Forwarding drags DP-DHL backward

DHL 3Q15Deutsche Post-DHL reported third-quarter net income down almost 90% to €49 million, as total revenue rose 3.0% to €14.42 billion. Operating profit (EBIT) for the quarter was down 70.9% to €197 million.

Express and e-Commerce were the only bright spots in an otherwise dismal quarter for the German post/express/logistics giant, as a variety of issues hit profitability in its mail, forwarding, and supply chain activites. A strike by postal workers in Germany hurt the Post-eCommerce-Parcel division, and a restructuring charge hobbled results in the Supply Chain division, but the biggest negative impact came as the company finally faced up to the massive failure of its attempt to modernize the DHL Global Forwarding division.

When it published its first-half results in August, DP-DHL said it was temporarily suspending the New Forwarding Environment (NFE) initiative. Three months later, the company confirmed what had been widely predicted, and terminated the program completely. In its own words: “Given the decreased likelihood that the Global Forwarding business unit will be able to realize benefits from the New Forwarding Environment (NFE) system in its current state, the Group recognized in the result of the first nine months of 2015 negative one-off effects of a total of €345 million. This comprises €308 million in impairment losses recognized on assets capitalized in relation to NFE as well as subsequent costs of €37 million related to the further course of transformation.”

While a failed initiative is bad enough – €345 million is a significant charge – the real problem is bigger. The NFE program was put in place because DHL Global Forwarding was being out-competed by rivals with advanced IT systems. DHLGF needed to upgrade to a modern IT system, and NFE was an attempt to do so. That it failed is bad enough, but that failure has left the company even further behind, and it must now find a way not only to undo the damage created by NFE – which includes replacement of senior management – but also to find some other way to modernize, as well as to win back lost customer confidence.

How will it do this? In its third-quarter results commentary, DP-DHL said the Global Forwarding division’s new management had adopted a new turnaround plan “with the objective of improving the operating performance quickly and of defining the future course of transformation. Measures designed to improve the division’s cost structure, earnings and customer service, amongst other factors, have been initiated. Based upon the review, which also included the future IT landscape, management has decided on a new IT renewal path.” This is vague enough to mean just about anything, so the world will have to wait and see.

But it was not all bad news from Bonn today. DHL Express continues to shine, with divisional EBIT up almost 20% to €364 million as revenue rose 6.9% to €3.33 billion. The revenue growth came from all regions, led by a 12.5% increase in the Americas. Much of the gain in the Americas was due to positive exchange-rate effects (i.e. a strong US dollar), but even in Europe, where exchange-rate effects were smaller, DHL Express saw revenue rise 6.1%. Revenue was also up for both of the division’s major products, Time Definite International and Time Definite Domestic. Again, the revenue gain was driven by exchange-rate effects, but, as can be seen in the chart, daily package volumes also grew strongly, up 8.5% for TDI and 7.0% for TDD.

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