DC Velocity - January 2014

ON NOV. 10, 2008, DHL EXPRESS ANNOUNCED THAT after six years of enormous losses, it would withdraw from the domestic U.S. parcel market by the end of January 2009. The news stunned an industry that believed DHL would scale back its U.S. presence but not end it. It wreaked havoc on the small southwest Ohio town of Wilmington— population 12,000—where DHL’s U.S. air and ground hub was located and where one in three households had someone who worked there. And it left parcel shippers to the not-so-tender mercies of two companies: FedEx Corp. and UPS Inc.

Much has changed since then. DHL Express ended domestic U.S. operations on Jan. 30, 2009, and the United States is to the company today what it has been for most of its 44-year history: one node in its vast global network. Each day, international packages fly in and out of Cincinnati, where DHL Express placed its U.S. hub serving international traffic after deciding it no longer needed a large operation in Wilmington to support a scaled-back service. There, the planes link with 30 freighters operating for the company across a 90-city U.S. network.

DHL Express is much better off since returning to its traditional knitting, according to Ian D. Clough, who has run U.S. operations since 2009. Profits from the U.S. business are exceeding expectations, and revenues are growing at a double-digit annual clip, Clough said. He would not provide specifics. “We are playing to our strength,” he said.

Although DHL left Wilmington, it did donate the facility, the nation’s largest privately owned airport, to Clinton County, where Wilmington sits. Today, one-third of the 3 million-square-foot site is occupied; it is used mostly for aircraft maintenance and repair services. About 1,000 people now work there, compared with 9,500 when DHL Express ceased operations.

Wilmington is still being marketed as an air logistics hub.

For the past year, Jones Lang LaSalle (JLL), the Chicago-
based real estate and logistics giant that is pitching the facil-
ity, has led an effort to clean out DHL’s infrastructure
because it was built for a parcel operation and not as a
logistics center. That involved, among other things, hauling
away 5,000 tons of steel and dismantling 26 miles of con-
veyor equipment, according to David Lotterer, JLL’s vice
president–industrial/supply chain & logistics solutions and
the company’s point man in Wilmington.

As for parcel shippers, they find themselves in an all-too-familiar spot: caught in what might be the most ironclad duopoly in American business. When DHL left, it took with it the third viable option for shippers, and the lowest-priced one at that. Since then, FedEx and UPS have dominated the nation’s parcel market as few companies have in any industry.

Regional parcel carriers are gaining modest traction. However, they control less than 2 percent of the market, according to Stifel,

Nicolaus & Co., an investment firm. These regional carriers have limited coverage areas but offer low pricing, and, unlike FedEx and UPS, impose few so-called accessorial charges—fees for additional services beyond basic pickups and deliveries that dramatically increase a shipping bill.

The U.S. Postal Service (USPS) has the resources to compete, but it is primarily focused on business-to-consumer (B2C) e-commerce, and not business-to-business (B2B) traffic. Shippers are also leery about working with USPS. More than half of the 48 shippers who responded to an October 2013 survey by San Diego-based consultancy Shipware LLC said they probably wouldn’t use USPS as an alternative for the air and ground services offered by FedEx and UPS. The main reason cited by the shippers—who combined account for $1.5 billion in annual parcel spending—was that it was too hard to do business with USPS.

FEASTING AT THE TROUGH

Left alone in the shipper henhouse, FedEx and UPS have feasted. According to Shipware, from 1998 to 2005, FedEx’s published or “tariff” rates rose on average 3.06 percent a year for air and 3.05 percent a year for ground services. From 2006 to 2013, its air and ground tariff rates each climbed, on average, 5. 28 percent a year.

At UPS, the contrast between the two eras is even more pronounced. From 1998 to 2005, average air tariff rates rose 3. 25 percent a year and ground tariff rates rose 3. 16 percent a year. From 2006 to 2013, the rate of annualized