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UPDATED: 9:56 a.m. May 28, 2008
UPS could see windfall in DHL deal

STAFF REPORT
Published on: 05/28/08

UPS said it could see as much as a $1 billion annual revenue increase from a new deal to handle domestic air shipment of express and international packages for rival shipper DHL, which is restructuring U.S. operations.

In a press release Wednesday morning, UPS said it expects to ink a deal later this year that could extend for 10 years.

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Sandy Springs-based UPS said it would provide only air shipment services for DHL between airports in North America. It would not pick up or deliver any DHL packages. UPS said it has a similar deal already with the U.S. Postal Service.

"We want to emphasize that this would be a relatively straightforward air lift agreement and that UPS and DHL will continue to compete in the marketplace under their own brands," said David Abney, UPS's chief operating officer.

UPS said its existing air network will handle much of the new volume, but more capacity will be added in 2009. UPS is already scheduled to take delivery of seven new aircraft this year and five in 2009, and it is expanding its air hub in Louisville, Ky.

The arrangement with UPS is part of a broader U.S. restructuring announced Wednesday by DHL parent Deutsche Post, of Germany.

Despite heavy investment and acquisitions in recent years, DHL has failed to make the inroads in the U.S. market that it hoped for.

DHL said it will close or consolidate smaller sorting facilities in the United States, reconfigure pickup and delivery routes and cut overhead and administrative costs.

But it said the overall impact on service levels will be "minimal."

"The restructuring action in no way diminishes DHL's commitment to retaining a significant presence in the U.S. market, which is key to DHL's global network," the company said.

Standard & Poor's, the debt rating agency, reiterated a "buy" opinion on UPS stock.

"We think this potential deal, which could provide a $1.0 billion revenue stream to UPS over ten years, shows that UPS and FedEx are handily beating DHL in the U.S. We also think the agreement could lead to a larger alliance, should DHL decide to exit its U.S. business," S&P said in a note to clients.

DHL has long been a power overseas, but its U.S. market share in air express remains below 10 percent, and is around 2 percent for ground services, Dow Jones newswires reported, despite the presence in major cities of its distinctive red and yellow delivery trucks. While speculation since the start of the year has swirled around a possible sale of the U.S. express unit to FedEx or UPS, antitrust issues would make such a move tricky, according to analysts.

Industry insiders have expected Deutsche Post to stop short of selling or closing the U.S. unit in favor of shrinking its footprint and using partnerships.

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