DHL to trim U.S. operations

German shipping giant Deutsche Post announced Monday that it would cut 9,500 jobs at its DHL Express operations in the United States.

Chief Executive Officer Frank Appel said DHL would close its U.S.-only domestic air and ground business by Jan. 30. International services to and from the United States will continue, however.

Analysts said that the move would directly benefit rivals such as United Parcel Service, the world’s largest package carrier, based in Sandy Springs, Ga.

At a news conference, Appel said that “this is not an easy decision because many people will be affected. This is absolutely necessary though.”

The Bonn-based company said that the new round of cuts come on top of 5,400 it already announced in the face of heavy losses at the unit, which has struggled amid growing competition from UPS and FedEx.

In May, Appel announced an initial restructuring of the U.S. operations. At the time, he said the company’s U.S. freight flights were to be taken over by UPS as part of a deal that could last up to 10 years and infuse up to $1 billion in annual revenue for UPS

On Monday, company officials said they were still hopeful a deal could be worked out with UPS by the end of the year.

However, terms will be affected by a change in volume from 1.2 million packages per day by air to 100,000.

“We still very much wish to pursue this UPS deal,” said John Mullen, DHL’s chief executive officer. “We’d like to conclude it by the end of the year.

“If that doesn’t happen, then we will of course have to make other arrangements,” he said.

Analysts said that even though UPS was set to benefit from the air freight agreement with DHL, it is likely to benefit more directly from the loss of a competitor in the marketplace.

“DHL’s U.S. customers still need to ship packages, and they will turn towards FedEx and UPS in the absence of DHL,” said Kim Caughey, investment analyst at Fort Pitt Capital Group in Pittsburgh. “UPS and FedEx should be able to pick up more market share after DHL scales back. There may also be some upward pricing pressure as DHL reduces its U.S. presence.”

Dan Ortwerth, a transportation analyst at Edward Jones in St. Louis, said DHL had underestimated the challenge from the start.

“Of course this is a bit of a near-term hit to UPS, due to the declining value of their agreement to provide intra-U.S. lift service to DHL,” he said. “However, in the long term we consider this a clear positive for both FedEx and UPS in terms of both package volume market share and profitability.”

David Ross, an analyst at Stifel Nicolaus & Co. in Baltimore, said he expects a 4 percent growth in volume for UPS.

“Margins should also be improved due to the greater volume through its fixed cost network and better pricing environment,” he said.

For its part, UPS officials said the company would continue to pursue a contract with DHL.

“From a competitive standpoint, UPS always has and will continue to compete vigorously in the marketplace against all competitors,” said spokesman Norman Black. “The current environment is no different.”

Appel said that, after February, DHL Express would employ only 3,000 to 4,000 workers, with the number of branches falling from 412 to 103, located in large metropolitan areas.

As a result, he said, annual operating costs at the U.S. Express unit would be slashed from $5.4 billion to less than $1 billion.

“We know there will be a strong public reaction (in the U.S.) but there is no alternative,” said Appel, adding that the company would give “fair and reasonable severance” to all employees.

Appel said Deutsche Post doesn’t plan to leave the U.S. market entirely despite facing tough competition.

“The United States remains a very important market and that’s why we will stay in that market,” he said.

Starting next year, he said, the company would focus exclusively on cross-border express shipping.

The company’s U.S. logistics unit, which includes Freight and Global Mail and employs some 25,000 people, would not be affected.

“If you are shipping internationally from the United States or to the United States, we will still have a service,” Mullen said. “But between U.S. cities we won’t have a service.”

Earlier this year, Deutsche Post said that growing competition, rising fuel prices, and other factors were weighing heavily on profits at its U.S. Express unit, making cutbacks inevitable.

On Monday, Appel said that Deutsche Post expected to spend an additional $1.9 billion on the restructuring, bringing the cost to $3.9 billion over two years. Most of that will be booked this year.

Because of the restructuring, Deutsche Post said the total losses at its U.S. Express business would reach $1.5 billion for the year.

Next year, the loss should not be more than $900 million.

Also Monday, Deutsche Post announced a third-quarter net profit of $1 billion, more than double the amount a year ago. Sales rose 4.1 percent to nearly $18 billion.

“We will continue our international business which is still profitable,” Appel said. “We are generating [$1.28] billion in profits outside the United States.”