UPS, FedEx in air war with DHL

The nation's two largest package carriers are trying to keep the world's largest package carrier out of the country.

United Parcel Service Inc. and FedEx Corp. filed separate petitions in August asking the U.S. Department of Transportation to review the ownership of DHL Airways. They suspect that DHL Airways Inc. is violating a federal law that restricts to 25 percent the foreign ownership of airlines operating within the United States.

The companies believe that DHL Airways is owned and controlled by Deutsche Post, the German postal monopoly that is 70 percent owned by the German government, but the ownership is disguised in a complex arrangement of subsidiaries.

"We are talking about the government of Germany competing against private individuals in the United States," said Norman Black, a spokesman for UPS. "Nothing more. Nothing less."

UPS (NYSE: UPS) of Atlanta and FedEx (NYSE: FDX) of Memphis, Tenn., fear that Deutsche Post will subsidize DHL Airways, allowing the airline to carry freight at rates lower than either UPS or FedEx can match, as part of a strategy to claim a share of the U.S. market.

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"All we want is a level playing field," said Sally Davenport, a spokesperson for FedEx.

Protecting market share

It's the second time in less than two years that the two companies have contested the right of DHL Airways to operate in the country. They filed petitions in January 2001 questioning the foreign ownership of DHL but the federal agency dismissed the petitions that May and issued DHL a certificate to operate.

The three companies are competing for control of the global package delivery industry. DHL already is the largest carrier in the world but it has to claim a share of the U.S. market to continue competing with the global expansion of UPS and FedEx, said George Hamlin, a senior vice president at Global Aviation Associates Ltd. of Washington, a commercial airlines consulting firm.

"UPS and FedEx want to make sure they aren't competing with their arms tied behind their backs," Hamlin said. "They want to be able to protect their marketplace."

DHL Airways denies that its ownership violates federal law and plans to respond to DOT by Sept. 6.

"We aren't surprised by the filings but we are confident in our citizenship status," said Joanne Smith, vice president of marketing for DHL Airways in Chicago. "This isn't the first time they have made an issue of this and we don't expect it will be the last."

Locally, DHL carried 2,913 metric tons of freight through Hartsfield Atlanta International Airport, less than 1 percent of the airport's total freight volume through the first six months of this year. FedEx carried 65,048 metric tons, or about 21 percent, and UPS carried 15,189 metric tons, about 5 percent, during the same period.

UPS and FedEx say they are suspicious of DHL's ownership because of inconsistencies they have found in DHL's filings with different government agencies and statements company executives have made to the press.

"Untangling the confusion and contradiction surrounding DHL Airways' ownership and control — whether or not that complexity is intended by DHL Airways to obfuscate its true ownership structure — is not a simple task," UPS wrote in its petition.

Determining Deutsche Post's role

According to the UPS filing, DHL Airways is either partially or wholly owned by DHL Holdings Inc., which provides about 99 percent of DHL Airways' business and pays for the company's fuel, landing fees, service expenses and the cost of loading and unloading the planes. The amount of ownership varies among the documents the company has filed with federal agencies from 45 percent to 100 percent.

DHL Holdings is a wholly-owned subsidiary of DHL International of Brussels. Deutsche Post owns 75 percent of DHL International and has announced plans to acquire 100 percent of the company, UPS claims in the filing.

"If Deutsche Post wholly owns DHL Airways' ultimate parent and if the Deutsche Post can 'cover' DHL Airways' losses in the U.S. with its profits, does that not put the Deutsche Post in control of DHL Airways?" the filing asks.

Smith defines DHL Airways' ownership by control of the company's voting stock. DHL Holdings Inc., a U.S. company owned by Deutsche Post, controls 25 percent of the voting stock in DHL Airways, the maximum allowed by federal law. The remaining 75 percent is controlled by equity shareholders who are U.S. citizens, Smith said.

"We have already been deemed a U.S. citizen by DOT," she said. "Nothing has changed since that ruling."

Smith called the allegations by UPS and FedEx "unsubstantiated" and "misstatements."

"We find their filings are completely without merit," she said.

DHL Airways is confident enough in its citizenship status to build a $200 million expansion of its U.S. hub at the Greater Cincinnati/Northern Kentucky International Airport in Cincinnati. The expansion is scheduled to open next July and will almost double the company's package processing capacity to 2.5 million pounds a day.

The construction is being paid for by DHL Worldwide Express Inc., another subsidiary of DHL International, and will be the largest hub in the company's global network.

"The U.S. is key to our global strategy," Smith said.

Despite almost simultaneous petitions from UPS and FedEx, the companies are rivals and aren't working together to stop DHL's expansion, spokespersons for both companies claim.

"You have two very concerned American companies," UPS's Black said. "It doesn't mean we are cooperating with each other."

DHL has accused both companies of trying to stop competition.

Black called that accusation "ludicrous and laughable."

"We are not afraid of competition," he said. "We didn't get where we are today by being afraid of competition."

The concerns of UPS and FedEx are supported by previous actions of Deutsche Post, Black said. In June 2001, the European Commission found Deutsche Post guilty of using profits from its postal monopoly to subsidize its parcel delivery service in Germany and fined the company 572 million euros ($561.1 million) plus interest that pushed the total to near 800 million euros ($784.8 million). Three months earlier, the commission had fined Deutsche Post 24 million euros ($23.5 million) for selling its package delivery service at a loss.

"If they are doing this in Europe, why are we to believe they won't do it here?" Black said. "We think there are some very serious issues here."