Postal partnerships ready to deliver

Date: 16/04/1998

Bruce Barnard
THEY make unlikely partners, but Deutsche Post and DHL are a perfect fit.

The recent announcement that the sprawling over-staffed state-owned postal monopoly was acquiring a 22.5% stake in a feisty young company which pioneered the global express courier business showed that change has reached even the most protected of European industries.

The estimated 460-560-million-ecu acquisition was driven by business logic and globalisation. But the decision to end the post offices' monopoly on the handling of standard letters in the EU in 2002 played a decisive role in Deutsche Post's move.

The deal also ratchets up the European challenge to US dominance of one of the world's fastest growing businesses.

Lufthansa Cargo has a 25% stake in DHL International, making it essentially a European operation as the other key shareholders, Japan Airlines (25%) and the Nissho Iwai trading house (7.5%), are largely passive investors.

KPN, the privatised Dutch postal service, raised the European flag on the air express business with its 1.67-billion-ecu purchase of Australian-based TNT two years ago. Industry rumour now suggests another acquisition might be unveiled when TNT officially opens its 65-million-ecu hub at Liège airport on 27 April.

"I would be surprised if we did not take over any large companies in Europe this year," said KPN chairman Ad Scheepbouwer in a recent interview.

The European express business, worth an estimated 28 billion ecu a year, is enjoying double-digit growth and is set to overtake the US market by 2010.

But until KPN swooped on TNT, the outsiders were creaming off the most profitable business lines. Although Deutsche Post and Chronopost of France are the European market leaders, they lack global reach in an increasingly global business.

Deutsche Post's planned stake in DHL, which could in future be raised to 25%, may tip the balance Europe's way. But will the European Commission approve it?

United Parcel Service (UPS), the giant Atlanta-based package delivery company, has raised concerns that the DHL acquisition is being subsidised by Deutsche Post's monopoly profits.

The DHL deal has significantly raised the stakes in a complaint UPS filed with the Commission in mid-1994 against the alleged abuse by Deutsche Post of a dominant position.

In a preliminary assessment, Commission competition officials said the scale of Deutsche Post's losses indicated that the firm intended to eliminate its competitors.

The Commission is about to open a state aid procedure into Deutsche Post's acquisition of a stake in DHL, but it is unlikely that this will unravel the deal.

Deutsche Post chief executive Klaus Zumwinkel says that after stripping out the costs of inherited pension liabilities and public service obligations, all other activities are profitable.

Although UPS and Deutsche Post at loggerheads over DHL, they have joined forces to pioneer an independent rail venture in Germany in competition with the state-owned Deutsche Bahn (see box).

As usual, the over-stretched Commission is barely keeping up with the rapid-fire changes sweeping an industry which has kept a low profile compared with the passenger side of the business.

Yet air freight is growing even faster than passenger traffic and now generates nearly a fifth of the revenues of big players such as KLM Royal Dutch Airlines and Air France.

Significantly, traffic rights for the giant US express and cargo carrier Federal Express were the last issue to be resolved before France and the United States clinched a new bilateral aviation accord last week.

Washington and Tokyo also went to the brink of a trade war earlier in the year over traffic rights for US freight operators in Japan.

The dividing line between the express carriers, known as 'integrators' in industry jargon because they provide a door-to-door service, scheduled airlines such as KLM with large freight operations and all-cargo carriers like the Luxembourg-based Cargolux are becoming increasingly blurred.

The integrators are 'trading up' to the bigger loads which have traditionally been the preserve of the conventional carriers, while the scheduled airlines are casting around for smaller loads. The odds are stacked in favour of the integrators because they possess the systems, the know-how and the experience, while the scheduled freight divisions of major airlines often play second fiddle to their passenger divisions.

This has led to a cull in the scheduled sector, with only a select core of European carriers making cargo a central activity - KLM, British Airways, Swissair, Air France and Lufthansa, which has spun off its freight business as a separate company.

Lufthansa is leading the battle against the integrators. Apart from owing a slice of DHL, it also became the first traditional air freight carrier this month to offer a delivery service with a money-back guarantee if goods are not delivered on time - just like the express industry.

Freight has been portrayed as a junior partner to passenger services in the spate of transatlantic alliances, bilateral aviation agreements between EU member states and the US, and Commission investigations into airline subsidies.

But freight is directly affected by these developments as the bulk of cargo still flies in the 'belly' of passenger jets on scheduled routes and has, in some cases, been the driving force behind joint ventures - notably in the pioneering transatlantic partnership between KLM and Northwest Airlines.

Industry insiders also say that Air France's controversial 20-billion-ecu government subsidy caused more furore among the freight divisions than the passenger units of its aggrieved rivals.

Yet, despite the dynamism of the express and freight sectors, and the contribution they make to the EU's economy, they are often given second-class treatment by Union governments and European airports.

The reason for this is simple: passengers have votes, consignments of cargo and packages do not.

Air express firms and cargo airlines are also coming under increasing pressure from the environmental lobby.

They were the first to feel the impact of curbs on flights at Amsterdam's Schiphol airport, and DHL's bid to set up a hub at Strasbourg sparked a protest supported by French Prime Minister Lionel Jospin.

TNT is moving to Liège partly to escape tougher environmental regulations at its former hub in Cologne.

The protests against night flights are most serious of all because the whole hub-and-spoke system which underpins express deliveries requires planes to land and take off in the early hours.

Amsterdam was within an ace of clinching a 370-million-ecu investment by Federal Express, but lost out to Paris' Charles de Gaulle airport because it could not offer attractive night slots.

The industry is fighting back. It recently set up a new lobbying group known as PLANE - the Platform for Logistics and Aviation Networks in Europe - to underline its contribution to Europe's competitiveness.

Major feature on current developments in express distribution companies in Europe.