FedEx + DHL Isn't Necessarily Bad for UPS

Rumors have been flying that DHL's United States operations are up for sale. With the recent announcement that Deutsche Post's DHL business unit lost 600 million Euros ($879 million) last year, the company is seeking strategic alternatives.

The leading candidate to purchase DHL is thought to be FedEx (NYSE: FDX). While some may think that a FedEx acquisition of DHL could spell trouble for UPS (NYSE: UPS), the new FedEx/DHL could actually provide some much-needed relief for both of these transportation companies.

Airborne no more
DHL hasn't been a player in the American express delivery business for very long (that is, if it ever really was one). Deutsche Post's DHL Worldwide Express purchased express carrier Airborne Inc. for $1.12 billion in 2003. Airborne Express was the low-cost carrier in the express shipping marketplace, often undercutting FedEx and UPS prices without the service guarantees that the bigger shippers provide.

DHL decided to rebrand the Airborne operations using the DHL name while keeping the low-price shipping position. DHL also scrapped the previous Airborne logo and colors, moving to bright yellow trucks and uniforms that couldn't be missed even in one of those blinding snowstorms hitting the West Coast lately.

Considering that Deutsche Post paid $1.12 billion for an investment in the U.S. express shipping marketplace, last year's loss of $879 million is significant, and it wouldn't be surprising if they were looking to offload the U.S. DHL operations ASAP. But what does this say for the marketplace if the "low-price carrier" can't compete in an economy that continues to echo "recession?" Wouldn't you think that consumers would be looking to cut costs wherever possible in this economic climate?

The price is right
The answer may lie in the fourth-quarter earnings report that UPS delivered last week. Beyond the losses that it took because of pension write-offs, UPS stated that revenue per piece was up 2.3% on "firm" pricing. UPS' 2007 increase in list rates was 4.9% (not including the additional increases in individual surcharge amounts), so growth in discounts given to corporate and individual customers must have made up the difference between increase in base shipping rates and realized revenue per package (assuming that weight per package stayed the same).

As background, to keep up in a competitive transportation marketplace, UPS, FedEx, and DHL give special incentive pricing programs to key clients. Actually, everyone seems to qualify as a "key" client today, and customers can gain discounts for simple tasks like using FedEx Ship Manager or by belonging to an organization such as the American Institute of Chemical Engineers.

So, even though UPS raised base rates by 4.9% in 2007, they gave clients increased discounts such that the average actual rate increase only came out to 2.3%. UPS and FedEx price competition means trouble for DHL since low-price is DHL's key claim to fame. Combine this with a recent USPS advertising campaign touting no surcharges and low rates, and it's easy to see how DHL could run into serious issues.

Yellow and blue make green
If FedEx does buy DHL's U.S. operations, it wouldn't be to boost its express or ground network. After all, those gaudy bright yellow trucks and planes aren't necessarily an asset to anyone. No, FedEx's potential purchase of DHL would be an easy way to stave off price pressures in a competitive shipping marketplace. In effect, FedEx would be taking one for the team: getting rid of the public competitor who fought on price alone.

That's not to say that FedEx is going to buy DHL, or that the government would OK such a move. But if the yellow DHL trucks were to move on, that could mean green for both FedEx and those brown guys at UPS.

For related Foolishness:

• FedEx's Driver Disagreement
• Fuel for Thought
• 4 Critical Errors You Must Avoid