DHL's exit from U.S. domestic market could push rates up

The decision by DHL Express to pull out of the U.S. domestic express delivery market will put 1.1 million daily shipments up for grabs. It's also likely to lead to higher rates for U.S. delivery services, as the low-priced competitor departs from the world's largest market, analysts say.

Parent Deutsche Post World Net announced Nov. 10 that DHL's U.S. air and ground services would be terminated by Jan. 30, 2009. All of the express carrier's 18 U.S. ground hubs and about 80 percent of its U.S. stations will close.

DHL will continue to offer international service to and from the United States, maintaining a network of 103 service centers as well as local ground services to shuttle air freight from the destination airport to end customers. The company currently is in talks with rival UPS Inc. to fly DHL's shipments within the United States.

DHL Express had been operating more than 20,000 delivery and linehaul vehicles, plus 450 ground hubs, service centers, and other facilities in the United States. By the time of the Nov. 10 announcement, the company had already dismissed more than 5,000 employees and had begun shutting down some of its stations. Executives said DHL Express would lay off another 9,500 people but would retain between 3,000 and 4,000 employees to serve international customers.

DHL handles 1.2 million daily shipments that touch U.S. soil. Of that, 1.1 million are strictly domestic. With DHL abandoning its domestic U.S. business, rivals such as UPS, FedEx Corp., the U.S. Postal Service, and expedited truckers are gearing up for market-share gains.

Thomas R.Wadewitz, analyst for JPMorgan Chase, estimates that based on 2007 figures, DHL generated about $2.8 billion in domestic air express revenue and controlled 12 percent of the overnight air delivery market. In a Nov. 10 note to clients,Wadewitz said the DHL announcement was a "significant long-term positive for FedEx and UPS" because DHL's exit "provides share gain opportunity and a better pricing outlook."

Edward Wolfe, head of a New York City transport-investment firm that bears his name, has said that he expects UPS and FedEx to divide up about 80 percent of DHL's U.S. domestic air business, 70 percent of its ground business, and 5 percent of its U.S. import and export traffic. Wolfe has estimated DHL's current annual U.S. domestic revenue at $2.6 billion, which includes $350 million in ground revenue. He also estimated DHL's remaining U.S. import and export revenue to be about $1.2 billion.

Wolfe says he expects UPS and FedEx to "benefit materially over the long term" from DHL's exit and that—assuming DHL's pricing formulas stay intact—the carrier's announcement bodes well for both rivals, even at current depressed pricing levels. Wolfe says his models do not take the possibility of firmer pricing into account.

DHL's U.S. operations, established in 2003 following the acquisition of Airborne Express, have lost an aggregate $3 billion in the past five years. They have also been a drag on the rest of the DHL Express global network, which generally has performed well. DHL Express reported that, excluding the United States, earnings before interest and taxes rose 11 percent year over year in the first nine months of 2008. Revenues outside of the United States grew 7.3 percent, and shipment volumes rose by more than 4 percent, Deutsche Post reported.

Underscoring the plight of the U.S. operations, DHL Express recorded a charge of $109 million through September as a cost of restructuring its U.S. business.