While some people thought Tuesday’s congressional hearing on the planned DHL-UPS deal might spotlight the Open Skies Initiative talks between the United States and the European Union (EU), the laser-beam focus was instead on potential violations of U.S. antitrust law.
Open Skies aims to loosen existing restrictions on EU air carriers operating in the United States. U.S. antitrust law, dating back to 1890, seeks to maintain competition in the marketplace to the benefit of American consumers.
The hearing’s focal point was reinforced by the testimony of attorney Samuel Simon, who spoke on behalf of the American Antitrust Institute, a 10-year-old organization comprised of attorneys and academics who conduct research, education and advocacy on antitrust law and competition policy.
Simon said the chief concern of consumers should be whether DHL will remain a viable and independent competitor if it replaces air linkage service provided by independent air carriers with one of its two major rivals, UPS.
“From our perspective, the deal appears on its face to set DHL up to be squeezed on prices and services by a principal competitor. We believe by becoming entirely reliant on one of its two major competitors for one of its most crucial in-puts (air delivery of its parcels), DHL will at best lose its independence as a competitor, and at worst will ultimately deteriorate to the point that it is no longer a factor in a market that will have gone from three to two competitors,” said Simon in his written statement.
“If DHL does not intend to depart the U.S. market, then perhaps its objective is to facilitate horizontal collusion, whereby it would benefit from higher prices within a less competitive market in which only two players need to make pricing decisions. It is usually easier for two similar rivals than for three more diverse rivals to tacitly collude,” Simon added.
Problems can arise if DHL becomes locked into purchasing “a critical input” — air transport and associated sorting — from a competitor, he said.
One thing UPS might do is internally charge itself a lower price for its own air service than it charges to DHL, according to Simon.
“Generally, we wouldn’t care if a company makes an independent but unwise decision. But if DHL enters a contract that fails to protect it against a price squeeze or a service squeeze (or both), or otherwise fails to protect its competitive independence, the result will be to reduce what is already a highly concentrated market to an effective duopoly, a matter that would be of public concern,” said the private attorney from Pennsylvania.
“The argument here is straightforward. DHL and UPS, direct competitors in a highly concentrated market, are agreeing to eliminate one of the principal dimensions of competition that currently exists between them, in a context that makes it unlikely that DHL will be able to compete aggressively. DHL will no longer control the air component of its service and it will know that its much larger competitor and supplier of this component will be able to impose discipline if it competes in ways that UPS dislikes.
“This will leave UPS and FedEx, both of which strongly opposed DHL’s acquisition of Airborne five years ago, in a position where they need not worry about an independent third competitor, but can key off of each other much more predictably in setting prices and other terms of trade,” continued Simon. “The agreement might therefore be considered a ‘facilitating practice’ that makes it easier for firms in an oligopoly to coordinate their pricing.
“Such a practice can be enjoined,” asserted Simon. In this context, “enjoined” means the deal can be legally banned.
Simon suggested at the close of his testimony, “If the Department of Justice is uncomfortable bringing an injunctive action against the DHL/UPS transaction as a violation of section 1, it should, rather than close its investigation, refer the matter to the FTC for investigation under the standard of Section 5 of the Federal Trade Commission Act, which outlaws ‘unfair methods of competition.’
“On its face the proposed transaction would appear to qualify, even if not technically violating the other antitrust statutes, because of its likely negative impact on the competitive process,” Simon said.
U.S. Rep. Mike Turner, who represents Clinton and Highland counties in Congress, also took aim at antitrust concerns.
“Losing money is not a defense to breaking the law. They’re trying to say, ‘Well, it doesn’t really matter whether or not we’re combining to take too large of a market and that we’re going to result in restraints of trade on others. We’re doing it because we’re losing money and how could anyone make us lose money?’ Well, no one’s making them lose money. They made themselves lose money by bad business decisions.
“That doesn’t mean we should amend the U.S. laws to allow them to do something they would not otherwise be able to do,” Turner said in a phone interview during a recess taken by the U.S. House Transportation and Infrastructure Committee.
Turner has taken to calling a potential post-transaction DHL by the name of “UPS-plus.”
If DHL is billed by UPS for UPS’s air transport costs, Turner said then DHL will have to mark up that price because DHL couldn’t make money if it bills customers the cost UPS charges them.
“So, they’re going to be ‘UPS-cost-plus’,” said the congressman.
ABX Air CEO Joe Hete also addressed the proposed deal’s alleged antitrust implications, but he first stressed the human impact that would accompany the immense loss of livelihoods if the transaction is carried out.
“The deal contemplated by DHL and UPS creates a crisis unprecedented in the rural United States, much less in rural Ohio. Never have so many jobs left such a rural region in so short a period of time. If the DHL UPS deal goes through, it is predicted that 10,000 jobs will be eliminated in the region by the middle of next year,” said Hete.
Air transport and related sorting — the two operations UPS would take over if the deal is consummated — are typically 40 percent of the costs in providing express delivery service, according to Hete’s testimony.
“DHL has tried to allay those concerns by defining this deal as a capacity sharing arrangement similar to a passenger airline’s codeshare agreement, or as a shipping company’s sharing of transport capacity,” said Hete. “We would respectfully offer a different perspective.
“In a codeshare between airlines, both entities share their services and excess capacity with each other. Should conditions change, should a relationship sour, or the competitive landscape change, either carrier’s withdrawal doesn’t keep the other from functioning in the marketplace.
That is not the case with DHL and UPS. … DHL will not share airlift or sort capacity domestically with UPS. DHL won’t have a domestic airline, and it won’t have a domestic sort,” added Hete.
“Of UPS and DHL, UPS is the only domestic provider of airlift or sort capacity in this arrangement. Now it may be that, as part of this deal, UPS and DHL intend to share services outside of the U.S. It may be that they intend to combine parts of their respective systems elsewhere as part of the deal they are working on in the United States. Were that true, perhaps this could be called a codeshare arrangement, a sharing of capacity. However, were that true, it would also signal another step in this industry’s global consolidation — a step neither company has made public,” stated Hete.
DHL Express Global CEO John Mullen testified at the hearing, as reported in the News Journal’s Wednesday edition. He called the proposed deal a “vendor services agreement,” a name switch from DHL’s earlier label “strategic alliance.”
“The proposed agreement, if consummated, would not involve any merger, acquisition, alliance, or transfer of assets between DHL and UPS. It would be a commercial vendor contract for services negotiated at arm’s length between two independent companies, limited to the air transport of DHL’s packages and certain sorting services in North America,” said Mullen.
“We would continue to provide all pickup and delivery and certain sorting services under the proposed arrangement, retain and manage our own sales force, develop and pursue our own commercial strategies, maintain our own back office services, set our own pricing and product offerings, etc.,” said the DHL Express chief executive officer.
Committee Chairman James Oberstar from Minnesota said in his opening statement, “When established carriers control markets, the tendency is for the carriers to follow each other’s price changes so that prices are identical, and customer choice is limited. If DHL is effectively ‘neutered’ in the marketplace, there would be incentives for UPS and FedEx to refrain from competing with each other, thereby increasing the price overall for express delivery packages.”
Toward the close of Tuesday’s hearing, Oberstar said the case to be made that the proposed deal would have anticompetitive effects is stronger than he anticipated beforehand.
U.S. Rep. Jerry Costello from Illinois, chairman of the Subcommittee on Aviation, said, “The relationship between DHL, ABX, and ASTAR is long and convoluted … Analysts have long stated that DHL’s business model was flawed from the start.”
He added, “While some change is understandable, it is surprising and questionable why DHL would choose one of its biggest competitors, UPS, to provide critical airlift service.”
Capt. John Prater, president of Air Lines Pilots Association International which represents the pilots of ASTAR Air Cargo, said in the hearing, “To put it simply, DHL’s difficulties in North America are not due to the cost or effectiveness of its lift, but rather with its inability to effectively implement the ambitious business strategy it announced in 2003.”
DHL purchased Airborne Express in August 2003, decided in June 2004 to locate its primary air hub in Wilmington instead of the airport near Cincinnati, and officially launched an expanded and upgraded air hub at the DHL Air Park in Wilmington only three years ago in fall 2005.
Everyone is throwing stones at dhl/ups possible deal which is going to cost thousands of jobs and I will be one of them. Where are all of the comments directed at Mr. Hete when Astar air cargo put a bid in for ABXair which would have saved a lot of these jobs at wilmington and
Posted: Thursday, September 18, 2008
Article comment by:
Frank Squire
Its important to understand that no matter what ideas were proposed to Mullen/DHL they were no more induced to listen to proposals then on Black Wednesday, May 28 when the Nazis dropped the buzz bomb in Ohio.
When a corporation denies the obvious, and everyone who participated in the hearing notices that something just does not make prudent business sense, then what you are witnessing is their chosen self destruction so they can cry to the public and government that the business is lost and a sale/merger acquisition to UPS is the only alternative. UPS is salivating at the downfall of DHL and for those that are not aware, they continue to poach customers yet the Germans do nothing! Oh by the way, during these hearings the honorable Congressman Lynn Westmoreland alerted all to the fact that UPS is a great citizen to the state of Georgia. (in his best Foghorn Leghorn accent), he didn't remain long after that.
Circumvention of antitrust/anticompetition laws is what this is all about disguised as a vendor agreement? Hey Luffewaffe? you really think the people of Ohio, and U.S.Congress and Senate are stupid enough to buy your claims? You have no idea the sleeping giant you have awoken in this country, DUMKOFFS!
Posted: Thursday, September 18, 2008
Article comment by:
Carl Mockabee
It's my understanding that DSL offered to buy ABX AIR about two years ago for between 7.75 and 8.00 a share. The CEO from ABX AIR said that's not enough and more or less snubbed DSL. If this is true the CEO at ABX AIR blew this one.
Posted: Thursday, September 18, 2008
Article comment by:
bill neace
“enjoined” means the deal can be legally banned. and this deal should be banned before any more damage is done.
i can not believe u.p.s.
can not see them selves
as being set up for failure! if this deal does happen it will be a large desaster in the
shipping industry. if u.p.s.does not meet every demand of dhl has to bring to the table,then d.h.l.will simply bail out on u.p.s. like they did a.b.x. dhl does not eat crow very kindly, and they won't, believe this. "its" thier way or the highway. i know of at least 10,000 customers u.p.s.will lose from he start! guess who these people are? but who is counting right? dhl is loosing money every day
correct?
thank you!
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