DHL International could be the first company to truly combine express and traditional air cargo. Chief executive Uwe Dörken is charged with making it work
From loss-making utility to publicly quoted company - in the past eight years the rise of Deutsche Post, the German post office, has been phenomenal. Although still majority owned by the German government, Deutsche Post has emerged as a powerful international corporation. After having reached breakeven in 1995, it was out on the acquisition trail three years later, buying enough European parcel companies to create a region-wide network. Global freight forwarders Danzas and AEI were added in 1999 to create the world's largest forwarding business, as well as sundry European ground logistics companies.
Most important was the acquisition of DHL International, one of the world's big four express operators. Deutsche Post started buying into DHL in 1998 with a 22.5% share. Over the next four years it acquired all the remaining shares, including Lufthansa Cargo's 25% stake.
At the end of last October, it revealed the big plan behind the acquisitions. Under its "STAR value enhancement programme", Deutsche Post announced that all its freight purchases would be unified under DHL and led by DHL International chief executive Uwe Dörken.
By almost universal consent, opinion in the air cargo industry has it that Dörken's empire is so overarching that it can never be made to work. Gleeful parallels are drawn with other conglomerates that came unstuck. The way the new company has gobbled up brand names is also galling to traditionalists. AEI, a towering name in air cargo, disappears under the new structure. Although the Danzas brand survives in the DHL Danzas Air and Ocean forwarding operation, everyone expects that it too will disappear soon.
Dörken defends the branding decision, pointing out that DHL is by far the strongest name in the group globally. "It is not just an industrial brand but a front door one too," he says. "Industrial brands are much easier to change: a brand like DHL takes 30 years to build up and probably can't be repeated."
While the branding has grabbed headlines, most interesting to watch are the potential synergies between the freight forwarding and express sides of the new DHL. Until now, the new world of express has been seen as an opponent of the traditional world of air cargo. The new DHL, dubbed by some the world's first super integrator, could blur the boundaries.
One intriguing area is in network synergies and capacity buying. As the world's biggest forwarder, Danzas is already seeking to leverage its buying power with airlines. It also has the Starbroker project to explore the creation of its own freighter lift on routes not well-served by commercial carriers. Meanwhile, DHL is both a freighter operator and a major purchaser of airline capacity. What if the two joined forces?
The idea is not without precedent. DHL has for years sold spare capacity on its intra-European freighter network to forwarders, and more recently has started sharing some of its freighter routes out of its Cologne sub-hub with Lufthansa Cargo. In October, DHL also bought 30% - later upping its stake to 40% - of Cathay Pacific freighter subsidiary Air Hong Kong and is co-operating with that carrier to set up an intra-Asian freighter network. All of these operations depend on a mix of traditional palletised "heavy" air freight, and express parcels, considered to be an optimal combination for profitably filling freighter aircraft.
Renato Chiavi, chief operating officer of Danzas, admits both its and DHL's express operations buy space in a similar way, and says there may be scope to feed each other's networks. But he adds the needs of the two sides are not usually compatible. "Express is overnight and daily, while our freight tends to be focused on the weekends," he says. "Their capacity is mainly intra-European and now intra-Asian, while we want intercontinental capacity."
Dörken says express and freight forwarding are two different business models: "In express, you set up a fixed, guaranteed door-to-door product, and then sell that. In forwarding, you make to order; you buy capacity when you have sold the product to the customer."
Dörken also stresses that DHL only operates its own flights where there is no alternative. "For example, intra-European overnight routes do not exist on commercial airlines," he says. Where DHL creates its own lift on intercontinental routes, it often uses wet-leased capacity. So its two transatlantic routes from Brussels and the UK are operated by Gemini Air Cargo, and its transpacific lift is provided by Northwest Airlines.
If not air capacity, then where are the synergies? Joint use of truck networks in Europe is certainly one of them: this was identified in the October announcement as an early area for attention. But the idea (much derided in air cargo circles) that the express and forwarding arms of the new DHL might try to cross-sell to each other's customers is not on the table. Sales forces will remain separate for the foreseeable future.
That said, a small joint sales team is being created for large key customers, and Dörken hints that might be gradually extended. "There has to be a balance. To begin with, only a few customers will be interested in this overarching approach." he says.
The whole rationale of Deutsche Post's acquisitions would seem to be to create a "one-stop shop" that can provide an organisation's entire freight, express and logistics needs. "That is a rather distant vision, but in the more immediate future, we are seeing customers buying more services from fewer suppliers," says Dörken. "And you have to be a larger player to be even listed for the major tenders."
DHL has always been a pioneer into new markets. It was the first back into Bosnia and Afghanistan after their wars, and, back in the 1970s, the first of the big four express operators to reach Africa, Latin America and the Middle East. Ironically, however, one market where it is not a major player is the one where it began: the US domestic market.
Founded in 1969 in San Francisco, DHL's first shipments were documents to Hawaii. But while rivals FedEx and UPS grew into major domestic businesses before expanding overseas - they now control an estimated 80% of the US express market - DHL swiftly moved into other countries. DHL International, the company Deutsche Post has bought, was set up in Hong Kong in 1972.
DHL's US operations remained a separately owned entity until 2001 when DHL International took control of the ground portion, while the air operation, DHL Airways, was for regulatory reasons spun off as a separate entity. Deutsche Post has a 45% stake in the carrier, but only 25% of the voting rights.
That initially satisfied the US Department of Transportation (DoT) which in 2001 recognised DHL Airways as a US operator, and gave its ground operations a foreign forwarder licence. But UPS and FedEx were soon on the offensive, claiming Deutsche Post was using monopoly mail profits at home to subsidise US operations and held effective backroom control of DHL Airways - charges both firmly denied by Dörken.
The dispute, which has been rumbling on ever since, gained new intensity in March when Deutsche Post announced that it was to buy US express operator Airborne Express. Once again, the group proposes to split off the ground operations and make Airborne's domestic air operations a separate, US-owned company called ABX Air.
This has sparked renewed resistance from UPS and FedEx, while supporters in Congress recently added a clause obviously aimed at DHL to President Bush's $80 billion bill to pay for the war in Iraq. The clause states that a carrier can not be considered a US operator for military contract purposes if it earns more than 50% of its revenue from a foreign entity that was also a shareholder, or if that entity was owned by a foreign government. Despite opposition from US secretary of transportation Norman Mineta, the law passed, though in diluted form.
Dörken's response is forthright. Describing UPS and FedEx as "quasi-monopolistic bullies" and their opposition to DHL in recent years as "a grotesque attempt to shut down competition", he insists DHL International has been open with the DoT all along, and claims DHL International's relationship with DHL Airways is just another wet-leasing relationship like many others it has. "Even in markets where we could operate our own aircraft, we often prefer to use partners," he says. "Our relationship with DHL Airways is no different."
Deutsche Post insiders admit that UPS and FedEx will not give up their battle, however, and reports that Deutsche Post was considering selling its stake in DHL Airways may indicate a recognition of that fact in senior management circles.
If DHL does fight off these legal challenges, what are its market prospects in the fiercely competitive US express market? One recent trend has been a switch from overnight air to fast ground-based services, and this is one area in which Dörken admits DHL has no market share. Airborne has been developing ground services recently, but only has a market share of a few percent.
This seems a grim position, but Dörken refuses to be downcast. "In cross-border shipments we have 20% of the US market, and Airborne adds a bit to that. With Airborne we have 10% of the domestic overnight market. So we have strong defensible positions in two areas, and an emerging platform on the ground side. I am not saying it's going to be easy, but we're not going into this blind."
REPORT BY PETER CONWAY IN BRUSSELS
Source: Airline Business