The scene is quite different compared to last May, when the economy was still relatively strong in the world's largest express delivery market and DHL and UPS announced they were negotiating details of a deal under which UPS would take over DHL's airport-to-airport flying in the US. UPS estimated it would generate as much as $10 billion in additional revenue over 10 years from the proposed agreement.
But DHL announced last November that it was pulling the plug on its five-year push to become the "third alternative" to UPS and FedEx in the US and earlier this year it ended all domestic US services to focus exclusively on international operations to/from 15-20 metropolitan areas. Its daily shipments in the US fell from around 1.2 million at this time last year to "less than 100,000" currently, spokesperson Jonathan Baker told ATWOnline.
It was still hoping to convince UPS to fly those shipments, but last week the companies ended negotiations. "We were unable to reach an agreement that made financial sense," UPS CEO Scott Davis told analysts last week. With DHL ending its domestic services, "the size and scope of the agreement needed to be adjusted and we were unable to come to an agreement," Baker explained.
DHL will fall back on ABX Air and Astar Air Cargo, the subservice cargo airlines that have been handling its US air business for more than five years. Both carriers were devastated by the original UPS-DHL announcement but DHL now must depend on them to maintain its international services to the US. "We have current contracts in place with both ABX and Astar, so we will continue to obtain cargo services under these existing contracts," Baker said.
DHL also is closing its air hub at Wilmington, Ohio, and relocating to its former US air hub in Cincinnati, where it will restart an automated facility this summer capable of sorting 250,000 packages nightly. "Cincinnati is now the perfect facility for our current international volumes," Baker said. DHL moved its hub to Wilmington, where ABX (formerly the air arm of Airborne Express) is based, in 2005.
ABX is operating a very scaled-down operation compared to a year ago, dropping from 10,000 employees to just 3,000 currently and parking more than 70 DC-9 freighters (ATWOnline, Nov. 18, 2008). "Are you looking to buy a DC-9?" spokeswoman Beth Huber joked to ATWOnline. The move to Cincinnati may force the carrier to shed an additional 1,000 jobs. Even though it will continue carrying DHL cargo for the time being (its contract runs through August 2010), most of DHL's former US business has shifted to UPS and FedEx.
UPS CFO Kurt Kuehn told analysts last week that the company has captured just over half of DHL's domestic US business in terms of revenue. He said it "put less focus on the lowest weight, very low value" parcels DHL had been carrying. On the volumes it did capture, UPS raised shipping rates 10%-15% from what DHL had been charging. "There are still opportunities for [further] DHL wins," Kuehn said. "We do feel pretty good that the volume we got was profitable and we saw an improvement in yield."
He added that a good portion of the former DHL volume "moved to ground" as shippers looked to cut costs and take advantage of UPS's extensive US trucking network. That reflects moves by customers around the world. "Both domestically and internationally, the trend is lighter weight [shipments] and customers coming to us asking how they can reduce their budget. . .[often leading to the customer] trading down in our portfolio," Kuehn explained.
UPS, in fact, has made "dramatic changes" in its air network in recent months, the CFO said, noting that it is "running full speed to match our network to demand." Most notably, that has meant the elimination of two major airport night sorts at Dallas/Fort Worth and Columbia, S.C., and the grounding of UPS Airlines' entire fleet of 44 DC-8 freighters. Other regional sorts have been scaled down as it concentrates more of its volume at its Louisville hub's WorldPort sort facility, mirroring a similar concentration by FedEx at Memphis (ATWOnline, Feb. 1).
A $1 billion WorldPort expansion to be completed next year will ramp up the high-tech facility's hourly capacity to 487,000 pieces. An expanding WorldPort combined with the declining economy has driven UPS to rely far less on regional sorts throughout the US. "We can fly substantially less aircraft but the aircraft are much bigger, much more efficient and much more environmentally friendly," Kuehn said. Davis added, "We're adjusting and downsizing our network. . .without reducing service."