One Service, Two Hubs

One Service, Two Hubs

Copyright 2004, Traffic World, Inc.

Five months after DHL sealed the deal to buy Airborne Express, DHL and Airborne are morphing into one cohesive company - all but the combined company''s two air hubs.

The company insists there is no immediate plan to merge Airborne''s hub in Wilmington, Ohio, with DHL''s air base in Cincinnati, although combining hubs that are less than an hour''s drive apart would save money and streamline network operations, making DHL more competitive against FedEx and UPS.

"That''s really where the economies of scale for this merger come in operationally, if they are able to maximize one hub," said Tim Sailor, principal of Long Beach, Calif.-based Navigo Consulting. "But right now those plans are really on the back burner. I think it''s probably because of the legal challenges as well as the operational challenges. I think that taking it very slow and incrementally has been very helpful for service levels."

Combining air operations would not be a simple endeavor, however.

For starters, DHL no longer owns a piece of either of the airlines that carry most of its freight in the United States. DHL''s German-based parent company Deutsche Post World Net divested its ownership of DHL Airways in mid-2003. When the sale to a private ownership group went through, the airline also changed its name to AStar Air Cargo. The other airline, ABX Air, became its own publicly traded company when DHL bought Airborne in August. To avoid a protracted legal fight over the airline''s corporate citizenship as it fought with AStar, ABX Air was spun off of the rest of Airborne when DHL bought the company, with the exception of the airline.

Each airline depends on DHL for more than 90 percent of its revenue, yet both ABX Air and AStar want to branch out to get more customers on their aircraft.

"Since the separation, one of the key things we will focus on is to try to diversify our revenue sources," ABX Air President and CEO Joe Hete said. For ABX Air to spread its portfolio, he said, the company needs not only new pure cargo customers but also to expand its peripheral operations such as aircraft maintenance and flight training.

Hete said the relationship with DHL is going well. As for a relationship with AStar, Hete said: "We have none." Although the airlines share a common customer, they consider each other competitors.

The two airlines'' fleets and operations are not compatible because Airborne/ABX long has used a unique loading system that pushes freight through passenger doors rather than through cargo doors. The strategy helped save money on converting aircraft by keeping aircraft fuselages intact but it also keeps the hub operations strictly focused on the small packages that can fit in the company''s special-built containers.

In another unique arrangement, Airborne owned the Wilmington airport, which is now in the hands of ABX Air. DHL has a heavy investment in Cincinnati, where it recently completed an expensive renovation after deciding to keep Cincinnati as its U.S. hub.

Still, industry observers believe the consolidation of the hubs is inevitable in the next couple of years.

"I would think you would see them merging them into one hub," AFMS Transportation Management Group President Michael Erickson said. "That''s a little harder change to make than merging the operations."

Service levels in December for the combined company were 97 percent on-time for air, according to Erickson. That percentage, he said, is an improvement over the service levels of either DHL or Airborne individually.

DHL''s Senior Vice President for Integration Dick Bostdorff said there is no firm timeline for reviewing the hubs but as with the rest of the integration is to move as fast as reasonably possible.

"We''ll continue to operate Cincinnati and Wilmington for the foreseeable future," he said. "The answer in the long term may be that two hubs can serve our purposes very well.

"I think you can say to yourself that the quicker you can rationalize duplicate air routes ... you''re going to save money and probably improve service," he said. "That''s the real opportunity and the question is how do you do that."

Working out the economics may be easy compared to working out the operations. "Both processes have positives and negatives to them when you look at the long-term," Bostdorff said. "I don''t have an answer yet on what container we''ll use, but it''s likely to be both."

Bostdorff is experienced at integration but not in air cargo. He worked for more than three decades in telecommunications industry, most recently, as chief operating officer at Nevada Bell, where he coordinated the integration of Pac Bell into SBC.

Bostdorff says the experience is relevant since both telecom and cargo both focus on networks and moving things around the country - in one case data, in another shipments.

Some 200 people are working full-time on the integration. Another 200 or so spend at least part of their time on the project. The team hopes to complete the integration within three years.

Five months into the project the effort is in the first of three phases, an effort that will capped by the combination of the sales force next month.

The second phase will eliminate duplicate network facilities and routes, rationalize real estate holdings and merge billing. Last will come optimizing business processes and combining truck routes and air and ground hubs.

The key, Bostdorff said, is to do it all without "messing up" service levels.

Shippers say the company is doing a good job with service so far. "I think it''s going pretty smoothly," Sailor said. "All indications I have so far are that service levels are higher than they were before the integration."

Many top Airborne officials have stuck with the company, some of them moving from Airborne''s base in Seattle to DHL''s U.S. headquarters in Florida. That has not included Airborne''s former chairman and CEO, Carl Donaway. Donaway was supposed to stay on but left his position as executive chairman of DHL USA in December, after months of being a low-profile figure in the combined company.