US examines proposed DHL-UPS deal

The US state of Ohio is beginning its examination of whether cargo delivery company DHL’s proposal to hire United Parcel Service to handle its US air package transport would violate local antitrust laws.

Ohio Attorney General Nancy H. Rogers says that she has asked DHL, its owner Deutsche Post and UPS to preserve all records related to the planning and negotiation of the deal.

Rogers, in a letter to the companies that she publicly released, said she may undertake an investigation of whether a DHL-UPS deal would reduce market competition.

DHL and UPS ageed in May to develop a contract whereby UPS will provide air uplift for DHL Express US domestic and international shipments within North America (the US, Canada and Mexico).

A final contract is anticipated later this year.

The agreement, when finalised, would probably extend for a period of ten years and produce up to $1 billion in additional annual revenue for UPS.

The company says it would begin phasing in a limited amount of volume in 2008 with ramp up in 2009.

The agreement would not involve the collection or delivery of DHL packages to their customers, only the transport of packages, primarily between airports, in North America.

As such, the work will be similar to that currently performed by UPS for the US Postal Service. UPS will be able to handle much of the anticipated new volume in its existing air network, although additional capacity will be added at the beginning of 2009, when the total amount of capacity needed will be determined.

However, UPS is currently scheduled to take delivery of seven new aircraft this year and another five next year. The company is also in the process of a $1 billion expansion of its Worldport® air hub in Louisville, Kentucky.

The arrangement with UPS is part of a broader US restructuring announced recently by Deutsche Post World Net, which involves eliminating excess capacity in its US Express network and redesigning its ground linehaul network.

The move is expected to result in annualised cost savings in US Express of about $1 billion, improving underlying EBIT by around $800 million in 2010 and around $1 billion in 2011.

DHL will reduce its infrastructure network capacity by approximately 30% by consolidating and closing smaller sorting facilities into modernised, larger stations; rationalising pickup and delivery routes by 17%, including new courier routing plans; rationalising its ground linehaul network by 18% through improved capacity utilisation and footprint reductions in some remote areas; and the aforementioned contract with UPS.

Ohio officials estimate that DHL’s cost-cutting planwithin the United States will wipe out an estimated 6,000 jobs at DHL’s Wilmington air freight hub, a major regional employer.

That is because the cargo flying that ABX Air and ASTAR Air Cargo do for DHL from Wilmington would no longer be needed, since UPS has its own sorting and air transport network elsewhere.

DHL and UPS both will cooperate with Ohio’s review, spokespeople for the companies say.

DHL, says however, that any deal with UPS would be a customer-vendor arrangement which doesn’t require any government regulatory approval.

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