FedEx, UPS Challenge May Slow Deutsche Post's U.S. Expansion
Deutsche Post AG's expansion in the $50.2 billion U.S. ground and air parcel delivery market may be slowed by a regulatory review sought by United Parcel Service Inc. and FedEx Corp., which dominate the U.S. market.
A U.S. judge today begins a hearing to determine whether Astar Air Cargo Inc., a Miami-based airline that flies for Deutsche Post's DHL unit, violates a law barring foreign control of a carrier. UPS and FedEx lobbied for the Transportation Department hearing, required by a law signed by President George W. Bush four months ago. The judge's decision, due by Dec. 1, may result in Deutsche Post having to change the way it does business in the U.S.
A win by UPS, the world's largest package-delivery company, and FedEx, the largest overnight-delivery company, would slow or raise costs for Deutsche Post's advance in the U.S., the biggest delivery market, said Brian Clancy, principal at MergeGlobal Inc., a freight-consulting firm in Arlington, Virginia.
“The regulatory challenge is the minor piece,'' Clancy said in an interview. “The other 90 percent of the challenge is the day-to-day blocking and tackling and competing with the 900-pound gorillas of FedEx and UPS.''
UPS controls 48 percent of the U.S. air-ground package and document delivery market, Clancy said. FedEx has 25 percent of the market based on revenue and Deutsche Post's DHL has 5 percent, he said. Other shares include the U.S. Postal Service with 14 percent and small competitors with a combined 8 percent, Clancy said.
Deutsche Post, Europe's largest postal service, plans to grow “as quickly as possible'' in the U.S., particularly in the expanding market of ground shipments, Wolfgang Pordzik, chief executive of Deutsche Post's U.S. unit, said in an interview. The company had 2002 sales of $3.70 billion in the Americas, or 9.0 percent of all sales.
`Not Helpful'
The German government owns 50 percent of Deutsche Post, and state-owned Kreditanstalt fuer Wiederaufbau bank owns 18.3 percent. The company had 2002 net income of 659 million euros ($691.4 million). UPS profit for 2002 was $2.42 billion, excluding one-time items, and FedEx income in the year ended May 31 was $830 million.
Deutsche Post's shares in Frankfurt have increased 45 percent this year, FedEx has climbed 22 percent and UPS is flat.
The hearing “is not helpful'' because UPS wants to use it to try to create uncertainty about DHL and take DHL customers and potential customers, Pordzik said. “It just makes life harder,'' he said. “We have got to spend resources to manage all this.''
UPS Claims
UPS during the hearing plans to show in documents from Astar and its suppliers that Deutsche Post controls the shipper by helping to pay for planes, maintenance and insurance, said UPS spokesman David Bolger. UPS wants the U.S. Department of Transportation to force Astar to scrap the financing arrangements and get backing separate from Deutsche Post, he said.
Bolger denied the company is using the proceeding to lure DHL customers.
Astar, which has an 11-year agreement to carry DHL's cargo and gets 90 percent of its revenue from the Deutsche Post unit, will show that Astar is controlled by U.S. citizens, said Ray Lutz, an Astar spokesman. Astar's purchase by John Dasburg, former chief executive of Burger King Corp., and two U.S. investors for $57 million on July 14 should have ended any questions about foreign control, he said. Dasburg is Astar's chief executive.
Before the sale, a Deutsche Post DHL unit owned 25 percent of Astar voting stock, and the company was known as DHL Airways.
The hearing's outcome will set a precedent for how other cargo shippers with foreign ties will be allowed to operate in the U.S., said David Marchick, a lawyer with Covington & Burling in Washington. ABX Air Inc., a Wilmington, Ohio-based airline that flies for DHL, also must meet U.S. ownership and other regulations to continue operating in its current form.
“The impact of the hearing on this issue is much larger than this relatively small transaction and this relatively small carrier,'' Marchick said of the Astar case.
Mineta Decision
ABX was spun off to former Airborne Inc. shareholders after Deutsche Post completed its $1.05 billion purchase of Airborne ground operations Aug. 15. ABX in 2002 got 98 percent of its operating revenue from Airborne, according to a proxy.
The administrative law judge holding today's hearing, Burton S. Kolko, must recommend by Dec. 1 whether Astar is foreign controlled, according to a department order. A deputy of Transportation Secretary Norman Mineta has the final say on whether Astar meets U.S. standards. The decision could be appealed to the U.S. Court of Appeals for the District of Columbia Circuit.
FedEx, UPS, Astar and Kolko can question witnesses at the hearing that may continue daily for a week or two, with a break next week for the U.S. Labor Day holiday. Scheduled witnesses include Dasburg and the other Astar owners.
UPS and FedEx are concerned Deutsche Post will use Astar to gain a foothold in the market and want to slow the German company's plans, said Doug Banez, managing consultant for Eclat Consulting in Arlington, Virginia.
`Impeding' Goal
“Impeding is certainly a goal here,'' Banez said. “They're worried that this startup airline will have a lot more power behind it than it might appear.''
Deutsche Post, which has more than 90 percent of the German market for first-class mail up to 100 grams, had 2002 revenues of 39.255 billion euros ($41.2 billion). That is more than the $31.3 billion in revenue UPS had last year and the $22.5 billion FedEx had in the year ending May 31.
UPS has argued that Deutsche Post uses mail revenues to subsidize the freight operation and compete unfairly in the U.S. UPS and FedEx also say that while they subcontract with third parties to carry packages in European countries such Germany, Deutsche Post has the competitive advantage through Astar of using a U.S. company it controls.
“We abide by the rules and we expect competitors to do the same,'' said Kristin Krause, a FedEx spokeswoman.
