DHL Express, the country's third-biggest overnight deliverer, recently hired a rival, United Parcel Service, to handle its air-cargo operations in the United States.
High fuel prices and a sluggish economy have taken a toll on overnight delivery services, forcing some significant shifts in how the biggest operators do business.
DHL Express, the country’s third-biggest overnight deliverer, recently hired a rival, United Parcel Service, to handle its air-cargo operations in the United States.
While its global business is profitable, the American segment of DHL, acquired in 2002 by Deutsche Post of Germany, is expected to lose $1.3 billion this year.
In an interview from DHL’s American headquarters in Plantation, Fla., its chief executive, John Mullen, discussed the UPS deal.
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Q. What factors drove you to make a deal with UPS?
A. The cost of maintaining our network in the United States has been very painful to us, and it’s been exacerbated by the increasing fuel costs. Under the arrangement with UPS, if our volume should continue to fall, our costs fall with it. And we have 110 aircraft in the United States, a lot of which are quite old and will need replacement in the coming years.
Q. What kind of impact have fuel costs had?
A. Very considerable. First, the straight cost burden, and our fuel surcharge does not cover all of it. But more importantly, it starts changing a customer’s behavior. When you say there’s a surcharge of 5 percent or 10 percent, they read the newspapers and they know fuel is going up. But when you start talking 30 percent and up, the customer starts saying: “Well, do I really need the package there tomorrow morning at 10:30?”
Q. Has that translated into less demand for air service?
A. We’re seeing that customers are downgrading their service expectations, from air to ground. And once customers change, it’s pretty hard to get them to come back again. And even if fuel prices were to come down significantly, we’re not sure customers would revert to urgent air express. Our whole industry is going to have to adjust because, while it may not be tomorrow, we’re going to see huge amounts of our revenue migrate to ground and other forms of transport.
Q. By outsourcing your air-cargo services, where does that leave the company? What is the business model now — more ground and less air?
A. Our business model hasn’t changed. We’re still picking up the package; we’re still delivering it. But instead of giving it to one operator who is flying just for us, we’re giving it to UPS, which, although it is a competitor, is just a service provider.
Q. What was the price of this deal?
A. UPS will charge us about a billion dollars a year to move our material. Our savings, taking into account other restructuring, including closing 30 percent of our ground stations in the United States, will save us about a billion dollars a year.
Q. How many jobs will you be cutting?
A. We’re cutting 1,500 to 1,800 of our own employees, including some at our air hub in Wilmington, Ohio. And these changes will have an impact on our suppliers, which will mean several thousand more jobs will be affected. Our cuts will come in smaller towns, and we’ll close stations where there are several in the same area.
Q. What percentage of your business will be affected by these changes?
A. We’re estimating that these changes, while they sound fairly large, will only have an impact on about 4 percent of our shipments. In other words, 4 percent of our shipments will go from early-morning delivery to maybe afternoon delivery. We’ll still be delivering them, but they will be slightly slower than before, but only a small percent.
Q. How does this affect the general landscape in the United States for deliveries?
A. It shouldn’t make any appreciable difference, and while the deal should make us both more productive, we remain full-tilt competitors. In the rest of the world, in Europe, Asia and emerging economies — where we are in a much stronger position — we are trying to make life as difficult as possible for them.
Q. How much of a decline in daily package volume have you seen because of the economy slumping?
A. Some customers are not sending altogether. But most are trying to find a cheaper way, such as sending it by ground. We’ve got the double impact right now of fuel costs and the economic recession because we carry an awful lot of mortgage documents, contracts and so on, and that side of our business is very significantly under pressure.
Q. When will the new arrangement go into effect?
A. We hope to have a completed agreement with UPS in a couple of months, and we would start to migrate volume across. We would like to see it all in place by mid- to late 2009.