DHL Express made a bold foray into the U.S. market a few years ago, challenging dominant players FedEx and UPS for a share of the lucrative parcel express business. But performance has fallen far short of expectations. And for months now, industry watchers have wondered how the company, a subsidiary of Deutsche Post World Net, would respond to mounting losses in its U.S. operations.

The answer came at the end of May, when DHL senior executives announced major changes for DHL Express in the United States. At a press conference held in Bonn, Germany, company officials acknowledged that restructuring was necessary to stem "unacceptable losses," but dismissed speculation that Deutsche Post might pull out of the U.S. market. "We have a comprehensive and radical plan to reduce losses, but we want to maintain a strong presence in the U.S. for our U.S. and global customers," said Deutsche Post World Net CEO Frank Appel, speaking through a translator. Deutsche Post is willing to accept losses in its U.S. business for some time, he added, because of the value of that business to the company's global network.

The most striking element of the plan is a proposed alliance with one-time nemesis UPS. UPS will begin providing airlift for all of DHL's domestic and international shipments within North America, bringing to an end DHL's relationship with ABX Air and ASTAR, the former Airborne Express and DHL Airways fleets. UPS is expected to begin providing airlift for DHL in the second half of this year.

DHL also said it would restructure its U.S. network, reducing the number of depots by more than 30 percent. The changes will result in the loss of about 1,500 jobs at DHL, about 4 percent of its U.S. workforce, and an undetermined number of jobs at ABX Air and ASTAR.

DHL Express executives said during the press conference that the restructuring would affect less than 4 percent of shipments and that the cutbacks would have little impact on service levels. At the event, John Mullen, CEO of DHL Express, said, "We've looked at our customers. For the vast majority, this will have little effect at all. We are comfortable that we have a workable plan to assuage any fear that our customers have that they will be overly affected." The biggest impact, he said, will be on small package deliveries to remote locations.

The changes will have a significant financial impact on the company, however. DHL is forecasting a pre-tax loss of about $1.3 billion in its U.S. business this year, but expects the restructuring will cut costs by $800 million in 2010 and another $1 billion in 2011. The cost of the restructuring itself is expected to approach $2 billion.

Mullen acknowledged that turning to UPS for airlift was necessary. "Our air network is uncompetitive," he said. He cited problems stemming from restrictions on foreign ownership, working with two vendors, an aging and inefficient fleet, and excess capacity as some of the reasons ABX Air and ASTAR could no longer compete.

The new arrangement will be a boon for UPS. Mullen said the deal, which had not been completed at the time of the press conference, was expected to be worth about $1 billion a year for 10 years.

DHL intends to implement most of the changes by the end of next year. The arrangement with UPS will be vetted by the U.S. Department of Justice to ensure it does not violate antitrust rules, but the DHL executives said they did not expect that to be a problem.