Prospecting DHL's Decision: Consultant looks at the integrated carrier's plans and potential for specific airports

Managing Airports Today

Prospecting DHL's Decision

Consultant looks at the integrated carrier's plans and potential for specific airports

By Michael Maynard, Senior Airport Planner, Wilbur Smith Associates

September 2004

All eyes are on DHL as the integrated express cargo carrier injects$1.2 billion into a North American expansion designed to step up competitionwith UPS and FedEx. The carrier's expansion includes plans for investment in operations, upgrades to the Wilmington, OH hub, creationof 13 DHL regional sort center facilities, and information technology enhancements. All else that is known at this point is that the expansion will be significant and will impact some airports in the U.S., but which ones? Here's an analysis of which locations could benefit.

The most intriguing element of the plan is the addition of seven regional sort centers to increase ground delivery and air capacity by 2004 and another five after 2005, bringing the total to 24. The South Florida Business Journal reports, "The company said the seven new regional sort centers [are] planned for locations throughout the United States." The "Cargo Facts" newsletter indicated that… "the seven new DHL regional hubs will be located in the middle part of the country, rather than on the coasts – i.e. between the Rockies and the Appalachians." This is the largest increase in the integrated express industry in recent years.

A doubling of its ground network will offer seamless connectivity within DHL's system and increase the geographic coverage of its second and third day delivery product. Where these new regional hubs will be located is currently a mystery and officials at DHL are tight-lipped on the subject. Looking at the carrier's current network may provide some clues, or at least give an idea of which regions of the U.S. will be impacted.

Merger Implications
When DHL bought most of the assets of Airborne Express last year in a $1.05 billion merger, it inherited a cargo carrier with about 14 percent market share of domestic integrated express. DHL had about 5 percent market share but more than 40 percent market share of international integrated express air cargo in the U.S. On paper it looked like a good fit. DHL had a corner on the North American international market while Airborne had a sizeable share of the domestic market. Each benefited from hubs in the Ohio Valley, and Airborne owned the largest privately held airport in the U.S.

However, when considering the differences in aircraft configurations, fleet compatibility, differing size cargo doors and containers, the redundancy of air hubs only 50 miles apart (in Cincinnati and Wilmington, Ohio) and differences in IT compatibility (DHL has 8-digit airway bills while Airborne has 10-digit), this merger becomes very difficult if not nearly impossible.

Prior to DHL's purchase of Airborne, its North American network was comprised of a single hub in Cincinnati and five international gateways located on the coasts. DHL product had a 12-noon delivery guarantee, and its daytime network was comprised of a single transcontinental flight connecting the West Coast to the New York City area. DHL also had express product but did not offer second and third day delivery or "deferred" product.

Airborne's network was comprised of a single national hub in Wilmington, with a daytime and nighttime network and eleven regional hubs and 325 stations. These regional hubs are located in San Marcos/Vista and Fresno, CA; Centralia, WA; Columbia, MO; Waco, TX; Atlanta; Orlando; Roanoke, VA; South Bend IN; Providence, RI; and Allentown, PA. The sort facility at Waco is located at the airport while the sort facility at Providence is five miles from the airport.

While the community of Wilmington, OH will benefit from the expansion at Airborne Airpark, Cincinnati-Northern Kentucky International (CVG) will take it on the chin. DHL will walk away from a new $220 million automated sort facility, removing more than 900 — or 6 percent — of CVG's airport jobs by the fall of 2005. The consolidation will create 600 new full-time jobs and 300 part-time jobs at Wilmington and will reduce redundancies in airlift, saving DHL $165 million a year. The Wilmington Air Park, now owned by DHL and operated by the independent ABX Air Inc., currently employs more than 6,000 people.

How it works
Airborne Express's strategy in developing its eleven regional hubs over the last 15-20 years was to divert parcels away from aircraft and the national hub facility and into trucks, which operate at about half of the cost per pound when compared to aircraft. The regional hubs accommodated some express parcels but mainly second and third day delivery products.

The regional hubs primarily sort shipments originating and having a destination within a 300-mile radius of the regional hub. This is so traffic bound in specific directions can be accommodated. For example, a station in Columbia, SC, with a parcel bound for Montgomery, AL, would transport that parcel via the Atlanta regional hub. That same station, however, would route parcels bound for Washington, D.C. through the Roanoke regional hub.

Locations of the regional sort facilities varied. Some were located on airports, others were not. The Allentown operation initially was located on the airfield but outgrew its facility and eventually moved off-airport. Given the type of product moving through the regional hub system, these hubs were, in many instances, not located in major markets but between them on major Interstate corridors. For example, the Waco trucking hub has access on I-35 to Dallas, Austin, and San Antonio. Similarly, Columbia is midway between Kansas City and St. Louis on I-70.

Location Analysis
Site selection by logistics businesses is more than just visiting a few industrial parks and finding the best real estate deal. It is the science of using computer databases and mapping software to determine the optimal location. Labor, vehicle costs, and pickup and delivery schedules are impacted on a daily basis in the logistics industry by facility location. In DHL's case, the first step is to accommodate regions in the U.S. that currently do not have regional hub coverage. These areas are known as "white zones." The second step is to increase service options near major markets. The first map (page 10) identifies the 300-mile radius of a regional hub and geographic areas currently in the U.S. without coverage.

As the map indicates, there is significant regional hub coverage of the East Coast, Southeast, and West Coast. There are gaps in the South-Central, upper Midwest, and Plains States, as well as the West that are not covered by the regional hub network. It is important to note that the 300-mile radius is not a hard and fast rule. In the Northeast, the Providence and Allentown regional hubs are 265 miles apart, while the Atlanta and Orlando regional hubs are greater than 300 miles.

DHL is looking for existing vacant facilities that can accommodate a regional sort facility. Typically these facilities range in size from 30,000 square feet to 100,000 square feet. The facility must have excellent highway access, truck doors and/or truck docks, as well as ample parking for employees and a vehicle fleet.

The company says it estimates the expansion will result in 30 to 50 local jobs at each regional sort center. The regional sort facilities will not necessarily need to be located near the central business district (CBD) of a city. According to DHL, some facilities will be directly tied into their air network but do not necessarily need to be located on-airport.

Several criteria were analyzed to determine which U.S. markets are advantageous locations for a DHL regional hub, increasing coverage areas near major markets, and for filling in the "white zones." The following criteria were used in the analysis:

• A regional hub service area radius of 300 miles
• Locating the regional hubs in the interior U.S. and away from the East and West Coasts
• Markets with current DHL aircraft service
• Proximity to Interstate highway corridors
• Significant metropolitan areas within the regional hub's service area.

Using the above criteria, markets with regional hub potential are identified. The results of the analysis are presented in the second map, which identifies potential markets where DHL may choose to locate the new facilities. Remember, precise locations are not the goal of this exercise, but to provide a general idea, based on geography, of which markets make sense for site selection. It should also be noted that areas such as Montana would still receive nearly all service via aircraft.

• Buffalo or Rochester, NY. Located about halfway between the Providence regional hub and the national hub in Wilmington, a facility in western New York could provide service to the densely populated East Coast, New York's I-90 corridor, as well as southern Canada and all of Pennsylvania. The facility could also service northeast Ohio, including Cleveland. DHL currently operates cargo aircraft at Buffalo International Airport and Greater Rochester International.
• Nashville, TN. A regional hub in Nashville would provide coverage for all of Tennessee, northern Alabama, and Kentucky. Other markets gained at this facility include Atlanta, St. Louis, Indianapolis, and all of southwest Ohio. DHL currently operates aircraft at Nashville International Airport. Nashville is at the junction of Interstates 65, 24, and 40.
• Jackson, MS. There is a significant "white zone" in the South-Central part of the country. DHL currently operates aircraft at Jackson International Airport. A facility in Jackson could serve all of Mississippi, Louisiana, western Tennessee, most of Arkansas, and Alabama. Jackson is at the junction of Interstates 55 and 20.
• Lake Charles, LA. This facility would provide service to major metropolitan areas located on the I-10 corridor. Metro areas covered by this facility include San Antonio, Houston, Galveston, New Orleans, and Mobile, to name a few. DHL currently operates aircraft at Chennault International Airport in Lake Charles.
• Tulsa or Oklahoma City, OK. A regional hub in Tulsa or Oklahoma City would be located about halfway between existing hubs in Columbia, MO, and Waco, TX. DHL currently operates aircraft in both markets. This facility would provide coverage for Oklahoma, central and eastern Kansas, northeastern Texas, including Dallas, and Kansas City. I-40, I-35, and I-44 dissect the area.
• Rochester or Minneapolis, MN. If a regional hub were to be located in Rochester or Minneapolis it would provide service coverage for all of Wisconsin, Iowa, Fargo, ND, and northern Illinois, including Chicago. The next nearest regional hubs are in South Bend and Columbia. DHL currently operates aircraft in Minneapolis and Rochester. Airborne Express's facility at Rochester is some 20,000 square feet in size and was completed in 1999. Minneapolis is included in the air carrier's daytime network.
• Omaha, NE. This market is located about 300 miles from Columbia, MO, and the Minneapolis metro area. Omaha is at the junction of Interstates 80 and 29. Two DHL aircraft currently serve Omaha. A regional hub in Omaha would provide service coverage for Iowa, South Dakota, Nebraska, Kansas, and northern Missouri.
• Lubbock, TX. A regional hub in Lubbock would serve western Texas and eastern New Mexico, including the Albuquerque metro area. DHL currently operates a cargo aircraft at Lubbock International Airport.
• Denver. There is a significant "white zone" in the Rocky Mountain region. A regional hub in the Denver metro area would provide coverage for all of Colorado, Southeast Wyoming, northern New Mexico, and western Kansas and Nebraska. DHL currently operates two cargo aircraft at Denver International Airport. Denver is at the junction of Interstates 70, 76, and 25.
• Salt Lake City. There is another significant "white zone" in the Intermountain Region of the West. A regional hub in the Salt Lake City metro area would provide coverage for all of Utah, western Colorado, southwest Wyoming, and southern Idaho, including Boise. DHL currently operates a cargo aircraft at Salt Lake City. Salt Lake City is at the junction of I-80 and I-15.
• Albuquerque, NM. Located about halfway between El Paso and Colorado Springs, a regional hub facility in central New Mexico could provide service to all of New Mexico, southern Colorado, the Texas Panhandle, as well as north-central Arizona. DHL currently operates cargo aircraft at Albuquerque International Sunport. Albuquerque is at the junction of Interstates 40 and 25.
• Phoenix. Phoenix is one of the fastest growing cities in the U.S. Las Vegas, another rapidly expanding city, is 300 miles to the northwest, and the fast-growing San Bernardino region of California is 300 miles to the west. Phoenix is at the junction of I-10 and I-17.
• Washington D.C. Although not in a "white zone" (and the Roanoke regional hub is nearby) the Washington, D.C. metropolis could support a regional hub located in northern Virginia or the Baltimore area. This facility would provide balance to servicing the southern portion of "Megalopolis." (Geographer Jean Gottmann defined the area from Boston to Washington as one huge urban area, known as "Megalopolis"). Allentown serves the central portion of "Megalopolis" while Providence the northern.

Now, if your market was identified above, keep in mind that the new DHL regional hubs are primarily trucking hubs. They don't need to be located on airports. There is a trend, however, for air freight trucking companies to locate on airports. Forward Air has hubs at Rickenbacker International in Columbus, OH, as well as a recently opened facility at Kansas City International. Forward Air's customers are largely air forwarders and airlines and nearly all material moved on Forward Air is trucked.

Marketing
Since this analysis is from the outside looking in, the extent to which location decisions have already been made by DHL is unknown. The effect of any marketing efforts may prove minimal. However, when marketing to any logistics company, present them with the big geographic picture. Tell them how your airport fits into the regional and global economy. You have to explain why your location is best. Stress Interstate highway access, proximity to other metropolitan areas, lack of congestion, easy access, prevailing labor costs, and workforce qualities.

Then present finer details such as landing fees, lease rates, and tax incentives. Tax incentives are generally considered last by firms during their site selection process. It is the savings in daily operations costs, such as labor involved in trucking, and vehicle costs as well as aircraft costs, which add up quickly.