Saturday, April 19, 2003

DHL sees benefits in Airborne buy

By James Pilcher
The Cincinnati Enquirer

DHL Worldwide Express' proposed purchase of Airborne Express' ground assets would not mean the closure of either company's hubs in the Tristate, said the man who will lead the new combined company.

"When you look at all that is involved in this deal, it benefits both hubs," said Carl Donaway, chairman and chief executive officer of Seattle-based Airborne who will become the CEO of the U.S. carrier created by the deal. "This merger is an enormous opportunity for us to grow, and to grow we'll need a bigger footprint. So I want to put it to rest right now and say that both hubs will remain open."

In an interview this week, Donaway also said that he has pledged that there would be no layoffs at Airborne's main hub in Wilmington, Ohio, about 50 miles north of Cincinnati, and that DHL's new $214 million hub sort building at the Cincinnati/Northern Kentucky International Airport would open in July on schedule.

The $1.05 billion deal, announced March 25, directly affects nearly 8,500 workers in Wilmington and DHL's hub at the local airport - the Brussels, Belgium-based shipper operates its lone domestic hub locally.

The deal gives DHL control of everything owned by Airborne except that company's subsidiary airline ABX Air Inc. DHL will pay Airborne shareholders $21.25 a share, and those shareholders will also get one share in the new separate airline ABX Air. The two companies combined for 2002 revenues of almost $4.4 billion in the United States alone.

Donaway said that while the purchase could close as early as this summer, it could take until the middle of 2004 to integrate the companies.

"Until then, we'll study it, but both companies will continue to operate as they are now," said Donaway, who addressed other issues surrounding the deal, including the recent Senate-sponsored provision dealing with foreign ownership of airlines that was directed at DHL, potential challenges posed by the coming integration and potential scenarios for using both hubs.

Experts and analysts have assessed the deal as a strong move by DHL (owned by the German postal company Deutsche Post) into the U.S. air freight market, now dominated by United Parcel Service and Federal Express. It would create an even stronger No. 3 to those two giants, which control more than 80 percent of the U.S. express delivery market. DHL already is the world air freight leader, dominating the international air express delivery market.

Joining the parts

Airborne's operation in Wilmington sorts about 1 million packages a night. DHL handles 150,000 packages nightly, a number that is expected to triple when the new building opens in the summer.

The differences between the two operations don't stop there. Airborne owns the airport in Wilmington, making it the largest privately held airport in the country, and that facility will belong to DHL under the terms of the deal.

And the Wilmington operation is fairly isolated, making it ideal for a 24-hour freight operation that otherwise might have to worry about offending neighbors with jet engine noise.

DHL, on the other hand, operates at the Cincinnati airport, which has an operational curfew because of noise issues, limiting operations to certain runways, although the facility is in the process of adding a new runway and extending another.

But Airborne's isolation brings other problems, and DHL's location has other advantages. Because of the small employment base in the relatively rural community of Wilmington, Airborne has taken to busing part-time sorting workers in from adjacent counties at night, and has even used migrant workers at times to keep its 5,000-person operation running.

"It has been a significant problem for us there in the past," said Donaway. "But we have such high turnover in this industry anyway. We lost 1,400 workers last year alone, so that's why I can say that this merger won't mean any job losses, especially if we are to grow."

DHL, on the other hand, has a large employment base in the Cincinnati area. The U.S. Census recently ranked Boone County, home of the airport, in the top 100 of fastest growing counties.

Another potential issue is the way each company sorts and handles packages. Many of Airborne's 118 planes do not have cargo doors, since the company handles packages that weigh 4.5 pounds on average. DHL's planes, on the other hand, are equipped for larger containers that need wider cargo doors. DHL officials have said the company's average at the local hub is about 8.6 pounds per package.

But Donaway said he doesn't see that as a major challenge, especially since Airborne's newer planes are equipped with larger doors.

"The issues are not with the operational engineering, but rather it comes down to harmonizing the routing systems," Donaway said. "But the biggest thing we have to realize is that we want to do this in a methodical way to not create any disruptions in customer service."

One expert agreed that combining the two operational systems should not be a problem, to a point.

"They could use the faster, more efficient planes to carry the larger, international freight, and break out the smaller stuff into the short-haul routes," said Peter Jacobs, air freight analyst with the Seattle firm Ragen McKenzie. "But I still don't understand the logistics of keeping two air terminals, or even whether they will need them."

Changing missions?

Donaway stressed that any final determination on what to do with the operations in Wilmington and at the Cincinnati airport is as much as a year away, and that no studies have even begun on how to integrate.

"The company that buys another certainly does its due diligence, but we're now in a position where the purchased company must also do its due diligence on who is buying them," Donaway said.

But Donaway also offered two hypothetical scenarios for what could happen to each operation.

He said Airborne had already been considering locations for a new hub for its ground business, when things are shipped by truck instead of by plane.

"We were looking at Nashville as well as Cincinnati already," Donaway said. "It could make sense to use that new building down there for that purpose, especially since it has very good access to the interstate system there."

Federal Express' ground unit also is in the process of acquiring a site in Greater Cincinnati for a regional truck hub, deciding between Butler County and off Mount Zion Road in Boone County.

Donaway also said that Airborne has been forced in the past to limit operations because of fog or bad weather in Wilmington. Besides handling ground packages, the Cincinnati hub could be a backup air hub in such circumstances.

"It would be great to have a second backup hub to divert a significant number of flights to get into the sort operation so we can maintain some service level," Donaway said. "It would be a great insurance policy."


Fare war makes Indy, Dayton hot spots
AK Steel bid now second-best
DHL sees benefits in Airborne buy
DHL deal faces regulation maze
Stores need strong Easter
Tristate Summary

Patent applicants wait in long line
American Airlines dumps executive bonuses