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Deutsche Post to Shrink U.S. Network, Shift Deliveries to UPS

By Jann Bettinga

May 28 (Bloomberg) -- Deutsche Post AG, Europe's biggest mail carrier, will shrink its U.S. network, fire workers and transfer some deliveries to United Parcel Service Inc. as it seeks to limit losses at its unprofitable DHL division.

The turnaround plan will cost Deutsche Post as much as $2 billion and generate cost savings of about $1 billion a year, the Bonn-based company said today in a statement. DHL will cut as many as 1,800 jobs in the U.S.

Deutsche Post bought DHL in 2002 and expanded U.S. operations with the purchase of Airborne Express in 2003. The express unit hasn't made a profit in the U.S. since then as it struggles to compete with UPS, based in Atlanta, and Memphis, Tennessee-based FedEx Corp. Deutsche Post said the U.S. business will continue losing money at least through 2011.

``DHL will be more selective in accepting business from a small number of scarcely populated areas and take advantage of capacity and cost reductions to grow a leaner and more focused ground business,'' the company said in the statement.

Deutsche Post shares dropped as much as 94 cents, or 4.4 percent, to 20.65 euros in German trading and were down 4 percent at 3:10 p.m. The stock has declined 12 percent this year.

UPS, the world's largest package delivery company, said it will forge a 10-year agreement with Deutsche Post that will give the U.S. company as much as $1 billion in additional revenue a year.

UPS rose $1.78, or 2.6 percent, to $70.18 at 9:35 a.m. in New York Stock Exchange composite trading. Earlier, the shares touched $70.27 for a 2.7 percent gain, the biggest intraday advance since March 24.

Deutsche Post Forecast

Deutsche Post cut its forecast for overall Ebit, or earnings before interest and taxes, by 100 million euros ($156 million) for 2008, citing reduced earnings in the express division. Group Ebit will be about 4.1 billion euros.

``The restructuring plan will lead to sustainable improvements in financial performance,'' the company said. The ``first positive effects'' will occur in 2009, it added.

Deutsche Post plans to cut infrastructure in the U.S., reducing capacity by about 30 percent by closing smaller sorting facilities and ending some routes. UPS will begin providing shipments for DHL later this year.

The U.S. express division will have an ``underlying Ebit loss'' of $1.3 billion this year, Deutsche Post said. The revamp will save an estimated $800 million in 2010 and $1 billion in 2011, the company added.

DHL Woes

Previous turnaround efforts at DHL have been hampered by delivery delays in 2005 at a new package-sorting hub in Wilmington, Ohio, as well as slowing economic growth this year. Deutsche Post scrapped a 2009 breakeven target for the U.S. division last year and wrote down the value of the unit by 594 million euros in the fourth quarter.

UPS cut its 2008 profit forecast in April and reported that first-quarter shipments fell because of a ``dramatic'' economic slowdown. FedEx, the second-largest U.S. package-shipping company, said May 9 that fourth-quarter profit will miss its forecast after surging fuel prices raised costs at least $100 million more than estimated.

The U.S. economy may grow at a 0.1 percent annual rate from April to June, the least since the 2001 recession, according to a monthly survey of economists by Bloomberg News published May 9. Gross domestic product rose at a 0.6 percent pace in the first quarter and 2007's final three months.

Deutsche Post Chief Executive Officer Frank Appel has repeatedly ruled out a pull-out from the U.S. express-delivery market, saying that a global delivery company needs to have a presence in the world's biggest economy. Losses at the U.S. subsidiary contributed to an 18 percent decline in Deutsche Post's first-quarter profit.

No Profit Prediction

Appel declined today to say whether the U.S. division will ever be profitable. The company ``can tolerate certain losses'' in parts of its global network, he said, without elaborating.

The German company earlier this month appointed Ken Allen, the head of DHL Express's eastern Europe, Middle East and Africa operations, to run DHL Express in the U.S. Allen, a British national and member of DHL Express's global management board, helped restore earnings at DHL's Canadian unit as its president.

DHL has a 6 percent share of the U.S. package-delivery market, trailing a 52 percent share at UPS and FedEx's 30 percent, according to SJ Consulting Group Inc. of Sewickley, Pennsylvania. The U.S. Postal Service controls about 13 percent of the domestic-packages market.

Market Share

FedEx dominates in express and overnight deliveries, with 37 percent of that segment in the U.S., while UPS commands 73 percent of the ground delivery market, data compiled by SJ Consulting shows. FedEx offers shipping services at the 1,900 FedEx Kinko's copy-service stores it owns, while UPS has 4,500 locations of The UPS Store and Mail Boxes Etc.

Deutsche Post said May 14 that first-quarter profit fell to 407 million euros from 499 million euros a year earlier following writedowns at the Deutsche Postbank AG retail banking unit and as slowing U.S. economic growth hurt earnings at DHL Express. Deutsche Post is considering a sale of its majority stake in Postbank.

To contact the reporter on this story: Jann Bettinga in Bonn via [email protected].
Last Updated: May 28, 2008 09:40 EDT