DHL Closing US Service Centers, Cutting 9,500 Jobs

12/11/2008 05:12 am ET | Updated May 25, 2011

ATLANTA — In a move that could greatly scale back a possible venture between UPS and Deutsche Post's DHL, the German company said Monday it will significantly reduce its air and ground operations in the U.S. and cut 9,500 jobs within the country.

The DHL-UPS deal was expected to last up to 10 years and infuse Atlanta-based UPS with up to $1 billion in annual revenue, if completed as first proposed in May.

UPS, the world's largest shipping carrier, has said the contract with DHL, which it has been working to finalize, would mostly involve the transport of DHL packages between airports in North America _ not the pickup or delivery of DHL packages to customers.

If DHL made significant cuts to its ground operations in the U.S., it wouldn't necessarily affect UPS and DHL reaching a deal since their talks have solely involved air delivery of packages, not ground delivery. But Deutsche Post's announcement Monday went well beyond the elimination of ground products within the U.S. Deutsche Post said it will discontinue U.S. domestic-only air and ground products on Jan. 30 to focus entirely on its international offering.

Deutsche Post, which cited heavy losses and fierce competition for its decision to curtail U.S. operations, noted it is not pulling out of the market entirely. It said its international shipping services to and from the U.S. would continue.

DHL competes with rivals UPS and Memphis, Tenn.-based FedEx Corp.

UPS spokesman Norman Black said his company would continue to work on an air-haul vendor contract with DHL. But, he added, "Today's announcement by DHL certainly could affect the size and scope of that contract. We'll go back into talks and see what develops."

Black cited the part of the Deutsche Post announcement in which it said it plans to stop offering air service between U.S. cities.

"By stopping that service, the only thing that's left is moving international packages once they get to the U.S. border," Black said. "That's a dramatically lower amount of volume than what they were originally talking to us about."

Currently, the company's total air volume for shipments from points between U.S. and international destinations and between points within the U.S. is about 1.2 million shipments a day. Deutsche Post said that figure will drop to about 100,000 shipments a day after the changes go through. The air volume figures do not include packages that do not start or end in the U.S.

Avondale Partners analyst Donald Broughton noted that while DHL's announcement does not directly kill the deal with UPS, he thinks termination will be an end result.

"I think a lot of observers, myself included, knew the largest value of that contract (between DHL and UPS) was going to be on the first day, and it was going to dwindle very quickly thereafter," Broughton said. "This just accelerates that process."

Edward Jones analyst Dan Ortwerth said Deutsche Post's decision changes the scope of a potential DHL-UPS deal, but doesn't necessarily kill it.

"I don't see any motivation for UPS to outright walk away," Ortwerth said. "UPS is in the stronger position, and I'm sure at the bargaining table they will protect their own interests plenty well."

Broughton said that while both UPS and FedEx stand to gain as DHL pulls back its U.S. service offering, FedEx will likely have the upper hand in gaining a broader share of the market in both domestic ground and air express shipments.

The analyst notes that FedEx has a ground network roughly one-third the size of UPS, which will allow it to grow business incrementally compared to its chief rival if both companies share the new business equally.

And FedEx's extensive air network will allow it to more easily expand and take more business, he said.

DHL's air and ground operations produced $3.4 billion in revenue last year.

"This a nice piece of the market for UPS and FedEx to play jump ball with," he said. "Overall this environment is very challenging, and this has been a positive in a sea of negative."

But although there are major near-term advantages, Broughton said the biggest benefits might be seen in the long run.

"The real upside might be two, three or four years down the road, when the economy is feeling better and FedEx and UPS are able to raise prices, because they won't have another competitor nipping at their heels," he said.

DHL's current vendors for air shipments within the U.S., ABX Air and ASTAR Air Cargo, have been opposed to the DHL-UPS deal, saying it would cost thousands of jobs if it went through. Now, given the extent of Deutsche Post's announcement, many jobs could be lost at the two companies even if the DHL-UPS deal isn't completed.

ABX spokeswoman Beth Huber said the decision will affect ABX' work force and operations. Just how much of an impact has yet to be determined, she said. ABX has about 7,000 employees.

A woman who answered the phone at ASTAR's offices declined to comment or take a message for a spokesperson, referring calls to DHL instead.

FedEx said in a statement that it welcomes the opportunity to pick up some of the U.S. business that DHL is exiting. "Global shippers have told us they are looking for unparalleled global reach, and FedEx is the global leader in express transportation," FedEx said. Black said UPS over the last several months has won the business of a number of former DHL customers. He said UPS expects to continue to be able to do that in the future.

Deutsche Post, based in Bonn, Germany, said the new round of job cuts are on top of another 5,400 job cuts it already announced.

The DHL Express unit currently employs some 18,000 workers. Deutsche Post said its other operations in the U.S., including freight and global mail and other logistics, won't be affected by its decision to close all of its U.S. ground hubs and reduce the number of stations from 412 to 103 across the U.S. The company said all international shipments into the U.S. will still be delivered, while 99 percent of the outbound shipments will be picked up.

The decision was announced as Deutsche Post said its third-quarter net profit more than doubled to 805 million euros ($1 billion) compared with 350 million euros a year earlier. Sales rose 4.1 percent to nearly 14 billion euros ($18 billion).

Deutsche Post investors cheered the decision, sending the company's shares up 7 percent to 10 euros ($12.90) in Frankfurt trading. In afternoon U.S. trading, UPS shares rose $1.95, or 3.8 percent, to $53.87, while FedEx shares rose $1.55, or 2.4 percent, to $66.13.

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