Deutsche Post World Net is to restructure its US Express business by working with UPS for airlift capacity and reducing costs in its ground infrastructure.
Under the plan, UPS will provide air uplift for DHL Express domestic and international shipments within North America. In addition, DHL will align its US Express infrastructure to existing shipment volumes by redesigning its ground linehaul network to match capacity with customer requirements more closely. The arrangement is expected to start later this year.
DHL’s US express business has been struggling for some time and this year it expects to lose $1.3 billion. The new arrangement is expected to deliver savings of around $800 million in 2010 and around $1 billion in 2011, improving EBIT. The company expects to spend up to $2 billion to finance the restructuring plan.
The uncertain economic situation in the US means that Deutsche Post World Net is reducing its guidance for underlying EBIT in the Express Corporate Division in 2008 to around 400 million euros from around 500 million euros. Subsequently, the Group’s full-year guidance before non-recurring effects and restructuring costs will be reduced slightly by 100 million euros to around 4.1 billion euros.
John Mullen, Deutsche Post World Net management board member and chief executive officer of DHL Express, said: “Our future focus will be where customers have told us they need to do business the most. Our entire network restructure will enable us to bring a new level of reliability and increased service performance to our international and US domestic customers while cutting unnecessary costs such as maintaining infrastructure that customers don’t ask for.”
DHL will be more selective in accepting business from a small number of scarcely populated areas in the US and take advantage of capacity and cost reductions to grow a leaner and more focused ground business.
As well as the UPS deal, DHL Express US plans to reduce its infrastructure network capacity by some 30 per cent by consolidating and closing smaller sorting facilities, rationalising pick-up and delivery routes by 17 per cent and rationalising the ground trunking network by 18 per cent.
UPS said the agreement with DHL, when finalised, would be expected to extend for 10 years and produce up to $1 billion in additional annual revenue for UPS.
David Abney, UPS’s chief operating officer, said: “We believe this arrangement with DHL would represent a wise use of our assets and network capacity while creating a substantial and profitable revenue stream for our company.”
UPS will be able to handle much of the anticipated new volume in its existing air network, although additional capacity will be added beginning in 2009 upon full implementation. The total amount of capacity needed will be determined at that time; however, UPS is currently scheduled to take delivery of seven new aircraft in 2008 and another five in 2009. The company is also well along on a $1 billion expansion of its UPS Worldport air hub in Louisville, Kentucky.
“We want to emphasise that this would be a relatively straightforward air lift agreement and that UPS and DHL will continue to compete in the marketplace under their own brands,” Abney added. “UPS brings to customers its own unique value proposition. By providing these services to DHL, UPS will not be diminishing its competitive position or ability to differentiate itself with customers.”