DHL/Airborne deal could shake up U.S. express market

With the "duopoly" of United Parcel Service (UPS) and Federal Express (FedEx) firmly in its sights, DHL has agreed to purchase most of Airborne Inc. The deal will catapult the international express company and its parent, Deutsche Post World Net (DPWN), into the No. 3 slot in the U.S. overnight

DHL will pay $1.05 billion in cash for Airborne, the equivalent of $21.25 per share. The combined company will operate under the DHL name and will be led by Carl Donaway, Airborne's current chairman and CEO.

Seattle-based Airborne, the third-largest overnight parcel carrier in the United States, moved approximately 356 million parcels in 2002. Although DHL leads the market for international express delivery outside the United States, it claims less than a two-percent share of domestic overnight shipments. By comparison, UPS and FedEx combined own 79 percent of the U.S. express-delivery market.

Under the terms of the agreement, DHL will acquire all of Airborne's services, customers, and assets, except for its airline operations. The airline will become an independent company called ABX Air and will be owned by Airborne's current shareholders. DHL will charter or lease ABX's aircraft under what it termed an "arm's length" agreement.

The deal comes as no surprise. The German postal conglomerate has spent billions of dollars on acquisitions to build DHL into a global delivery and logistics giant. It was no secret, moreover, that DPWN wanted to increase DHL's presence in North America. Two years ago, in fact, Bear Stearns analyst Edward Wolfe predicted that DHL would snap up Airborne. "DHL is in need of a domestic express product to complement its export/import U.S. business, and [Airborne] needs to improve its international operations," he said at the time.

Long-Term Threat

With this latest move, DHL has put UPS and FedEx on notice that it is now a serious competitor in their home market. Analysts say the impact of the merger will be more a growing rumble than a sudden explosion.

"This is likely to result in a more competitive ground market in the long term, as DHL/DPWN is better-capitalized than Airborne," says JP Morgan analyst Gregory Burns. "They have the resources to invest in [Airborne's] growth." In the short term, he adds, the acquisition will not increase Airborne's capacity nor will it likely affect pricing, given that Airborne has striven to be the low-cost alternative to the Big Two.

Ted Scherck, president of market analysts The Colography Group in Atlanta, believes the combined company will challenge UPS and FedEx not only in the express market, but also in the logistics arena. "...[T]he combination of the two companies, with strong U.S. and international capabilities supported by significant physical and financial assets—including its own dedicated freighter fleet—will become a major factor in the decision-making of businesses large and small seeking single-source logistics solutions," he says.

Both DHL and Airborne have third-party logistics units with operations in North America. Beginning this month, moreover, DPWN will begin rebranding all of its express and logistics business units worldwide under the DHL name. That move will include Danzas AEI Intercontinental, itself the product of two of DPWN's earlier acquisitions: Danzas, the $6 billion Swiss international logistics service provider, and Air Express International (AEI), the U.S.-based international forwarder and logistics company that DPWN bought for $1.4 billion in 2000. By bringing its express and logistics operations under the DHL umbrella, Deutsche Post will create a formidable competitor to the similarly structured logistics units operated by FedEx and UPS.

Legal Complications?

Analysts expect that shareholders of both companies will support the plan. The deal could hit some turbulence, though, when it comes under scrutiny from U.S. regulators.

At issue is a law that restricts foreign ownership of U.S. airlines to 25 percent. Both FedEx and UPS asked the U.S. Department of Transportation (DOT) to revoke DHL Airways' license in 2001, claiming that the company violated those ownership rules. Deutsche Post won that battle, but DOT is now revisiting DHL's ownership structure at the request of FedEx and UPS.

DHL's ownership is complicated. Currently, the German government owns 68.3 percent of DPWN, with the balance owned by shareholders. DPWN also owns 100 percent of Brussels-based DHL International, and DHL International owns 100 percent of U.S.-based DHL Worldwide Express. DPWN also holds 25 percent of the voting rights in U.S. airline DHL Airways.

The spin-off of Airborne's airline operation is designed to ensure compliance with the 25-percent limit. For that reason, Burns sees no regulatory obstacles to the acquisition. Wolfe, on the other hand, is more cautious. Although the spin-off of the airline may technically comply with U.S. law, the fact that DHL will be chartering ABX's capacity could result in de facto foreign control, he notes. Wolfe is predicting that the renewed DOT inquiry coupled with the inevitable federal review of the DHL/Airborne deal will run into "meaningful" regulatory delay.

If DHL does get the go-ahead to close the deal, as seems likely, FedEx and UPS will find themselves facing a strong competitor that is certain to grab a significant portion of their market share. The only question is how much and how soon.