Deutsche Post expands its global reach as a logistics/express integrator
What does $6 billion buy? If you are Klaus Zumwinkel, the visionary management board chairman of Deutsche Post AG, which runs the German post office, it buys you entry into the global express delivery/logistics field at a time when your monopoly profits from Germany's mail delivery business are coming under increasing pressure from government-driven liberalization and tariff regulation. But a scat at the table is not a license to print money, as Zumwinkel is learning.
Since 1997, Deutsche Post has embarked on a 40-company buying spree, acquiring not only such name brands as Switzerland's Danzas, the DHL family and, most recently, the ground-based express delivery operations of Airborne Inc., but also dozens of smaller freight forwarders and delivery services including the European operations of Dutch firm Nedlloyd, Sweden's ASG, US-based Air Express International and Canada's Loomis express company. Through DHL, it even has become a 40% owner in Air Hong Kong, the cargo airline formerly 100% owned by Cathay Pacific Airways. Today, more than 50% of annual turnover is generated by the company's express and logistics businesses.
Yet, although mail delivery services represented only 30% of 2002 revenues of 39.2 billion (euro), they provided more than 68% of the 2.4 billion (euro) in profits from operations, according to the company's annual report. Meanwhile, the express delivery business, which means primarily Brussels-based DHL International Ltd. and its US sister, DHL Worldwide Express Inc., provided turnover of 12.5 billion (euro) but paltry EBITDA of 243 million (euro), while the Danzas-led logistics business, with 2002 revenues of 9.15 billion (euro), managed just 224 (euro) in profits from operations.
It's numbers like those, and the challenges posed by the $1.05 billion Airborne deal completed in August, that caused Moody's Investors Services to attach a "negative ratings outlook" to Deutsche Post at the end of September. According to Moody's, "The main challenges facing Deutsche Post … include turning around DHL's current loss-making US domestic operations at the same time as integrating Airborne, and leveraging Danzas' extensive global logistics network to improve its current low profitability through increased utilization and a strengthening of its position in higher-value-added contract logistics."
Still, it is far too early to push the panic button. Despite expressing caution about "weak underlying credit metrics," Moody's confirmed its Al investment-grade rating on Deutsche Post's long-term unsecured debt and affirmed a Prime-1 rating on the company's short-term borrowings. And while the ratings agency thinks the Airborne deal represents "material risk," it also believes it will give Deutsche Post's DHL subsidiary "the scale and scope" to strengthen it in the huge US expedited-delivery market.
Besides, Deutsche Post didn't get where it is today by playing it safe. Since Germany's postal/telecommunications reform law was enacted in 1989, the company has evolved from a debt-ridden public agency into a global one-stop shop for postal, freight, express, logistics and financial services under the trade name of Deutsche Post World Net.
The transformation shifted into high gear with an initial public offering of 31% of the company three years ago, followed last April by restructuring and bundling of key divisions under the "new DPWN brand architecture." The German government still owns 50% of DPWN and state-owned banking institution KfW holds 18.3 but the government has made it clear that it will complete the privatization process when the timing is right.
Last January, DPWN took a major step toward integrating its prime holdings via the merger of the networks of DHL Worldwide Express with Deutsche Post Euro Express and Danzas–renamed DHL Danzas Air & Ocean–under the DHL brand name. On the organizational level, it is in the complex process this year of combining the administrative centers of Deutsche Post Euro Express in Bonn, Danzas in Basel and DHL at the latter's Brussels location.
The complete takeover in 2002 of DHL, which began with a 22.5% stake in 1998, marked a major milestone in DPWN's expansive corporate strategy, explains Zumwinkel, "laying the foundation for our groupwide value-creation program, STAR, which also began in 2002," and defining long-term corporate strategy. "With STAR we will leverage our pole position on international markets to transform DPWN into the number-one provider. In the course of this initiative, 'value creation' and 'integration' will become maxims for all functions, all organizational units, all locations and all employees." Already established are groupwide guidelines and structures for procurement management and "positive cost effects" on IT, the company says.
Zumwinkel told shareholders at the annual meeting in March that the program entails both operating and financial goals. "We want to grow our earnings 40% by 2005 and record an EBITA of 3.1 billion (euro) in 2005," up from 2.4 billion (euro) last year and a forecast for 2.8 billion (euro) in 2003, he said.
Key to that strategy is building DPWN's presence in the $50 billion US parcel and express delivery market, which is dominated by FedEx and UPS with an estimated 79% share, according to Moody's. DPWN estimates its own share through its DHL Worldwide Express freight forwarder at 1%. "We have the structural problem (in the US) that we fly but have nothing on the ground," Zumwinkel told shareholders.
That gap was the rationale behind DHL's daring decision to acquire the nonairline assets of Airborne earlier this year. Although Airborne's presence in the market for ground services is tiny–2 according to DHL–it is a start. And DHL plans to use its global network and 18% share of the US international air express market to leverage its presence in the estimated $30 billion ground component.
As part of the deal, DHL has entered into a lift purchase agreement with ABX Air, the air arm of Airborne that was spun off as a standalone entity in the transaction and has 116 aircraft. "It's a standard ACMI contract for overnight air services in the US for handling the former Airborne (now DHL) overnight express volume," DHL's Brussels-based CEO, Uwe Doerken, tells ATW. Effective Sept. 2, pickup and delivery services previously handled by 169 of DHL's nationwide US service centers have transitioned to couriers servicing the Airborne delivery network. Says Doerken: "Combining the ground networks of DHL and Airborne means more choice, more value and more service for US businesses, many of which dislike being forced to deal with UPS and/or FedEx."
During the same period as the Air borne acquisition, DHL Airways, the US cargo airline affiliate in which DPWN held a minority stake, was sold to an investment group led by new DHL Airways Chairman and CEO John Dasburg for $57 million. Now renamed Astar Air Cargo, it also has entered into a new 11-year accord with DHL Worldwide Express to provide lift. Astar maintains a hub with a new $300 million sorting center at Cincinnati/Northern Kentucky International Airport only 50 mi. from ABX Air's hub operations in Wilmington, Ohio.
Astar's new name is intended in large part to create separation between itself and DHLWE, "reinforc(ing) the reality that Astar is not a corporate affiliate" and that it intends to pursue other business opportunities as well. That in turn, it is hoped, will repel once and for all efforts by UPS and FedEx to have the former DHL Airways found to be I not in compliance with US citizenship laws. The US Dept. of Transportation was conducting a hearing into the matter at this writing. FedEx and UPS also have challenged the deal between DHLWE and ABX Air, claiming that ABX will be so reliant on DHLWE for the vast majority of its business that it effectively will be controlled by the forwarder, violating the same citizenship law that limits foreign ownership of a US airline to 25%.
DHL argues that its relationship with DHL Airways was similar to those that UPS and FedEx have with carriers abroad where they subcontract to locally owned airlines. Each often subcontracts exclusively to one such airline in a particular country. Doerken also points out that DHL only operates its own flights absent an alternative. "For example, network carriers don't operate intra-European overnight routes. Where DHL creates its own lift on intercontinental routes, it often uses wet-leased capacity: Transatlantic routes from Brussels and the UK are operated by Gemini Air Cargo and Northwest Airlines provides our transpacific lift."
For their part, FedEx and UPS object strenuously to what they allege is government controlled DPWN's use of profits from its postal business to subsidize DHL's activities in the expedited delivery segment. It is a charge DPWN hotly denies, although opponents cite a decision by the European Commission last year that in the early 1990s Deutsche Post was the recipient of illegal state aid that effectively cross-subsidized its parcel delivery business. The EC ruled that DP must repay to the German government a total of 907 million (euro) in settlement of the decision, although the company is appealing.
In a "white paper" released to coincide with the sale of DHL Airways and the purchase of Airborne's ground network, DPWN stated that "none of (its) four divisions receives financial backing from the German government" and pointed out that all of the activities cited by the EC occurred before 2000, "when DPWN's express/parcel delivery line of business was set up as a freestanding corporate division."
Doerken claims, "DHL does not have a dominant position in any country, including Germany, comparable to what they have in the US, where key markets are extremely concentrated. Letter mail is over 90% (controlled by) USPS; the parcel market more than 70% UPS; express market over 60% FedEx. Such shares are unheard of in Europe: The largest operator doesn't have more than 25%" in any given market.
The company plans to consolidate its corporate headquarters in the US over the next 12-36 months. Doerken has appointed Carl Donaway, formerly chairman and CEO of Airborne, as executive chairman of DHL Holdings (USA) Inc. while John Fellows will remain CEO.
Even without the potential political pitfalls in the US market, Doerken has his hands full with the task of integrating the multitude of different but sympathetic business lines. It is still early days and it remains to be seen if the vision of a "new DHL" that successfully exploits the synergies between freight forwarding and express services is commercially and organizationally workable. There will be doubters and naysayers, not only among competitors.
Obviously Doerken is not among them. "The new DHL presents a fantastic opportunity," he maintains, "having not only the broadest geographic portfolio of any company in our industry (covering more than 220 countries and territories) but also the broadest service portfolio, from shipping containers to all (types of) freight-forwarding, to trucking and express delivery, up to the fastest transportation modes. It includes all kinds of added value–warehousing, supply-chain management–giving us a unique opportunity to offer customers a comprehensive basket of integrated services."
However, he concedes, "The current economic slump certainly doesn't help revenue development, but nevertheless we are coping quite successfully. Significant productivity enhancement has kept us in line with overall market expectations on the group profit side, even though revenues have been below our original forecasts. We have to continuously demonstrate how well we integrate (the product palette). We have to excel in every single service aspect. There's no automatic guarantee a customer will buy from us just because we offer more."
About 75% of DHL's revenues are generated outside of Europe, where it is the market leader. Its international network links more than 120,000 destinations and employs 71,000 people, more than 10,000 of whom are based in the US.
The company claims to run the most elaborate logistics network in the Middle East, with primary hubs in Dubai and Bahrain with 2,000 employees. It was the first express and logistics company to operate in Iraq after economic sanctions were lifted. Up to six daily flights from Bahrain to Baghdad are serviced by a combination of chartered A300s, An-12s and 727s depending on volume. Trucking services to and within Iraq have been expanded.
In Europe, DHL operates its own fleet of 53 aircraft, mainly 757-200SFs and A300Fs, through two entities, DHL European Air Transport based in Brussels and DHL Air based at East Midlands Airport in the UK, according to spokesperson Ina Quilling.
Since April 2002, Lufthansa Cargo has been using DHL's intra-European overnight express network, replacing its own 737QCs with DHL's increased-capacity 757s. A total of 13 destinations are covered for LHC by the European DHL system, with blocked space bookable under LH flight numbers. Underlining the significance of air transport for the group, Deutsche Post AG appointed to a scat on its supervisory board former Lufthansa Chairman and CEO Jurgen Weber, who now chairs LH's supervisory board.
Aside from Europe and the US, Asia-Pacific is a prime business focus, with hubs in Bangkok, Singapore, Hong Kong, Tokyo and Sydney. China is perceived to succeed Japan as DHL's largest market in that region in three years. It is involved in a 50/50 express services joint venture with Sinotrans, China's biggest freight forwarder, in which it has a 5% shareholding. DHL plans to operate about 30 stations in China by year end.
Although considered unlikely by close observers, DPWN and DHL may end tip on the wrong side of a US DOT ruling that sets back plans for expansion there. A bigger risk is that in rushing into the brutally competitive US domestic market against well-capitalized and aggressive competitors, DPWN may be going a bridge too far. Still, with the German government steadily removing the barriers to competition in DPWN's home market, Zumwinkel and company clearly believe that the best defense is a good offense. And no one ever said this is a business for the faint of heart.
Deutsche Post
Revenue and Earnings
2002 Profit from
((euro) mil.) Revenue op. activities *
Mail 11,666 1,658
Express 12,489 243
Logistics 9,152 224
Financial Services 8,872 621
Total for Corporate
Divisions 42,179 2,746
Other/consolidation (2,924) (325)
Group 39,255 2,421
