Trucks at Work

Facing reality

Taking a pragmatic approach, we will go on to be a smarter player in the challenging U.S. express market.” -Frank Appel, CEO of Germany‘s Deutsche Post World Net, the parent company of DHL.

Sometimes, you just gotta shrink to survive - and partner with former competitors, too. That‘s the conclusion Germany‘s Deutsche Post World Net reached concerning its money-losing DHL express operation in the U.S., but it‘s a lesson I think many domestic trucking companies can learn something from as well.

I mean, let‘s face it: when you‘re faced with either reducing the size of your company or going out of business entirely, which option do you pick? It‘s also got to be galling for DHL to forge a deal with erstwhile rival United Parcel Service to handle a big chunk of its air express shipments, but again, what other choice is there to make? DHL is on track to lose $1.3 billion this year, so something had to be done - and done quickly - to staunch the bleeding.

Frankly, it‘s pretty gutsy to play the cards Deutsche Post got dealt this way - straight up, with a minimum of spin. They took a cold, unsparing look at the reality before DHL and made the decisions that should allow it to survive and return to profitability down the road - preserving jobs in the process, I might add. They didn‘t have to do it this way - they could have sold DHL off to the highest bidder and washed their hands of the job losses that followed. Yet they didn‘t do it.

OK, so let‘s look at this in a little more detail. Under the plan, DHL and UPS agreed to develop a contract whereby UPS provides airlift for DHL Express U.S. domestic and international shipments within North America. In addition, DHL aligns its U.S. express infrastructure to existing shipment volumes by redesigning its ground linehaul network to better match capacity with customer requirements (that‘s a convoluted way of saying it‘s reducing the number of trucks in its fleet). The impact on service levels will be minimal with less than 4% of shipments affected, noted Frank Appel, CEO of Germany‘s Deutsche Post, allowing DHL to remain focused on delivering international and domestic express products while keeping a strong commitment to the U.S. market.

Here‘s how the plan breaks down:

1. DHL reduces its infrastructure network capacity by approximately 30% overall, first by consolidating and closing smaller sorting facilities into modernized, larger stations, resulting in reductions of approximately 34%. Next, it‘ll reduce pickup and delivery routes by 17% and further “rationalize” its ground linehaul network by 18%.

2. The contract between DHL and UPS to get airlift for DHL Express U.S. domestic and international shipments within North America, which also reduces overhead and other administrative costs. UPS should start providing airlift late this year.

3. DHL and UPS are also pursuing an 10-year airlift contract that would create a single airline partner for DHL Express in the U.S., allowing DHL to continue operating its courier and ground network as well as pickup and delivery services to its customers across the country.

“We have promised to relentlessly focus on improving financial performance and ... I am confident we have found a sustainable way forward for U.S. Express in the best interest of customers, employees and investors,” he noted in a press release. Deutsche Post added it‘ll cost $2 billion to restructure DHL‘s U.S. operations, yet those efforts should save DHL around $800 million in 2010 and around $1 billion by 2011.

“The U.S. express market remains one of the most challenging marketplaces worldwide in light of the current economic downturn,” said John Mullen, CEO at DHL Express. “Our future focus will be where customers have told us they need to do business the most. Our ... restructuring will enable us to bring a new level of reliability and increased service performance to our international and U.S. domestic customers while cutting unnecessary costs such as maintaining infrastructure that customers don‘t ask for.”

It‘s tough to face an unpleasant reality like this, no doubt about it. But it sure seems the wisest course is the one Deutsche Post and DHL are taking, to not only face it but also make plans to deal with it, rather than just folding up the tents and walking away.