABX and ASTAR. Nor can they modify UPS' schedule when volume fluctuations occur, which happens regularly in the industry.

What’s more, inside sources say DHL is going to kill off all iterations of its successful @home service by the end of this summer. The original Airborne@home product was faster and less expensive than UPS ground residential. It used the excess capacity on the two-day air network -- and occupied the idle time and space on the pick-up drivers’ routes (as it only went to post office zips that were already on the drivers’ regular deliver schedules).

The @home service used the highly effective and extremely inexpensive USPS Parcel Select Destination Delivery Unit (DDU) rate to accomplish the last mile delivery to a home. It was best in class and cost nothing to start up.

Apparently DHL now believes @home is no longer a profitable business. Of course when Airborne built it, the product had only one corporate overhead to support. When Airborne was sold to DHL in 2003, the execs at Deutsche Post thought it would be prudent to sell the bulk of the @home business to DHL Globalmail, and then use DHL Express as its subcontractor to continue to provide the service.

So now the product has to support the corporate overhead and staff at DHL Express in Plantation, FL; the corporate overhead and staff at DHL Globalmail in Weston, FL; the DHL Express Global corporate overhead in Germany; and additionally the Deutsche Post corporate overhead in Bonn. No wonder it’s losing money.

The practical reality is that the @home product was built to fill excess capacity in an airline (and later ground) network, and for all intents moved between terminals for little cost. Now, with the migration to UPS for uplift, there is no longer excess capacity. DHL will have no choice but to pay UPS a per piece, per pound, rate for the movement between the terminals -- and it’s easy to assume that the cost will be substantially higher than when the cargo just moved as fill.

The @home business is highly seasonal, but since the number of DDUs on the @home network never changed, it should have been fairly easy to plan in advance for the additional traffic. In fact, DHL could have even improved the service and lowered the cost per piece, knowing the volume would be there through the holidays.

So now customers are faced with negotiating a contract with FedEx Smartpost or UPS Basic (if UPS even wants to negotiate with DHL customers right now). Other alternatives are Newgistics and Blue Package. But neither has the penetration of more than 21,000 DDUs every day that DHL has.

Furthermore, having one less player in this market will have an adverse effect on the price one can negotiate.

The last day for pick-ups for the DHL@home family of products, from what has been reported, is Aug. 28. That gave the merchants using DHL@home about 10 weeks to find an alternative, negotiate a contract and make the transition. Merchants that had been using @home are going to be in competition with each other to get the attention of the alternative service providers in this space. It would be prudent to act now and start the process early if you have not already picked up the phone and started booking appointments with the parcel carrier reps.

Gerard Hempstead is president of Hempstead Consulting (www.hempsteadconsulting.com), a firm that helps companies reduce their transportation costs, and a retired vice president for DHL.