DHL Saves Face

Partnering with a competitor may help DHL salvage its business reputation in the U.S.

Anytime a company joins hands with a rival, it's bound to raise concerns. And yet "co-opetition"—the sharing of resources amongst competitors—has a successful track record in dozens of industries, from shipping to financial services to telecommunications. DHL's proposal to outsource its air shipments to UPS () is likely to benefit both companies, and it may also set a precedent for similar partnerships in the express delivery market, according to industry analysts.

"I think it's a brilliant stroke for both DHL and UPS," says Doug Caldwell, executive vice-president of ParcelPool.com, an Orem (Utah) logistics provider. He believes the extra freight from DHL customers will help UPS fill its planes to near-capacity, building efficiency and ultimately lowering costs.

To be sure, it's not the first such move in the industry. In 2000, Federal Express () forged a long-term agreement to carry U.S. Postal Service packages through its air network. In return, FedEx placed drop-off boxes in some 38,000 retail postal outlets across the country. The deal currently being negotiated between DHL and UPS is similar, but it would be the first of its kind between two private players.

"With fuel prices unlikely to ever come back down materially and with ever-increasing costs of maintaining these networks, it makes sense that you will see competitive sharing arrangements around the world," says John Mullen, CEO of DHL's global business. "It makes sense anywhere where you can generate productivity and a better use of assets."

Going Greener

It could also be an environmentally beneficial move, according to Jim LeRose, principal of logistics consultancy Agile Network. "If you share capacity, you are reducing the amount of planes, cars, and trucks that go to the same places—so perhaps this is a twist on a [green initiative] as well," he says.

Many critics believe the deal is a win for DHL customers because of the strong reputation of UPS. "You're going to be moving from essentially a DHL air network to a UPS air network, and there's really nobody better operationally than UPS," says Caldwell. "They run on time, they sort on time—they're very efficient."

It's less clear what effect the arrangement will have on prices across the industry. "DHL was a downside pressure on the market," says Dan O'Rourke, editor of trade magazine Parcel. "It was another major carrier, so that kept some pressure on the other major private carriers. Obviously that pressure has dwindled quite a bit now."

The clearest beneficiaries of the deal are shareholders of Deutsche Post World Net, DHL's German parent, who have suffered billions of dollars in losses while DHL waited to make a major strategy shift in the U.S. "This stops the bleeding as far as their situation in the U.S.," says ParcelPool.com's Caldwell. "The question has been up until now whether DHL is even going to be able to maintain a presence in the U.S. market, much less expand it. If they perform the transition well, it's possible that they could increase their market share in the future."