DHL in the hot seat

A year from now, DHL's decision to turn over its U.S. air linehauls to UPS—a move that will likely lead to the closing of DHL's Wilmington, Ohio, air hub and the loss of some 8,000 jobs—may be seen as a tough but necessary business decision.

But this is 2008, a presidential election year. And Ohio is a key battleground state. So it's not surprising that DHL's decision has become fodder for congressional hearings and a piñata for Democratic operatives and organized labor looking to tie the issue to Sen. John McCain (R-Ariz.), the GOP's presidential candidate. There is a connection: McCain's campaign manager, Rick Davis, represented DHL parent Deutsche Post World Net in his lobbying days and played a key role in helping DHL acquire the Wilmington Air Park in 2003.

But the political backdraft doesn't square with the facts. DHL took over the Wilmington hub from the former Airborne Express, which operated it for years. By 2003, Airborne was struggling financially and might not have survived if DHL hadn't bought the ailing express carrier for $1.05 billion.

The Airborne acquisition—and control of the Wilmington air hub—was part of Deutsche Post's strategy to capture a bigger share of the U.S. express delivery market. But DHL could not compete with behemoths FedEx and UPS. DHL says intolerably high operating costs have resulted in losses of about $5 million a day, much of that from uncompetitive flying arrangements with vendors ASTAR and ABX Air. Operational missteps, notably a poorly executed 2005 integration of the Wilmington hub and the original DHL facility in Cincinnati, have not helped matters. The integration, which was completed shortly before the peak holiday shipping season, led to major service problems and lost business.

Beset by rising costs, underutilized assets, tough competition, and a weak economy, DHL needed to revamp its operational structure, which led to the discussions with UPS. The new arrangement is expected to be phased in starting early next year.

The DHL-UPS deal is similar to the U.S. Postal Service's arrangements with FedEx and UPS to fly its mail. UPS will fly DHL's shipments from airport to airport, and DHL will handle the pickups and deliveries. Because UPS has a hub in nearby Louisville, Ky., the Wilmington air center has become redundant.

The takeaway isn't the political fallout, but rather that DHL is continuing its efforts to extricate itself from a five-year nightmare. In House testimony on Sept. 9, John Mullen, CEO of DHL Express, outlined in painful detail the problems the company has faced since September 2003. Some were of DHL's own making; others were not. Yet the message from Mullen was clear: Regardless of who dug the hole, DHL will do what it takes to climb out of it.