DHL solves transpacific lift problems with Polar Air
In a deal bound to increase competition for the high-value trade moving by air between the United States and China, DHL last month signed a letter of intent to pay USD150 million for a 49 per cent stake in pure freight operator Polar Air Cargo.
The deal, which will give DHL 25 per cent voting rights in the company owned by New York-listed Atlas Air Worldwide Holdings, also includes a 20-year agreement expected to reserve for the giant German shipper up to 50 per cent of Polar's capacity across the Pacific. It is expected to be finalised within three months.
Although loath to publicly say so, DHL has been struggling lately to find enough scheduled transpacific lift at the right times from Asia to the US. With freight shipping demand in the region growing, the shortage looks set to grow more acute.
At present, most of the operator's transpacific business is carried in the belly of passenger flights by long-time partner Northwest Airlines under a commercial agreement set to expire mid-2008. The US carrier has been a reliable supplier for DHL over the years but with exports from China booming, Asia's biggest express operator needs an alternative.
Plus, cargo companies such as DHL that depend on commercial uplift are being hit by the belt-tightening of debt-weary US airlines. Their recent reduction of service across the Pacific may have produced impressive passenger load factors of 81 per cent in the first nine months and returned some carriers to profitability but it has cut space in their aircrafts' bellies to move cargo.
With the Polar buy, DHL will solve its space shortage.
From summer 2008, the deal will give DHL access to at least six 100-tonne capacity Boeing 747-400s mostly flying to and from Shanghai via South Korea and Japan, as well as 12 flights a week to and from China's commercial heartland. In addition, it will be able to take advantage of Polar's four flights to and from Beijing which will launch in March when year three of the most recent Sino-US air service agreement begins.
DHL also has the option to lease capacity from Polar before the deal officially begins.
However, the deal's biggest merits probably lie behind the numbers. By becoming an owner, DHL can use its influence to tweak the timing and scope of Polar's network to the demands of the express industry, an option not open to it under the present agreement with Northwest, whose schedules and destinations are dictated by its passenger business.
Passengers prefer to arrive or depart during the day, whereas express products tend to be transported at night to reach their destinations for the next business day.
What does all this mean for Hong Kong where DHL has committed HKD1.6 billion to build its central Asia hub at the Chek Lap Kok airport and where it is has a 40 per cent stake in all-cargo carrier Air Hong Kong?
The short answer is, not much.
Its Air Hong Kong venture, in which Cathay Pacific Airways is the majority shareholder, sees most of its business from the intra-Asia trades; the small portion that is Europe-related generally moves through Singapore, where it links with the freighter network of partner Lufthansa.
The impact of the Polar deal mostly will be felt at DHL's facilities in Shanghai and Beijing as well as at Polar's hub in Seoul. That is not to say DHL's enhanced network in North Asia will siphon away trade that would have been destined for Hong Kong.
Asia's biggest express operator expects the trade volume at its Hong Kong hub to surpass 240,000 tonnes this year and to expand about 17 per cent again next year.
While it may mean little in the short term for Hong Kong, it will hit boardrooms in Memphis and Atlanta, where rivals United Parcel Service and Federal Express will be compelled to mount a competitive response.
