DHL CEO recommends productive cooperation with the private sector in the US

DHL CEO in written testimony to the House Government Reform Committee Task Force on the Postal Service said that "the Commission recommended that the Postal Service focus on its core strengths, particularly the first and last mile of its mail delivery stream, but, in other areas where Postal Service functions can be better and more efficiently performed by private sector companies, the Postal Service should outsource to the private sector. Simply put, outsourcing, or worksharing as it is frequently called, substitutes lower cost private sector resources for the more expensive resources that would be provided by the Postal Service, while also affording customers competitive postal network access. This not only creates a mutual benefit for the Postal Service and its private sector partners, but also improves the quality of service to the customer. The Postal Service should be given the necessary incentives to further develop such productive cooperation with the private sector.

Good afternoon, Chairman McHugh and members of the Special Panel. My name
is John Fellows and I am the Chairman and Chief Executive Officer of DHL Worldwide Express. First of all, I would like to thank you for the opportunity to testify today and to recognize Chairman McHugh and other members of the Panel for your leadership on the many complex and sometimes contentious issues affecting the future of the U.S. Postal Service.

DHL: Who We Are.

Please allow me to preface my remarks with some basic information about our
company. DHL Worldwide Express, Incorporated (DHLWE) is a U.S. company,
headquartered in Plantation, Florida, that operates the DHL express delivery network in the United States. Our parent company, DHL International, is Belgium-based and owned by Deutsche Post World Net (DPWN), a publicly-traded German corporation that, among other things, operates Germany’s national postal service.

DHL, which was founded in 1969 by a group of American entrepreneurs, has
been a pioneer of international air express delivery service and today is a global industry leader. The DHL global network serves more than one million customers located in more than 220 countries and territories worldwide, handling 160 million shipments each
year, of which more than 31 million are carried to or from the United States. DHLWE employs [more than 38,000] Americans across all 50 states and accounts for the jobs of thousands more who work for other U.S. companies that provide support services for the DHL network in the United States. For example, although DHLWE operates its own ground services, we contract for all of our airlift in the United States from air carriers licensed by the Department of Transportation, including ASTAR Air Cargo and ABX Air.

This is an exciting time for DHLWE. Just last year, the Company acquired the
ground assets of Airborne, Incorporated, thereby substantially expanding the scope of our U.S. network and establishing ourselves as the third largest express delivery service provider in the United States. Although our market share remains far smaller than those of Federal Express and UPS, we see exciting opportunities for growth due to our enhanced ability to offer U.S. shippers an attractive and viable competitive alternative.

We also have ambitious plans to develop our logistics business, which is further
increasing our competitiveness by enabling us to offer customers an integrated package of express delivery and inventory management services.

The Postal Service Should Focus on Its Strengths.
All businesses that function in the courier, express, and postal markets today face significant challenges, not only from each other but also from alternative methods of communicating and doing business. In this respect, the Postal Service is no different from any other competitor. The Postal Service has a unique asset, however, its universal delivery network — a network that is unparalleled in terms of its geographical scope, frequency of delivery, and number of delivery points — but also has evident limitations.

According to both the President’s Commission and the General Accounting Office, the Postal Service’s business model is outdated, its organizational structure too inflexible, and its costs are excessive. The key challenge for the Postal Service, as well as law and policy makers, is to determine what changes are necessary to preserve a universal delivery network that is efficient and beneficial to consumers.

In fact, the American postal system can viewed as a network of services
supported by a wide variety of functions, of which delivery is merely one. Mail
collection, processing, and transportation are other essential elements. Not surprisingly, the Postal Service performs some of these functions better than others. The Commission recommended that the Postal Service focus on its core strengths, particularly the first and last mile of its mail delivery stream, but, in other areas where Postal Service functions can be better and more efficiently performed by private sector companies, the Postal Service should outsource to the private sector. Simply put, outsourcing, or worksharing
as it is frequently called, substitutes lower cost private sector resources for the more expensive resources that would be provided by the Postal Service, while also affording customers competitive postal network access. This not only creates a mutual benefit for the Postal Service and its private sector partners, but also improves the quality of service to the customer. The Postal Service should be given the necessary incentives to further develop such productive cooperation with the private sector.

DHL is Both a Competitor and a Partner of the Postal Service.
DHL is well positioned to offer a distinct perspective on these issues because we are both a competitor and a strategic partner of the Postal Service. That competition occurs primarily in the market for domestic express parcel delivery services. DHL, however, through Airborne Express, also has partnered with the Postal Service to create the innovative and successful Airborne@Home program, under which DHL/Airborne acts as an expeditor, picking up large volumes of parcels from major shippers, then moving these parcels through our air and ground linehaul network and delivering it to the local post office located closest to the consignee. From there, the Postal Service then delivers the parcel the “last mile” to the customer’s residence. As part of the Airborne@Home program, we have integrated our world-class tracking system with the Postal Service’s Delivery Confirmation offering to provide door-to-door tracking throughout the package delivery process. We have a number of variations of the service, but our standard offering provides two-to-four-day, door-to-door final delivery to residences. Airborne@Home competes with 1-6 day ground delivery offerings, but offers quicker delivery for the price. It’s a program that benefits the Postal Service, DHL/Airborne, and our customers.
DHL also has a separate arrangement with the Postal Service whereby DHL
provides air linehaul transportation in support of the Postal Service’s Global Express Guaranteed service for deliveries outside the United States. DHL and Airborne, however, are not the only express delivery companies to have formed partnerships with the Postal Service:

· UPS has followed Airborne’s lead by reaching a similar agreement with the
Postal Service in support of the UPS Basic service, which essentially replicates
the Airborne@home model; and
· Federal Express has an alliance with the Postal Service to provide air linehaul transportation of Postal Service shipments; as part of that alliance, FedEx has been allowed to install its drop boxes at thousands of post offices throughout the United States.

These cooperative relationships enable the Postal Service to enhance its own
network and services by accessing the networks of private sector express delivery providers, and vice versa. It’s also worth noting that the Postal Service’s cooperation with the private sector is not limited to express delivery companies. For example, the Postal Service is establishing relationships with major U.S. retailers in an effort to market its products through locations other than post offices, such as grocery stores. The
Commission’s report recommended that the Postal Service expand these partnerships as a way to reduce costs and improve customer service.
The emergence of this dynamic marketplace, with its multi-faceted forms of
competition and cooperation between the public and private sectors, suggests a number of conclusions:
· First, the Postal Service’s universal delivery network must be preserved and made more efficient.
· Second, it simply is unrealistic (and not even necessarily desirable) for privatesector express delivery companies to expect Congress somehow to quarantine the Postal Service and the monopoly mail sector from the competitive marketplace in which we operate; but,
· Third, the Postal Service should focus on its core strengths, which the
Commission has identified as the first and last mile of its mail delivery stream,
while outsourcing to private sector companies when they can perform Postal
Service functions more efficiently.
The Report of the President’s Commission and the Support of the
Administration Provide New Impetus for Change.

DHLWE applauds and strongly supports the efforts of this Congress and the Bush
Administration to confront the fundamental challenges facing the Postal Service. We regard the report of the President’s Commission as an important event that has provided new impetus for a fresh approach and we welcome Congress’s vigorous response to the report, as exemplified by the work of this Special Panel. DHLWE fully recognizes the importance of universal postal service to U.S. businesses and residents, and to the U.S. economy in general. We also are aware of the serious problems confronting the Postal Service today and the need for the Postal Service to become more efficient while
preserving (and, as necessary, adapting) universal service to meet the demands of a highly dynamic economy and operating environment. The Commission’s report offers a thoughtful critique and some recommendations, but also leaves many issues unresolved and open for further discussion and debate.
In response to the Commission’s report, the President has expressed support for
postal reform, but the Administration, in the words of Treasury Under Secretary
Roseboro when he testified before this Panel on January 28, has chosen not to be “overly prescriptive.” Instead, the Administration has offered five general principles to guide the congressional debate, emphasizing that reform should focus on enabling the Postal Service to:
· implement best commercial and business practices;
· enhance the transparency of its operations and performance;
· achieve greater operating flexibility;
· become more accountable; and
· be self-financing.

These are all laudable goals that DHLWE supports, and which serve to highlight the challenges that must be overcome if real change in the postal status quo is to be achieved.

Key Elements of Postal Regulation.
From the private-sector, express delivery service provider perspective, ours is
truly a global business, and the reality is that, over time, competition is increasingly being conducted on a global basis. As the expanse of the competitive playing field grows ever larger, more global, and less segmented by national boundaries, and as public-sector postal service participation in the private sector increases, it is important to ensure that competition from postal services does not distort that playing field. As a general rule,
DHLWE strongly advocates a free market approach to competition in preference to
intrusive government regulation. The ability of a wholly government-owned and
operated postal monopoly to compete in the private sector, however, must be predicated on reasonable, independent regulation that can ensure a level playing field and a properly structured market. In other words, the Postal Service should be allowed to compete, but subject to appropriate legal and regulatory safeguards to protect competition. Such regulation should incorporate the following elements:
· First, as the Commission recommended, the scope of the Postal Service’s
monopoly should be established by an independent regulatory authority, not by
the Postal Service itself, and should be drawn narrowly.
· Second, as I have noted, in order to ensure the long-term viability of a universal delivery network, the Postal Service should follow the Commission’s
recommendation by focusing on its core business of delivering the mail, while

outsourcing to the private sector related activities that can be performed more
efficiently by others.
· Third, the Postal Service should be required to operate any competitive activities under a separate business entity and to apply transparent accounting principles to all of its activities, including accounting for its competitive activities separately from its monopoly activities. Such accounting should include an empirically precise method of defining postal costs and properly allocating those costs between monopoly and competitive activities.
· Fourth, the Postal Service should be subject to the antitrust laws and other
competition-related and consumer protection laws. DHLWE believes that such
laws, if applied to the Postal Service and properly enforced, can provide sufficient safeguards for competition.

The Lessons of Postal Reform in Other Countries May Be Instructive.
In assessing how best to implement these fundamental priorities, the experience
of other countries that have already undertaken comprehensive postal reform may be instructive. For example, the European Union and individual member states have issued directives implementing far-reaching changes that are effectively reinventing the ways in which universal postal service may be preserved and improved in the future. These include:
· Requiring each EU Member State to limit the scope of its monopoly postal sector;
· Implementing a phased transition toward eliminating postal monopolies
altogether;
· Establishing strong and independent regulatory authorities that, among other
things, prohibit postal services from competing unfairly with private-sector
companies;
· Ensuring competitors reasonably priced access to postal networks; and
· Ensuring that markets for express delivery services are open to competition, not just from EU companies, but from all comers.
The process of establishing a consensus in support of these objectives and
implementing them has been difficult and imperfect, particularly in terms of overcoming the long tradition of government-owned postal administrations in Europe and the additional complexities of creating uniform rules and standards that transcend national boundaries. Yet, despite these and other obstacles, Europe is now moving in the right direction.
This, however, is not to suggest that the EU experience necessarily should be
regarded as a model for U.S. postal reform or that there should be a “one size fits all” approach—merely that other countries are making progress toward achieving the compatible goals of enabling postal services to be more efficient and self-sustaining, while preserving universal postal service.

Thank you for the opportunity to appear before you here today. I will be happy to answer any questions you may have.