[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
EFFECTS OF THE PROPOSED ARRANGEMENT BETWEEN DHL AND UPS ON COMPETITION,
CUSTOMER SERVICE, AND EMPLOYMENT
=======================================================================
(110-168)
HEARING
BEFORE THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 16, 2008
__________
Printed for the use of the
Committee on Transportation and Infrastructure
U.S. GOVERNMENT PRINTING OFFICE
45-107 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gov Phone: toll free (866) 512-1800 Fax: (202) 512-2250 Mail: Stop IDCC, Washington, DC 20402-0001
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia, JOHN L. MICA, Florida
Vice Chair DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of JOHN J. DUNCAN, Jr., Tennessee
Columbia WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California FRANK A. LoBIONDO, New Jersey
EDDIE BERNICE JOHNSON, Texas JERRY MORAN, Kansas
GENE TAYLOR, Mississippi GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California HENRY E. BROWN, Jr., South
LEONARD L. BOSWELL, Iowa Carolina
TIM HOLDEN, Pennsylvania TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine SHELLEY MOORE CAPITO, West
BRIAN HIGGINS, New York Virginia
RUSS CARNAHAN, Missouri JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois TED POE, Texas
NICK LAMPSON, Texas DAVID G. REICHERT, Washington
ZACHARY T. SPACE, Ohio CONNIE MACK, Florida
MAZIE K. HIRONO, Hawaii JOHN R. `RANDY' KUHL, Jr., New
BRUCE L. BRALEY, Iowa York
JASON ALTMIRE, Pennsylvania LYNN A WESTMORELAND, Georgia
TIMOTHY J. WALZ, Minnesota CHARLES W. BOUSTANY, Jr.,
HEATH SHULER, North Carolina Louisiana
MICHAEL A. ACURI, New York JEAN SCHMIDT, Ohio
HARRY E. MITCHELL, Arizona CANDICE S. MILLER, Michigan
CHRISTOPHER P. CARNEY, Pennsylvania THELMA D. DRAKE, Virginia
JOHN J. HALL, New York MARY FALLIN, Oklahoma
STEVE KAGEN, Wisconsin VERN BUCHANAN, Florida
STEVE COHEN, Tennessee ROBERT E. LATTA, Ohio
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland
(ii)
CONTENTS
Page
Summary of Subject Matter........................................ iv
TESTIMONY
Brown, Hon. Sherrod, a United States Senator from the State of
Ohio........................................................... 6
Fisher, Hon. Lee, Lieutenant Governor of the State of Ohio and
Director of the Ohio Department of Development................. 15
Hammes, Gary, Senior Vice President and Chief Operating Officer,
ASTAR Air Cargo, Inc........................................... 35
Hete, Joseph C., President and Chief Executive Officer, ABX Air
and Air Transport Services Group............................... 35
Mullen, John P., CEO, DHL Express................................ 35
Prater, Captain John, President, Air Line Pilots Association
International.................................................. 35
Raizk, Hon. David L., Mayor, City of Wilmington, Ohio............ 15
Ross, Captain David R., President, Airline Professional
Association, Teamsters Local 1224.............................. 35
Simon, Samuel R., the American Antitrust Institute............... 35
Turner, Hon. Michael R., a Representative in Congress from the
State of Ohio.................................................. 7
Wallace, Burt, President of Corporate Transportation, United
Parcel Service of America...................................... 35
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Carnahan, Hon. Russ, of Missouri................................. 79
Costello, Hon. Jerry F., of Illinois............................. 80
Latta, Hon. Robert E., of Ohio................................... 84
Mitchell, Hon. Harry E., of Arizona.............................. 88
Oberstar, Hon. James L., of Minnesota............................ 89
Richardson, Hon. Laura A., of California......................... 94
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Brown, Senator Sherrod........................................... 96
Hammes, Gary..................................................... 99
Hete, Joseph C................................................... 114
Mullen, John P................................................... 129
Prater, Captain John............................................. 146
Raizk, Hon. David L.............................................. 159
Ross, Captain David R............................................ 201
Simon, Samuel R.................................................. 218
Turner, Hon. Michael R........................................... 228
Wallace, Burt.................................................... 231
SUBMISSIONS FOR THE RECORD
Wallace, Burt, President of Corporate Transportation, United
Parcel Service of America, supplemental statement.............. 243
ADDITIONS TO THE RECORD
The Honorable Ted Strickland, Governor of the State of Ohio,
written statement.............................................. 248
The Honorable George V. Voinovich, a United States Senator from
the State of Ohio.............................................. 250
[GRAPHIC] [TIFF OMITTED] 45107.001
[GRAPHIC] [TIFF OMITTED] 45107.002
[GRAPHIC] [TIFF OMITTED] 45107.003
[GRAPHIC] [TIFF OMITTED] 45107.004
[GRAPHIC] [TIFF OMITTED] 45107.005
[GRAPHIC] [TIFF OMITTED] 45107.006
[GRAPHIC] [TIFF OMITTED] 45107.007
[GRAPHIC] [TIFF OMITTED] 45107.008
HEARING ON THE EFFECTS OF THE PROPOSED ARRANGEMENT BETWEEN DHL AND UPS
ON COMPETITION, CUSTOMER SERVICE AND EMPLOYMENT
----------
Tuesday, September 16, 2008
House of Representatives,
Committee on Transportation and Infrastructure,
Washington, DC.
The Committee met, pursuant to call, at 2:15 p.m., in Room
2167, Rayburn House Office Building, the Honorable James L.
Oberstar [Chairman of the Committee] presiding.
Mr. Oberstar. The Committee on Transportation and
Infrastructure will come to order.
I see we have a very lively interest and apparently a very
long line of people outside. I hope there is accommodation for
them in the Subcommittee hearing room to follow the
proceedings.
In the interest of time, I will make an opening statement
and frame the issue in its broadest strokes, then yield to the
Ranking Member, Mr. LaTourette, and we will go directly to
witnesses. I will ask Members to use their five-minute time to
make their own usual comments.
In light of the late start, because of the length of the
previous hearing, I want to get right to the subject matter on
the effects of the proposed arrangement between DHL and UPS on
competition, on customer service and on jobs.
DHL Express and UPS announced that they intend to enter
into an agreement for UPS to provide airlift services for DHL's
domestic express and international package volume in the U.S.
and between the U.S. and Mexico, the U.S. and Canada.
The two are competitors in air express service. Packages
are picked up by trucks, moved by air, delivered again by
truck.
Over the past several years, DHL has contracted with other
air carriers, ABX and ASTAR, to do the airlift portion of their
service. DHL has said that this agreement is the only way it
can continue to maintain its presence in the U.S. market in
view of their losses, some $3 billion in losses since 2003.
But concerns have been raised about the anticompetitive
effect that the proposed UPS/DHL deal would have in the air
express market. Furthermore, Members of Congress from Ohio
particularly and those in the Wilmington, Ohio, area where the
DHL hub is located are concerned. Not only concerned, they are
stunned by the loss of thousands of jobs and local revenue.
I understand that. We have had iron ore mining facilities
close in my district. We have gone from 16,000 jobs in mining
down to 1,800 in 18 months, and the devastation that produces
on local economies is painful.
So far, there has been no concrete agreement between DHL
and UPS, and it may not be consummated for yet another few
weeks.
As you look at this proposition, it is probably the most
complex operating and financial arrangement in the post-
deregulation era of aviation. I will attempt to lay out just
the highlights of the issue.
DHL is an important but not the largest competitor in the
air express market. In 2007, that market was $32.8 billion.
FedEx had 43 percent of the market; UPS, 32 percent; DHL, 8.5
percent; U.S. Postal Service, 2.8 percent.
But it has not been growing. The express market has
stagnated or slipped. The daily package volume in the U.S. is
now at 6.6 million shipments a day, and that is down just under
2 percent from last year and 5 percent below its 2000 peak.
Now that is attributable to downturn in the national
economy, to the internet for transmission of documents, to jet
fuel prices, a host of other business factors.
But if you look forward, if the agreement were consummated,
clearly from what I have heard from my colleagues and then
independent review, it would devastate the economy of the City
of Wilmington. Air Park is the largest employer in southwest
Ohio, 9,000 jobs alone: 725 employees of ASTAR, 1,200 DHL,
7,000 ABX employees.
Competition in the express delivery market may also be
adversely affected if the deal is consummated. Various
observers of the scene, those who are not directly affected,
have said that it potentially could violate antitrust statutes
that prohibit agreements that result in restraint of trade, but
this is a different kind of an arrangement.
It is not a merger. It is not an acquisition. It is not
subject to Hart-Scott-Rodino. So the parties are not required
to file documents for pre-implementation review under the
antitrust statute.
Therefore, the Ohio congressional delegation and the State
of Ohio have been frustrated in their attempt to get a better
understanding of or respond to the situation.
Now this doesn't mean that the Department of Justice cannot
review the agreement to determine whether there are
anticompetitive effects, but I think we have a somnolent
Department of Justice.
Others have said if you allow DHL to outsource airlift to
UPS, a competitor, DHL then would be captive to UPS in terms of
capacity, price and customer service. Airlift is about 60
percent of the cost of shipping a package overnight. So, if you
lose a significant percentage, then an important part of DHL's
costs will be controlled by UPS.
DHL could lose the ability to price its services so as to
compete realistically with both UPS and FedEx, a condition
called price squeezing. Either way, DHL could well go out of
business, leaving the market in a duopoly condition. UPS will
control capacity on its aircraft, and if DHL is not guaranteed
space its ability to ensure on-time arrivals will be hampered.
If the industry is reduced to two major express carriers,
competition would be reduced, prices will go up.
When established carriers control markets, the tendency is
for carriers to follow each other's pricing rather than really
compete with each other. We have seen that in the passenger
market. So, if DHL is neutered in the marketplace, then UPS and
FedEx will have less incentive to compete with one another,
increasing the price for express delivery packages.
I think those are the broad issues that frame this inquiry
today.
With those remarks, I yield to the distinguished gentleman
from Ohio, Mr. LaTourette, for a comment. Then I see the
Ranking Member of the Aviation Subcommittee has arrived, and we
will hear from him.
Mr. LaTourette. Thank you, Mr. Chairman, now that I am back
in the cheap seats.
Mr. Chairman, I want to thank you for having this hearing
and as a testament to the bipartisan nature in which you deal
with any issue dealing with transportation in the United States
of America. As I said on the day of your elevation to the
Chairmanship, none of us on the Republican side would have
chosen to be in the Minority, but if we had to we are glad that
you are the Chairman of our Committee.
I also want to single out for praise my colleagues from
Ohio, although Wilmington is a little bit south from
northeastern Ohio. When this matter, which really is going to
have catastrophic consequences to Wilmington, Ohio, came to the
attention, two public figures--among others but also above
others--Congressman Mike Turner of Dayton and our junior
Senator, Sherrod Brown, really stepped into the fray and are
attempting to move heaven and earth to find a resolution for
those who are about to be displaced.
Credit also goes to our former colleague, Governor
Strickland, and his Lieutenant Governor, Lee Fisher, who have
been intimately involved and have looked at everything, I
think, that they can possibly look at from the State side.
This is troubling issue. It is troubling because about
12,000 people have the potential to lose their job, but it also
has to be considered in sort of a world view.
If you look at what has happened to the price of fuel, jet
fuel being included, there is not a lot of money being made
today in the air freight business. As a matter of fact, the
United States Postal Service, which is also in the air freight
business, is looking at closing a number of its air terminals
because it has turned out to be not the moneymaker they thought
that it, in fact, was going to be. And so, anything that we
discuss has to be discussed in terms of where we are with the
cost of fuel in this Country.
It is my understanding also and I think the Chairman
rightly says that there is no agreement between DHL and UPS at
this moment in time. So, therefore, it is tough to determine
whether or not it runs afoul of something when we don't even
know what it says.
Just from a business standpoint, I guess I understand UPS's
position, and that is they have excess capacity at their
facility in Kentucky and why wouldn't they want to use their
assets to full capacity.
The difficulty that I have, I think, in this case is with
DHL, the German almost owned, German-owned company, 100 percent
owned by the Germans, in that it is my observation from just
looking at the facts that they made a bet. They made a bet that
somebody in the Congress was going to blink on the ownership of
American Airlines, and when they didn't blink it thwarted their
plans to go from a minority shareholder--and I get them
confused, whether it is ASTAR or ABX--to actually taking
control. That then has sort of led to a downward spiral.
But whatever the situation, wherever the fault lies, I
think that is incumbent upon this Congress to join with the
State of Ohio and do whatever we can to alleviate the suffering
that is going to occur in Wilmington.
And, the reason I am glad it is here in this Committee is
this is an issue that doesn't have anything to do with
politics, Mr. Chairman, but I was down in southern Ohio two
weekends ago for my nephew's wedding, and I saw an
advertisement that somehow this business in Wilmington, Ohio,
is John McCain's fault.
It is not John McCain's fault. It is not Barack Obama's
fault. We will perhaps determine whose fault it is, but to
suggest that it is the fault of one party or another to get
somebody elected or not elected to become the next President of
the United States, I think is disgusting.
Quite frankly, even though I don't come down on this side
of the issue, if this Congress had accepted this
Administration's recommendation on the foreign ownership of
airlines, perhaps DHL wouldn't have made this decision and
10,000 people wouldn't be losing their jobs.
So I hope we take it out of politics and we put it back
where it belongs, and that is let's make sure that we do
whatever we can with whatever resources we have to help these
folks that are looking at a very bleak feature.
I thank you, Mr. Chairman, and yield back.
Mr. Oberstar. I thank the gentleman.
I certainly concur. This is a business proposition that we
need to examine from the standpoint of its effect on the
economy and its effect on international aviation and trade in
cargo.
Now the distinguished Chair of the Aviation Subcommittee,
Mr. Costello.
Mr. Costello. Mr. Chairman, thank you.
Mr. Chairman, in the interest of time so that we can get to
our first panel, Senator Brown and Congressman Turner, let me
be very brief. I will insert a statement in the record.
I, obviously, have some of the same concerns Mr. LaTourette
and you share concerning the employees, what it does to the
local economy, the competition in the industry, and in
particular I am interested in hearing from Mr. Simon concerning
the pros and cons of this proposed arrangement for both
consumers and for the employees. So I look forward to hearing
his testimony and the testimony of the other witnesses.
I thank you, Mr. Chairman.
Mr. Oberstar. I thank the gentleman.
Mr. Petri, the Ranking Member and Ranking Member of the
Subcommittee on Aviation.
Mr. Petri. Thank you very much, Mr. Chairman. I, too, am
looking forward to the testimony of our witnesses today, and I
thank you for holding this timely and important hearing.
It is essential that we focus on the financial issues
facing the airline industry right now, not least of which is
the unprecedented price of jet fuel over the last few months
and its impacts on air carriers, both passenger and air cargo.
These difficult financial times have pushed many air carriers
to make difficult business decisions and to pursue cost-cutting
and revenue-generating actions.
In fact, DHL has cited a decline in air express volume and
increased operating costs, especially jet fuel expenses, as a
reason that they are pursuing the significant steps that are
the subject of today's hearing.
As part of their plan to address their ongoing losses, in
May, DHL announced that it will work together with UPS toward
an agreement to have UPS provide airlift to all of DHL's
express, deferred and international package volume within the
United States. DHL's airlift service has been and currently is
provided by two small air carriers, ABX and ASTAR.
It is not surprising that since the proposed transaction
was announced, aviation experts, labor groups, affected
communities and other interested parties have commented both
for and against this potential arrangement. Indeed, the
proposed arrangement's impact on the marketplace competition,
customer service and employment have been the subject of much
speculation.
While the potential agreement between DHL and UPS is still
being negotiated, it has generated great concern particularly
among those who could be the most impacted: ABX, ASTAR and the
communities such as Wilmington, Ohio, where many, many good
jobs could be lost.
This concern is understandable and, given the potential
impacts of this agreement, it is both important and necessary
for this Committee to fully explore the proposed transaction.
At the same time, DHL has cited that the agreement and
restructuring is necessary to address over $1 billion in annual
losses. The future of DHL operations in the U.S. also must be
considered.
Today, we have before us, representatives of the interested
groups to testify about the proposed DHL and UPS agreement. I
look forward particularly to hearing from my former colleague
and now Senator, Sherrod Brown from Ohio and Representative
Mike Turner and welcome them here today. I also look forward to
the testimony of Lieutenant Governor Lee Fisher and Mayor David
Raizk.
Finally, we will hear from all four of the air carriers
involved--ASTAR, ABX, DHL and UPS--two pilot union
representative from the American Antitrust Institute.
Again, I look forward to hearing the testimony of all those
who are appearing today and thank you again, Mr. Chairman, for
having this hearing.
Mr. Oberstar. I thank the gentleman.
And now, we will proceed with the testimony from our first
panel, Senator Sherrod Brown, a former House colleague--he got
good training over here in the House and went over to raise the
caliber of the United States Senate--and Congressman Mike
Turner, Representative of the area most directly affected.
We thank both of you for your advocacy for this hearing and
the concerns expressed so adroitly.
Senator Brown.
TESTIMONY OF THE HONORABLE SHERROD BROWN, A UNITED STATES
SENATOR FROM THE STATE OF OHIO
Senator Brown. Thank you, Mr. Chairman, and thank you. I
concur with the words of my friend, Steve LaTourette, about
your Chairmanship. Thank you for that.
And, Ranking Member Petri and Chairman Costello, thank you.
And, Steve LaTourette, thank you for your always support on
transportation issues.
I would thank the Ohio Members especially here, Jean
Schmidt and Zach Space and Bob Latta, for their work on this
issue. I have seen just terrific support from both houses
including my senior colleague, Senator Voinovich, and the
entire delegation in both parties.
I especially thank Representative Turner who has absolutely
led the charge on this issue and has really stepped up.
We both were sort of laughing--that may be the wrong word--
with many of the pilots who are here in the room behind us
today, that DHL did not expect this kind of community
opposition and opposition from people who represent this
community to this decision. It did sort of strain credibility,
but it is pretty clear how important this is to all of us.
Also, a special thanks to the Governor and to Lieutenant
Governor Fisher who have been in there every day on this issue
and Mayor Raizk who has just always been on the phones, meeting
with people, doing whatever he had to do to fight for these
jobs, and the leadership of Teamster Local 1224, Captain Ross,
and the Air Line Pilots Association, Captain John Prater and
the other pilots that are here today.
Last week, Mr. Chairman, in the House Judiciary Committee,
we learned that DHL voluntarily went before the Justice
Department, which we appreciate. Yet it will not submit itself
to a voluntary investigation and plans, it says, to consummate
the deal regardless of the status of the investigation.
That makes it very difficult for the Justice Department to
do its work, to examine the deal from the customer's
perspective. I hope both companies will reconsider and allow
the Justice Department to investigate and not consummate the
agreement until the government completes that investigation.
I am particularly disturbed that DHL's confidentiality and
exclusivity agreement with UPS to complete this contract limits
it from alternative structures that can keep DHL competitive,
that can benefit consumers and that can keep jobs in our State.
Specifically, DHL embarked on this proposal with UPS before
really engaging the incumbent carriers, ABX and ASTAR, in an
effort to reduce costs. ABX and ASTAR have ideas. They had
plans. They had proposals. But DHL chose this course before
talking with the Governor about ways the State might help DHL
cut costs.
After not choosing to work with its partners, DHL went
ahead and bound itself to a confidentiality and exclusivity
agreement with UPS.
Considering the lengths the State of Ohio went some four
years ago when DHL bought Airborne, the lengths the State went
to and surrounding communities took to welcome DHL to
Wilmington including some $400 million in direct and indirect
incentives, DHL's behavior is hardly a model of corporate
responsibility.
All of this raises several questions which I don't think
have been answered:
How can DHL, under this proposal, lower prices or improve
service?
How can DHL prevent UPS from manipulating costs and
service?
How does DHL prevent UPS from obtaining sensitive
information on customers and pricing?
Congress also needs to understand how DHL took Airborne
Express, a company in southwest Ohio that was profitable, and
in just four years generated staggering losses while DHL in
Germany and Europe overall has been a very, very profitable
company. As you know, it is owned by Deutsche Post, the former
German privatized post office, a very profitable company in
Europe--not so, supposedly, in the United States.
When DHL purchased Airborne Express in 2003, it had an 18
percent market share. By last year, its market share had
dwindled to about 7 percent.
The ripple effects of this proposed deal, Mr. Chairman, if
it goes forward would reach beyond, as Mr. LaTourette said, the
financial hardship it would create in Ohio. The final result
may leave a mark on how our government approaches something
that I know you are so concerned about, Mr. Chairman, the next
stage of the U.S./E.U. Open Skies Initiative which aims to
loosen existing rules and regulations and restrictions on E.U.
air carriers operating in our Country.
Its proponents claim that these negotiations ultimately
will create thousands of U.S. jobs and benefit our Nation's
economy enormously. Ohioans have heard this before five years
ago.
So, Mr. Chairman, I will close with we certainly want DHL
to stay in Ohio. We want them to be successful. We want to work
with them. We want them competing in this market.
We want the 8,200 Ohioans, many of whom are represented
here today, to continue working, continue being the productive
employees they were, many of them, for Airborne prior to five
years ago and all of them the productive employees they have
been for DHL in the last year or two or three.
Thank you, Mr. Chairman.
Mr. Oberstar. Thank you, Senator.
Congressman Turner, welcome.
TESTIMONY OF THE HONORABLE MICHAEL R. TURNER, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF OHIO
Mr. Turner. Thank you, Mr. Chairman. I greatly appreciate
your holding this hearing today and your great summary as we
begin the discussion on this matter because you really laid out
some of the important issues that we need to address in this
hearing.
I also want to thank Senator Brown for his hard work and
leadership on this issue and Senator Voinovich who has
submitted written testimony.
We also want to recognize the Ohio delegation Members--
Space, Schmidt, LaTourette and Latta--and, of course,
Congressman LaTourette's leadership post on this Committee.
And, Lieutenant Governor Fisher and Mayor Raizk, we
appreciate their participation.
We even have the support of the two presidential
candidates. Obama and McCain have both weighed in, indicating
that this transaction deserves greater scrutiny.
Last week, we had a hearing before the Judiciary Committee.
Chairman John Conyers, upon hearing testimony, said that he
believed there were further questions that even his Committee
wanted to look at, and he asked for the two parties to hold off
on the transaction until his Committee could move forward.
We are certainly hopeful that as you all hear today this
testimony, that additional questions that you might have could
be addressed in the future.
This has been a bipartisan issue, and Mr. Chairman, I
appreciate your elevating it before your Committee today.
Wilmington, Ohio is in my district, and I want to tell you
a little bit about the people that are there. This facility is
not closing because of the people that are there. They are
hardworking, they are professional and they are committed.
This facility that is being subject to possible closure
operated at a profit prior to DHL's acquisition and its
operation.
Professions in this community will be lost. Homes are at
risk. Dreams are at risk. The ability to send children to
college is at risk.
In a nine-county area around Wilmington, Ohio, people send
family members to this facility in order to obtain health
insurance. Families' farms and small businesses depend on the
health insurance that is offered at this facility.
Additionally, non-profits and community service
organizations will be impacted.
Mr. Chairman, I would ask that I would be able to submit
written testimony from Mary Houghtaling, who is President and
Co-Founder of Community Care Hospice in Clinton County, which
speaks of the issue of the impact on small business and non-
profits in the area.
Mr. Oberstar. Without objection, so ordered. The document
will be received for the Committee record.
Mr. Turner. Thank you, Mr. Chairman.
But today I wanted, with the others, to outline for you
what is bad for the U.S. consumer and what is bad for the U.S.
air cargo industry.
If you go back just four years ago and view this as a
stepped transaction, you have a very different picture of the
U.S. air cargo industry.
Four years ago, there would have been five major carriers
that were operating. UPS acquired Emery which disappeared. DHL
acquired Airborne which operated at the facility that they are
now attempting to close, which disappeared. And now with DHL
and UPS looking to combine their operations, we are going to go
down to with what was five to two operators in the U.S. market.
But don't just stop there. You also need to look at what is
going on in the European market. The Atlanta Journal-
Constitution reports that of the three major carriers in
Europe--UPS, TNT and DHL--they say UPS and TNT, number three
and number two, are in negotiations for a merger. That would
mean that in Europe, where there were three major, they are
going down to two.
But, in reality, it will be one because if you go to send a
package in Europe to the United States and you go into a UPS
office or a DHL office, you will in effect be dealing with the
same company, the combined operations which we will see in our
market.
So what else is bad for the U.S. economy if this occurs
besides this consolidation? Well, there are huge barriers to
entry in this market. What is an industry that grew slowly now
is an industry that requires full integration and logistics
throughout the Country.
No one else will be able to now enter the market where this
consolidation has occurred. So we have consolidation and we
have preventing further competition.
Once they have market control, what will happen? Well, they
can limit service, and they can affect price.
What are some of the things that we do know? Well, I met
with DHL officials in my office, and here are some of the
things that we do know about this:
Their computer systems will have to be integrated because
they will have to talk to one another as they go through
sending packages of their various volumes.
Their costs will have to be coordinated because DHL will
basically become UPS plus.
I also asked them, the DHL representatives, is it possible
that this strategic alliance that they are forming with UPS,
could it involve also their Asian and European markets, and
they indicated that it could.
So what do we need to know? We need to know:
Why would UPS and DHL agree to this?
How did DHL take Airborne, a prior business that was
profitable, and generate losses?
What is the future relationship with DHL? Is this just the
start?
And what does it mean for the 10,000 people who are
Wilmington?
Is UPS in negotiations to acquire others? Is DHL?
I recently had a conversation with the German Ambassador to
the United States and discussed with him the issue of the
proposed or possible UPS acquisition of TNT, and he indicated
to me that perhaps if UPS and DHL combined here that it would
affect other approvals for UPS in Europe in the future. That is
something UPS needs to consider.
Usually when something doesn't make sense to me, I think
that something else must be going on. In this instance, I
believe this is a de facto merger.
Why else would DHL hand its clients to UPS?
Why would DHL agree to a cost structure that will become
basically UPS plus?
If DHL is going to share its information with UPS, why
wouldn't UPS steal DHL's clients?
Why would anyone choose DHL when everyone would know that
they are a front office then for UPS?
And why is there no deal for us to scrutinize? Why aren't
they able to place before us the transaction?
Well, to me, if it doesn't sound right, it probably isn't
right.
I would like to conclude with a paragraph that I put in an
op-ed piece that I had in the Cincinnati Inquirer:
All of this should be unnecessary. If DHL lived up to its
promises to Ohio and to the Town of Wilmington, we all would be
focusing on how to make DHL more successful.
Wilmington's past support for DHL should count for
something. The surrounding community accepted DHL's vision of a
global company operating in their back yards and understands
that DHL must curtail its losses.
However, usually when a company is losing money, they fire
someone. They don't fire a whole town.
Now, in this instance, DHL is going to come forward and
they are going to tell you that they are losing a lot of money.
I have to tell you that I believe that bad management is
never an excuse to allow market consolidation. DHL has an
opportunity to put its house in order without doing harm to the
U.S. economy and the U.S. shipping industry.
I guess now that we know that maybe there is a difference
with DHL. Perhaps the letters of DHL stand for Do Harm and
Leave.
Thank you, sir.
Mr. Oberstar. That was very powerful testimony from both
the witnesses.
Is there any set of circumstances that either of you can
conceive of under which, with a contractual arrangement, where
the air services of DHL could remain competitive in Wilmington?
Mr. Turner. Yes. DHL acquired Airborne. As you recall, DHL
was operating its own facility down in Cincinnati, and Airborne
was operating there in Wilmington.
When they acquired them, Airborne was profitable and had
not generated the losses that DHL had. Certainly, DHL would
have an ability to manage its resources so that it does not
have these losses.
Now they have mentioned frequently that their inability to
own their own airline may contribute to their losses. But even
so, they have publicly estimated that of the $1.3 billion that
perhaps they lost from bad business decisions, only $300
million may be attributable to not actually owning their own
airline.
While this deal has been going forward with UPS,
contractually UPS and DHL have entered into an exclusivity
agreement prohibiting their current carriers from even making
proposals to them. So we don't have the ability to give
scrutiny to what their other options are because those
negotiations have been thwarted.
Senator Brown. I would add two things, Mr. Chairman, where
I agree with Congressman Turner.
One is that my conversations early in this process with ABX
and ASTAR is that they have in fact made approaches. Because of
the agreement that Congressman Turner mentioned, they have been
rebuffed.
Second, we know that DHL has been a very profitable company
in Europe. We are not so sure. We have not been able yet to
determine if they have moved profits and losses on paper across
the ocean, one to the other, but there is some evidence that
when a flight goes from the United States to Europe they may,
in fact, credit some of the losses to the U.S. division and the
gains to the European part of DHL. We are looking into that.
To run up those kinds of losses after the profit that they
enjoyed, that Airborne enjoyed just five years ago certainly
raises some questions.
Mr. Oberstar. Thank you.
Mr. LaTourette.
Mr. LaTourette. I don't have any questions.
Mr. Oberstar. No questions. Any questions?
Congressman Space.
Mr. Space. Thank you, Mr. Chairman.
I would like to thank Chairman Oberstar and Ranking Member
Mica along with Subcommittee Chairman Costello and Subcommittee
Ranking Member Petri for facilitating this important hearing
today. It means a lot to me. It means a lot to the other
Members of the Ohio delegation, and it means a lot to the
people of Ohio.
I would like to thank Lieutenant Governor Fisher, Senator
Brown, Representative Turner, Mayor Raizk and others for
testifying today.
I certainly thank Governor Strickland in his absence for
his interest in this issue.
I think their participation in this hearing and their
actions so far have demonstrated the commitment that the people
of Ohio have to handling the various problems caused by this
transaction.
I am hoping that this hearing will shed some light on this
merger that will harm not only thousands of families in Ohio
but also millions of business and individuals that ship
packages every year.
If this deal goes through, the loss of jobs to Ohio are
enormous. Southern Ohio's economy is already much worse than
most areas of the Country, and this decision will exacerbate an
already very difficult economic situation, difficult in a
number of senses.
We have seen a steady evaporation of our manufacturing base
in Ohio. We have faced numerous infrastructural challenges. We
have a glaring lack of access to health care, education and
technology.
Our wage scales have become stagnant. Our unemployment is
rising much faster than the national rate, and poverty is
running rampant, poverty that exceeds 30 percent in some of the
counties of my district, poverty in all of its manifestations
which include hunger and homelessness and addiction, crime and
even the breakdown of the traditional family unit.
It is precisely because of these conditions and these
challenges in Ohio that this company was offered such an
attractive incentive package just a few years ago. Well, we
don't know the full extent of that incentive package today, but
it ranges between 100 and 400 million dollars.
And now, DHL is, in a sense, closing its doors under a veil
of secrecy and in the dead of night.
Using what they refer to as a confidentiality agreement,
they are refusing the State of Ohio's offer to come in and
provide assistance and any means necessary or, at the very
least, mitigate the effects of this action on those thousands
of employees whose lives will be affected. I find that action
both offensive and insulting.
We need to get to the bottom of why DHL has turned its back
on Ohio, whether DHL has done anything improper and how this
transaction will affect American consumers, the cargo industry
and the State of Ohio. Ultimately, I hope DHL will reconsider
alternatives to its plans with UPS.
Thank you, Mr. Chairman.
Mr. Oberstar. I thank the gentleman.
Congresswoman Schmidt.
Mrs. Schmidt. Thank you, Mr. Chairman. I do want to thank
you for holding this hearing. I will echo Mr. LaTourette. I am
glad, since we are not in the Majority, that you are at the
helm. You are really guiding the ship in a very fair and
nonpartisan way.
I also want to thank Senator Brown for coming forward on
behalf of the citizens of Ohio and, of course, my dear
colleague, Congressman Turner, who is majorly affected by this.
My district is also affected. About 750 jobs are affected
if DHL pulls out.
But really my concern here is something that Congressman
Turner echoed too, and I would like him to explain it a little
bit more carefully for everyone to fully understand what I
think is going on here.
Like, Congressman Turner, when it doesn't smell, it is not
right. It is like when you open up milk, and it is all curdled
at the top, that is not necessarily cream.
I don't think this is cream here. I think there is
something else afoul, and I really think that what DHL wants to
do is to force this into a duopoly situation, jacking up the
prices and making this unfair for not just the consumers here
in the United States but the consumers across the globe as
well.
That is where the Department of Justice really needs to
enter the situation.
But, Congressman Turner talked about UPS's intention with
TNT, and I would like you to kind of explain that a little bit
more fully to all of us because it is something I wasn't aware
of until you brought it forward just a few minutes ago.
Mr. Turner. Well, the Atlantic Journal-Constitution
reported that UPS is in these negotiations to acquire TNT.
Mrs. Schmidt. TNT stands for?
Mr. Turner. I am not certain, but they listed it as number
two in the carrier service industry for Europe. They listed UPS
as number three and DHL as number one.
What I think the whole point of that is, is this will not
be the end of consolidations. So that if you view this as these
two companies are, in effect, merging, what will be the
evolution in this industry where we go down to what will be two
in the United States and perhaps two or one in Europe?
You have to look at it as a stepped transaction to see what
the total impact will be on the market.
The concerns for the market are, obviously, their ability
to affect service, their ability to affect price because once
people get control over a market they have ability to say: Your
town is too small; we are not going to serve you. Your area is
not profitable; we are not going to serve you.
Or, the ability to discriminate through price and to affect
other competitors.
What we are seeing is that through this consolidation they
will gain that ability, and that is what our concern needs to
be.
The human story of the 8,000 jobs that are being lost in
southwest Ohio certainly tells the compelling nature of the
immediacy of the need for review, but the most underlying
important issue is that this is bad for the U.S. economy, bad
for the U.S. consumer and bad for this industry to see this
level of consolidation.
Mrs. Schmidt. May I have a follow-up?
Also, Congressman Turner, I believe it was in your
testimony, you talked about the fact that if DHL has this
arrangement with UPS, there is not going to be able to be a
firewall between the two of them regarding price.
Maybe you could expand a little bit on what happens when
the bar code label is put on a package and how that bar code
may be expanded when it goes through the processing center so
that whoever is processing it can make sure that the proper
price is being paid for the actual shipment of it, which what I
believe then--correct me if I am wrong--is it makes it
painfully aware to UPS exactly what DHL is charging so that
they can know what price point is there.
Mr. Turner. That is an interesting point because DHL and
UPS allege that they are going to continue to compete with each
other as independent companies.
But in order to consolidate their logistics of the airlift,
so to speak, their computers system are going to have to be
linked because if I send a package through DHL and they drop it
off at UPS and I want to know where it is, it is not just going
to go in this black hole of nothingness. UPS is going to be
communicating to DHL. DHL won't just say to me, call UPS.
In a way, that shows that the data between the two
companies will be shared. UPS will know volume, destination,
perhaps pricing. They certainly will know cost.
Those are all the elements necessary to know what your
competitor is doing. They are the types of things that you
would get in a merger.
Mrs. Schmidt. Thank you. I have no more questions.
Mr. Oberstar. Do others have questions?
Mr. Arcuri.
Mr. Arcuri. Thank you, Mr. Chairman. I have a question.
You indicated that Airborne was running at a profit. It was
profitable five years ago. Is that correct, Senator?
Is there any indication as to why changes in the market or
is there any identifiable reason why DHL is now no longer
making a profit at that facility, anything?
Senator Brown. As I mentioned in my testimony, they have
lost a significant amount of market share, and I think from
Congressman Turner's discussion earlier that that is a question
of management in many ways.
I think at the same time they have continued. He may know
more precisely, other factors, but at the same time they have
been immensely profitable in Europe.
We haven't really seen the question answered: Are they
moving profits and losses from one continent to another in part
to perhaps deflect some criticism of this merger?
Mr. Turner. I don't specifically. It will be a great
question for DHL as to how they take a company that was
profitable and generate $1.3 billion in losses.
There are a number of reports in industry magazines that
indicate poor service, overspending, expansion of
infrastructure that did not justify based on customer base and
loss of customers.
One other thing, by the way, Congresswoman Schmidt asked
what TNT stands for. I am told it is Thomas Nationwide
Transport.
Mrs. Schmidt. Thank you.
Mr. Arcuri. Thank you very much.
Senator Brown. I would add too, if I could, Mr. Chairman
and Mike, after DHL bought Airborne, they also got significant
government help. They still had those kinds of losses in spite
of the help they got from particularly the State of Ohio but
also some local communities.
Mr. Arcuri. So they received a package to stay, they bought
the company, and then they are still showing losses.
Senator Brown. To stay. They promised more jobs. They have,
within half a decade, made this kind of a decision.
Mr. Arcuri. I have nothing further. Thank you, Mr.
Chairman.
Mr. Oberstar. Ms. Hirono.
Ms. Hirono. Thank you, Mr. Chairman.
This potential agreement raises a lot of issues, not to
mention the antitrust concerns, anticompetitive concerns. Is
the Department of Justice going to be reviewing this potential
agreement in any way, shape or form?
Mr. Turner. The Senator was just saying we are certainly
hopeful. We have no communication from them that they are. We
have requested it.
Both presidential candidates have indicated that it would
be a worthwhile review to occur. I know a number of other
Members of Congress have stepped forward and said that they
believe the Justice Department should also.
Senator Brown. And the Administration has. We don't have
commitment yet on that, but the Administration has been
helpful. When I asked them for a point person, someone who had
the President's ear and the President's Chief of Staff's ear
directly, they gave us someone who has been very helpful to
coordinate any response from Justice, Department of Labor,
Department of Transportation, other Federal Agencies.
So we are hopeful, but we don't know yet.
Ms. Hirono. So would it be appropriate for Congress to
request that the Department of Justice undergo a thorough
review of this agreement, potential agreement?
Senator Brown. We have made that. I don't know if Congress
as a body ever does that. I certainly wouldn't object to that.
Many of us have done it directly and personally.
Ms. Hirono. Okay. Thank you very much.
Senator Brown. Thanks for the suggestion.
Mr. Oberstar. Other Members have questions, comments?
If not, we thank you very much for your presentation, very
enlightening on the subject at hand.
Both are welcome to remain here. Although under Committee
rules non-Committee Members are not allowed to ask questions,
but you are certainly welcome to remain as part of the
Committee to hear the rest of the testimony.
Our next panel consists of the Lieutenant Governor of the
State of Ohio, who is also Director of the Ohio Department of
Development, the Honorable Lee Fisher and the Mayor of
Wilmington, Ohio, the Honorable David L. Raizk.
Lieutenant Governor Fisher, thank you for being here.
Our thanks to our former colleague, Governor Strickland. I
had the opportunity of traveling in his then congressional
district in the Port of Columbiana and meeting with local
development interests on very important transportation and
intermodal issues that they presented. This was several years
ago.
I understand the devastation from weather effects that have
left two million people without power, that the Governor felt
he needed to stay and sent you in his stead.
So, please proceed.
TESTIMONY OF THE HONORABLE LEE FISHER, LIEUTENANT GOVERNOR OF
THE STATE OF OHIO AND DIRECTOR OF THE OHIO DEPARTMENT OF
DEVELOPMENT AND THE HONORABLE DAVID L. RAIZK, MAYOR, CITY OF
WILMINGTON, OHIO
Mr. Fisher. Mr. Chairman, thank you very much for giving me
the opportunity to appear before you today.
As you indicated, Governor Strickland wanted to be here,
was actually scheduled to be here, but we have had a weather
crisis in the State of Ohio. The aftereffects of Hurricane Ike
have hit Ohio quite hard. More than two million Ohioans are out
of power. Four hundred and fifty school districts have been
closed
Governor Strickland is doing what, of course, he always
does in these situations, and that is feet on the ground,
touring the areas and working to identify what we can do to
deal with this emergency, including the possibility and the
likelihood of seeking Federal help.
But I will tell you, Mr. Chairman, that Governor Strickland
and I discussed you in particular, and he has the greatest
admiration and respect for you and wanted me to convey that
today.
I want to thank you, Mr. Chairman, and all the Members of
the Committee, particularly my colleagues from Ohio, all of
whom I know quite well.
I want to begin by repeating what Senator Brown and
Congressman Turner said, that this has been a remarkably
bipartisan effort. Congresswoman Schmidt, Congressman Space,
Congressman Latta, Congressman LaTourette and many other
Members of this delegation, in fact, all the Members of the
delegation have joined us in this effort.
I am the Lieutenant Governor of Ohio, and I also have the
dual honor and responsibility of serving as the Director of the
Ohio Department of Economic Development. I previously served as
Attorney General of the State of Ohio, and during that time I
was the Co-Chair of the National Association of Attorney
Generals Antitrust Committee.
As a former attorney general and the current director of
our economic development efforts in Ohio, I am very troubled by
the proposal which will potentially eliminate more than 8,000
jobs in Wilmington. Governor Strickland and I believe that this
proposed transaction, in addition to leading to devastating job
losses, will seriously undermine competition in the United
States package market.
But the human cost is what we really focus on. We speak in
terms of 10,000 jobs at stake, but that is 10,000 families. It
is 10,000 homes and far, far more than 10,000 lives literally
turned upside down.
The Wilmington Air Park is the largest privately owned
airport in the United States. It is the single largest employer
for the residents of six Ohio counties. Every lost job will be
felt time and again when these hardworking women and men stop
shopping in the stores, eating in the restaurants and buying
the houses.
Even as the first round of layoffs has already begun and
with the imminent threat of closure dangling over them, the
hardworking men and women of ASTAR and ABX and other facilities
in the Air Park show up every day, and they give all to their
jobs.
DHL has taken the position that this is not necessarily a
matter worth of their attention.
Mr. Chairman, attention must be made.
In a free market, businesses can fail, jobs can be lost. I
see that every day. We lament the ups and downs of the business
cycle, and we make preparations for a better day.
But I would submit to you this is not a free market
transaction that we are discussing. It is, in fact, an
anticompetitive deal.
After this billion dollar a year deal is in place, a deal
that hands over the actual--do you hear that sound?
[Remarks off microphone.]
Mr. Fisher. Okay. I wondered if that was your way of saying
I should stop. Okay.
[Laughter.]
Mr. Oberstar. The gentleman from Florida will not do that.
Mr. Fisher. Okay. Thank you, Mr. Chairman.
After this billion dollar a year deal is in place, a deal
that hands over the actual shipping process to DHL's main
rival, the company assures us that DHL and UPS will remain
competitors, and I expect that you will hear that today from
DHL. In fact, DHL has recently said in the New York Times that
DHL is trying to make life as difficult as possible for UPS.
Well, if I were going to make life difficult for someone,
Mr. Chairman, I could think of a few things I would try before
giving them a billion dollars.
DHL insists that this deal keeps DHL and UPS full-tilt
competitors.
I am a Cleveland Browns fan, and the Cleveland Browns will
travel to Baltimore this Sunday to play the Ravens. If one of
the Ravens fumbles, there is a reason why no one on the
Cleveland Browns will pick up the ball and politely hand it
back.
It is because competitors are not partners. They have never
been, will never be. You are either one or the other.
This deal is a merger in everything but name. If you hand
the essential functions of your business to a competitor, that
is a merger. If you discard the planes and the people that make
your business possible, that is a merger.
It would be one thing for a company that makes
refrigerators or pencils to outsource their shipping services,
but DHL doesn't make products. It ships them. If you business
is shipping and you outsource the shipping, that is a merger.
There is a very real threat to the consumer here. When UPS
essentially controls DHL's costs and operations, then UPS
controls DHL's pricing. When that happens, there will be
effectively only two shipping companies to serve the North
American market.
I think it is Economics 101 that if you create a duopoly,
you diminish consumers' choices and you raise consumers' costs.
Governor Strickland and I believe that the U.S. Department
of Transportation has jurisdiction to investigate this
financial agreement. DHL is a common carrier under Federal law,
and the U.S. Department of Transportation has authority under
the Federal Transportation Code to regulate carriers' business
practices and the terms on which they hold out service to the
public.
We asked Secretary Peters to exercise her jurisdiction in
this matter, and she has respectfully declined, saying that she
does not believe that she has authority to investigate.
We are asking this Committee to review Secretary Peters'
statements and to encourage the DOT to examine the economic
impact of this transaction as is their authority under law and
in a way, of course, that would not interfere with the review
of the transaction by the U.S. Attorney General's Office or the
investigation of the Ohio Attorney General's Office.
Let me add, Mr. Chairman, that the creation of this duopoly
would undercut the ability of ABX and ASTAR to continue
operating. These pilots you see before us are wonderful
professionals. It is their jobs, their families, their
livelihood that is on the line which is why they are spending
every single day doing everything they can, including being
here.
I was here last week, testifying before Congressman Conyers
and the Judiciary Committee, and they were here in full force,
and I expect they will always be here in full force as long as
these proceedings occur in the United States Congress.
It would force off the stage the two major players in an
industry, ABX and ASTAR, with incredibly high barriers to
entry.
If this were truly a competitive free market transaction,
why weren't DHL's existing service providers, ASTAR and ABX,
not to mention the State of Ohio, given a chance to actually
present clear alternatives to this transaction and, in the case
of ABX and ASTAR, to submit a bid for the work?
Why wasn't our State given a chance to respond before the
deal had been decided upon?
I think it is important to point out that Senator Brown
made an important statement. He said that we want DHL to
succeed, and that is correct. We do. We want them to succeed,
but we also want them to live up to their commitments.
And, Mr. Chairman, we are prepared and we have said this
repeatedly to work with DHL to deal with their losses, to work
with them on an economic development transaction that can be a
win-win--a win for DHL, a win for ABX and ASTAR, a win for Ohio
but most importantly a win for the men and women whose jobs are
seriously at risk.
When this issue first arose, we immediately assembled a DHL
Regional Economic Task Force co-chaired by Mayor Raizk, who you
will hear from in a minute, and myself and all the Members of
the congressional delegation.
Last week, we learned from DHL and UPS during another
congressional hearing that they have a memorandum of
understanding prohibiting them from talking with other parties,
including the State of Ohio, while their negotiations are
ongoing.
In this hearing room today, I join Senator Brown and
Congressman Turner in publicly requesting that both DHL and UPS
discard this arrangement so that our administration and other
parties involved can present good faith alternatives to the
transaction with UPS. DHL made $6 billion in profit last year,
and we have no doubt their Ohio operation could contribute to
that bottom line.
I want to thank the Members again of the Ohio congressional
delegation and you, Mr. Chairman. The Federal Government once
helped to facilitate DHL's acquisition of Airborne Express, and
now we need the Federal Government's help to facilitate DHL's
continued existence in Wilmington, Ohio, as a real service-
providing company.
Thank you, sir.
Mr. Oberstar. Thank you very much, Governor Fisher. I
greatly appreciate your testimony and elaborating on the
arrangement between the State and DHL.
Mayor Raizk. I pronounce it Raizk.
Mr. Raizk. Raizk.
Mr. Oberstar. But I earlier pronounced it Raizk. That is
the way we would say it in Slovenian. That must be Polish,
though.
[Laughter]
Mr. Raizk. No, it is not. Senator Voinovich says the same
thing, but actually my background is Lebanese. It is an Ellis
Island spelling.
Mr. Oberstar. Oh, okay. Well, it is a good ethnic name
anyway.
Mr. Raizk. It is a good ethnic name, absolutely.
Mr. Oberstar. Very much at home in my part of the world.
Mr. Raizk. Absolutely.
Mr. Oberstar. Yes. All right.
Mr. Raizk. Thank you very much, Mr. Chairman, and I
sincerely appreciate the opportunity you have given us by
holding this hearing and to hear our story in Wilmington, Ohio.
First of all, I said after last week's hearing that I was
never prouder to be an Ohioan than I was on that day. For
everyone to see the total bipartisan effort of all the Ohio
delegation in coming to the aid of Wilmington has been truly
amazing.
I can't thank enough Senator Brown and Congressman Mike
turner. They have been with me almost every step of the way.
Also, Senator Voinovich and all the Ohio delegation, I
appreciate all of your efforts, and certainly Governor Ted
Strickland and this gentleman to my right, Lieutenant Governor
Lee Fisher. Since three days after the announcement we have
been together, and he has supported me in everything that I
have done.
I am also honored to represent the community that I serve,
my home town, Wilmington, Ohio. Wilmington in Clinton County is
a wonderful place to live, work and raise your family. But
since May 28th, a storm has been hanging over Wilmington, and
it won't go away.
On May 28th, DHL--Wilmington's and Clinton County's largest
employer and the largest employer in the five surrounding
counties--announced that they were seeking a deal with UPS,
their biggest competitor, to handle their airlift operations in
the United States, effectively ceasing operations at the
Wilmington DHL airport.
This was particularly difficult for me as I received this
news firsthand in Germany at DHL/Deutsche Post World
Headquarters. I was in Germany as a guest of DHL, representing
the City of Wilmington and the Wilmington Airport, the largest
hub in the DHL network at the grand opening of their new hub in
Leipzig.
Given the current economic climate that has been going on
and continues, we knew that some restructuring was in the works
and some job losses would be coming primarily as a result of
the standing down of the DC-9 portion of their business.
But there was reason for optimism concerning the Wilmington
Air Park. In February, I hosted a conference call in my office
with Governor Strickland, representatives of ASTAR Air Cargo
and ABX Air, DHL's partners for airlift and sorting operations
in the United States, and representatives of DHL. At that time,
DHL assured the Governor that although there would be some job
cuts coming, they were committed to the Wilmington Air Park.
In April, in discussion with DHL on possible assistance
from the State of Ohio, Lieutenant Governor Lee Fisher was also
assured of DHL's commitment to the Wilmington Air Park.
So it was with some comfort level that I went to Germany to
represent Wilmington. That comfort was further enhanced when
German Foreign Minister Steinmeier, the keynote speaker at the
hub opening, mentioned Wilmington, Ohio in his address.
Imagine my shock two days later when I received the news
firsthand that DHL was seeking a deal with UPS.
CEO John Mullen of DHL, whom you will hear from later
today, was very gracious in granting me an audience after that
announcement.
What will be the result of this proposed transaction? What
will be the impact?
The job loss alone which includes DHL, ABX Air, ASTAR Air
Cargo and 18 companies located in and around the Air Park with
direct or indirect relationships with the operations there
would be almost 10,000. The annual payroll for ABX Air, DHL and
ASTAR Air Cargo alone is $257 million. Health care benefits
provided for their employees are another $63 million.
These employees of these three companies provide 9 percent
of the revenue to our local hospital. Losing that would result
in a loss of seven to eight million dollars in revenue plus the
resulting increase in charity care when these benefits cease.
It would put them out of business.
This transaction would bankrupt the State's unemployment
insurance fund. The impact to schools, city and county
government, non-profits and local businesses would be
devastating. Our data analysis indicates that one in five small
businesses will fail in the region.
If I sound alarmist, it is because we are facing an
economic catastrophe of unparalleled proportion.
We are not trying to save old technology jobs that have
failed to keep pace with the new economy. These are 21st
century jobs: pilots and crew members, supply chain and
logistics professionals, airframe and aircraft mechanics,
conveyor engineers.
And, this isn't Rust Belt versus the Sun Belt. These jobs
simply disappear.
In 2004, we welcomed DHL and ASTAR Air Cargo into the
Wilmington family. ABX Air and its predecessor, Airborne
Express, accounting for over 6,000 of these jobs, have been
with us for 30 years. They are part of the fabric of our
community.
There is an Air Park employee in one of every three
households in Wilmington. Many husbands and wives both work at
the Air Park.
Many family farms are saved because part-time work at the
Air Park provided the health care that they needed for their
families.
Students at Wilmington College, many the first in their
families to go to college, reduced their indebtedness at
graduation by working with ABX.
In short, these jobs just didn't appear in 2004. Over the
last 30 years, the community has grown with the growth of the
Air Park. This proposed transaction would literally rip the
fabric of our town.
Now I don't know about antitrust, and I don't know the
definitions and what your criteria are. I am a simple mayor
from a small town in southwestern Ohio.
DHL and UPS say this is a contractor-vendor relationship.
But to abandon your largest hub and deliver the freight to your
number one competitor, then I say it is a de facto merger. How
can you be a player without a hub?
FedEx has a hub. UPS has a hub. DHL will no longer have a
hub if this goes through.
Financial Times Deutschland, this past week, recently
reported that CEO Frank Appel of Deutsche Post World Net said
that they are going to, instead of reducing their footprint in
the United States 30 percent, they are going to move it to 50
percent and, in doing so, may contract with UPS to handle some
of their ground transport instead of the United States Postal
Service for that last mile.
Again, if we are losing air and ground, it is a de facto
merger.
Given the recent history of acquisitions of smaller air
carriers by both companies and the significant antitrust
waivers embedded in the Open Skies agreements, a picture starts
to form. There is something more going on here.
In Wilmington, a foreign-owned company with huge assistance
from the State and local governments took over ownership and
operations of the largest private airport in the United States,
a state of the art facility. In a little over three short
years, if they complete this transaction, they will have taken
two American companies that had significant market share off
the board. In the process, they will displace almost 10,000
American jobs.
If this is what unfettered globalization means to America,
then to paraphrase Senator Sherrod Brown, we are indeed in a
race to the bottom.
For, at the end of the day, this is about people. These
folks are not just numbers on a page. They are our friends and
our neighbors, our families. We go to church with them. We
attend PTA meetings together. We go and watch our kids play
ball.
How will they pay their mortgage? How will they feed and
clothe their kids? How will they educate their children?
Please think about these hardworking Americans as you
consider these issues.
Thank you very much for the opportunity to speak, Mr.
Chairman.
Mr. Oberstar. Thank you, Mayor, for painting a picture in
the very stark and real and personal way that you did.
Lieutenant Governor Fisher, you were formerly Attorney
General. How can there be real competition in ground service if
UPS is going to handle all the air service?
They say this is a contractual arrangement for the air
service, that the ground service of DHL will remain or will
survive the agreement. If UPS provides the feed, then how can
there be a real competition?
Mr. Fisher. Mr. Chairman, I think first, as you have heard
Mayor Raizk say, the ground transportation actually may be
next, that this may be the next step.
The combination of UPS's and DHL's overnight shipment
business would give UPS total control of more than half of the
small packages that are shipped for overnight delivery in the
United States.
That high market share is magnified by the fact that it is
highly unlikely that any new competitor would be able to enter
the relevant market following the consolidation because the
industry, Mr. Chairman, already has high barriers to entry in
the form of significant up-front capital investments, marketing
costs, important name recognition requirements, a large number
of exclusive contracts, and the competition that has been
represented by DHL has served as an important constraint on
UPS's pricing and forced continual improvement of quality of
service. That is what happens when you have competition.
I think FedEx, with all due respect to it, unlike DHL, does
not have the incentive to be a price maverick like DHL has
been.
And so, I think the bottom line result here is that, as has
been said many times, it is in fact, we think, a de facto
merger.
Mr. Oberstar. Thank you for that response.
The State of Ohio, you spelled out, gave $400 million in
incentives.
We have been through something similar in Minnesota with
Northwest Airlines when they were at the edge of bankruptcy,
and the State Government, actually it was the airport
authority, provided bridge funding for Northwest Airlines to
convert their high cost, short-term debt to lower-cost long-
term debt in the aftermath of the Checchi-Wilson buy-out that
loaded the company with a huge amount of debt.
But there were caveats. Not caveats, there were agreements
in that funding that made certain obligations upon Northwest:
Maintain their headquarters in Minnesota. Maintain a
Minneapolis-St. Paul hub. Maintain a certain level of
employment.
Over time, those agreements have been modified, eroded
because of market conditions.
Were there similar commitments made by DHL in exchange for
the funding provided and the financial incentives for them to
locate and are they enforceable?
Mr. Fisher. Chairman Oberstar, the answer is yes. With
every economic development transaction in which we provide tax
credits, grants and/or loans comes a corresponding commitment
by the company with regard to the retention and/or creation of
certain job levels over a period of time.
In this particular case, in 2004, a job retention tax
credit based upon a $295 million payroll was offered with an
estimated credit value of about $66 million, a job creation tax
credit at 90 percent for 5 years with an estimated credit value
of about $13 million, direct grants called Rapid Outreach
Grants of $2 million, workforce training grants up to $2
million, a roadwork grant of $1 million, and a commitment to
build a new route called the Wilmington Bypass.
Now, in fairness, DHL has not received at this point all of
those commitments. It has received some, particularly the
outright grants.
We have callback provisions in all of our agreements. If
this transaction does in fact go through and in fact they do
abandon southwest Ohio, we will aggressively seek back all
those commitments that we are lawfully allowed to do.
Mr. Oberstar. Of course, you really want the jobs. You
don't want the callbacks.
Mr. Fisher. That is exactly right.
Mr. Oberstar. Mr. LaTourette.
Mr. LaTourette. Thank you, Mr. Chairman.
Actually, Mr. Chairman, our Lieutenant Governor is hiding
his light under a bushel basket. When he was elected to be the
Attorney General, we used to call him Landslide Lee because he
won by 1,234 votes and anytime you went to one of his speeches
he would say his favorite numbers are 1,2,3,4.
Mr. Fisher. That is right.
Mr. LaTourette. And just the last note on your statement,
Lieutenant Governor, if the Browns recover a fumble after
watching them play the Cowboys and the Steelers, I will be
shocked.
[Laughter.]
Mr. Fisher. You said that. I didn't, sir.
Mr. LaTourette. Lieutenant Governor Fisher, you have
outlined the incentives that the State of Ohio has offered or
is prepared to offer DHL, and I thank you for that.
In your observations, you talked about an MOU, a memorandum
of understanding. I don't find anything sinister in the fact
that two parties that are discussing. I think it is pretty
boilerplate that they would have a clause that you are not
going to talk about what it is you are talking about and also
competitors.
But the question I would ask you is have you or the
Governor or Senator Brown or Congressman Turner made the
request of DHL and UPS that they release that last piece?
I mean I don't think it is unreasonable that two businesses
talking about whatever it is they are talking about don't have
to tell you what it is they are talking about.
I think that for them, for DHL, well, I guess they don't
have shareholders because they are owned by the German
Government. I think for DHL to make a business decision as to
whether or not this is a good deal with UPS or not, I think it
would be incumbent upon them to see what else is out there.
Have you all made that request of the two companies and, if
so, have you received a response?
Mr. Fisher. Mr. Chairman and Congressman LaTourette, the
answer is yes, we have. I have had two phone conversations with
Frank Appel who is the CEO of Deutsche Post World Net in Bonn,
Germany and, to him and also to Mr. Mullen, we have made the
request that they consider alternatives both from the State of
Ohio, ABX and ASTAR and give us the opportunity to meet with
them any time, any place including in Germany.
The Governor and I both have offered actually to travel to
Germany on a moment's notice if we believe that they would
seriously consider an offer by the State.
They have indicated that they do not believe there is any
alternative that is viable, and they have also recently
indicated that the provision of their agreement with UPS bars
them from actually engaging in that discussion.
We have asked them both privately and publicly to, in fact,
set aside that portion. I think you are right. We are not
asking for the details, at this point anyway, of their
transaction with UPS. We will see that eventually if, in fact,
it goes through in a written agreement.
What we are asking is that before they actually sign on the
dotted line and consummate such agreement, it seems to me it is
only good business sense beyond the interest of fairness, good
business sense to explore every viable alternative.
Now they, I think, would say to you they have looked at
alternatives, but I think that that would be disingenuous
because the State of Ohio obviously has resources available to
it that could be offered to DHL under the appropriate
circumstances. They have never asked us for that, and we have
never been given the opportunity to offer them.
Mr. LaTourette. We are going to see their representatives
on the next panel, and I will ask them that question.
Mayor, in your testimony, you talked about a meeting where
everybody said, we love Wilmington. Then you had another
meeting. Everything is going great. Even though with the way
the economy is going, you expected some job losses.
Then they have you over to Leipzig, apparently to a big
party, and they sort of lowered the boom. I hope you had your
ticket paid for on the way back.
What happened? I mean were they just lying to you? Did they
hose you?
What happened between those happy meetings and when they
gave you the news in Germany?
Mr. Raizk. I really don't know. As I said, before I left,
we vetted it out very carefully that there was going to be some
announcement in Germany on the 28th.
But in consultation with the Department of Development and
Lieutenant Governor Fisher's office, in consultation with both
ASTAR Air Cargo and ABX officials before I went, everybody felt
comfortable with the idea that there were going to be some cuts
coming. They were looking at restructuring.
We had this conversation back in February, as I said, with
the Governor on a conference call in my office. The Governor
was very specific in his request of DHL officials, that okay,
we know that things are going to have to happen and you have
some losses, but are you committed to the Wilmington Air Park?
And the answer to that was an unqualified yes.
Then I can only and the Lieutenant Governor can verify with
the conversations that he had in April, still prior to my
going.
So you can understand that looking at those, if I took the
history of those conversations and also even the day before I
left, what we felt might comprise the announcement on the 28th.
It was certainly a blow because it was just out of left
field that we were going to not cut jobs necessarily or
restructure how we are operating, but we are going to turn it
over to UPS, which was completely a rout.
In fairness, no one said on May 28th in the announcement to
their shareholders that they were abandoning Wilmington, the
Air Park. But what they said, if they handed their airlift to
UPS, UPS's hub is in Louisville, 125 miles from Wilmington. It
doesn't take a lot of math to figure out that Wilmington was
done and the freight was going to go to Louisville.
So, no, I don't know. Frankly, I believe that this decision
was at a very, very high level amongst Deutsche Post and DHL
officials. I do not believe that very, very few people in
America even knew of this decision or of this, and I think that
has been borne out subsequently.
Mr. LaTourette. Mayor, thank you. We are going to see that
same bunch in the next panel. I will ask them.
Mr. Raizk. You can ask them.
Mr. LaTourette. I will ask them.
Thank you, Mr. Chair.
Mr. Raizk. Thank you, Congressman.
Mr. Oberstar. Other Members wish to be heard?
Ms. Johnson. Thank you, Mr. Chairman.
I am trying to determine as I listen whether this is an
acquisition or a contract. Is the business closing?
Mr. Fisher. Congresswoman, I think that it is fair to say
that it is named one thing but is another. It is being termed a
transaction or an agreement, but we think it has all the
effects and the results of an actual merger.
The result of that transaction or merger, whatever you call
it, will be the loss of some 10,000 jobs in southwest Ohio
because they will either be eliminated entirely or moved, as
Mayor Raizk just said, 125 miles south to Louisville, Kentucky,
where UPS has its hub, because UPS will now be the provider of
DHL's air services.
Ms. Johnson. What is the motivation for this happening? Are
they losing money?
Mr. Fisher. Congresswoman, yes, the answer is that their
motivation, as has been explained to us, is that they are
losing money.
Our response is I am not at this point disputing whether or
not they are losing money. I don't have enough information to
be able to say that is true or not true. But I do think even if
we accept that as fact, what is important is that they explore
every viable alternative before engaging in a de facto merger
that would have the result of the loss of 10,000 jobs.
One of those alternatives would be sitting down with the
State and the two carriers that they currently contract with,
which are called ASTAR and ABX, and either separately or
preferably together see if we could work out ways to deal with
their cost issues and challenges, at the same time, saving the
jobs in Wilmington.
Ms. Johnson. Thank you.
Thank you, Mr. Chairman.
Mr. Oberstar. I would like to observe for the record that
Senator Voinovich has talked to me about this situation, and we
will keep the record open for a statement that he may submit,
but he is very deeply concerned.
He and I worked together on a great many issues of economic
development over the years, going back to when he was Mayor of
Cleveland.
Congressman Mack? No questions.
Congresswoman Schmidt.
Mrs. Schmidt. Thank you, Mr. Mayor. Don't ever let anyone
say that a mayor doesn't have a big job because you certainly
do, especially in this situation.
In your written testimony, you indicated that the losses to
the Wilmington community, should DHL reach an agreement with
UPS and decide to shut down the Wilmington Air Park, will be
enormous.
Everyone has been focused on job loss, but as a former
local government official I know that the underpinnings of that
can be far more devastating than just the actual loss itself.
Could you please elaborate to this Committee what you believe
will be the underpinnings of that pullout?
Mr. Raizk. Thank you, Congresswoman Schmidt.
First of all, it is not just Wilmington, and I think it is
important for the Committee to understand the regional nature
of the employment at the Air Park. As you indicated, in your
area, there is a significant number of jobs of folks who work
there. It is the six surrounding counties that are affected.
So, as we look at this, for instance, just the uncertainty
alone, sales tax receipts are down in our county. Even though
there has not been a significant job loss, there has been some,
over a million dollars in the last month because people are
scared, and they are not purchasing or buying or doing those
things that they would normally do, because they don't know if
they are going to have a job or not.
I think the biggest thing is not just the employment, but
it will be the concept of retraining, and that is going to be
difficult. There is going to have to be huge resources for
retraining.
And it is real interesting. As I have said, these are 21st
Century jobs. How do you retrain folks who have the skills for
the 21st Century? What do we retrain them to?
The impact on small business, as you know, Ohio's number
one employers are small businesses all over the State. Although
we still have agriculture in our area, the impact on the small
business is just going to be huge. We have determined through
some data analysis that one in five will fail, and that is not
just in Wilmington. That is throughout the region.
Then there is the resultant more job loss that are not
reflected in those 10,000 because most people work for small
business in Ohio.
So I think the health care system is going to just get a
terrible situation of how they are going to survive because
they are going through rough times as it is.
Education, I am really concerned about the schools. For
instance, the Wilmington City School District is supported by a
1 percent income tax. If these jobs go away, they will have a
devastating effect to their school system.
Mrs. Schmidt. Mr. Mayor, I would like to continue along
that line. You said that the Wilmington schools have an income
tax that feeds their schools, and so a loss of jobs is a loss
of income to them. But what about the City of Wilmington as
well?
I am sure you have a fire department, a police department.
You have a road department. How many employees do you have?
What is your budget?
How much of that budget is dependent upon DHL's presence
and, with a DHL pullout, what does that do to the City of
Wilmington directly?
I mean you have talked about the indirect effect, and I
think that speaks miles that you are looking out for everyone
around you, but I also want to hear what the effects are going
to be for the City of Wilmington directly.
Mr. Raizk. Well, it is funny you should ask that because
the City of Wilmington has always supported the Air Park
through infrastructure, through the impact that its citizens
have put up with. We are a community of about 12,000 that
basically during the day supports a community of about 30,000
because we provide water and sewer and the road structure.
Everything comes through the town, the freight, the fuel
trucks.
But until January of this year, the Air Park was not a part
of the City. We did just recently annex the Air Park with the
anticipation that we would receive, because we do have a 1
percent income tax as you know, about $2.5 million a year that
we have been looking sorely forward to because for the last 30
years the citizens have been supporting the Air Park and that
infrastructure out of their own pockets without receiving any
revenue.
So, while we have geared up to take care of all of those
things, it was time to get the citizens paid back for their
contributions to the economic engine out there. Unfortunately,
just as we are starting to get the receipts in, now we are
under the threat that they are going to take them away.
We have about 160 employees in the City of Wilmington. We
are very unique. We operate our own fully permitted EPA
landfill. We have our own water. We have our own sewer. We have
our own full-time fire department and police departments.
Certainly, we have geared up with anticipation of taking
care of this additional acreage and those folks who work out
there. Now we are looking at probably having to retrench if we
can't have that income.
Mrs. Schmidt. Thank you.
Thank you, Mr. Chairman.
Mr. Oberstar. Congressman Space.
Mr. Space. Thank you, Mr. Chairman.
Mr. Mayor, I just want to commend you for the very able
representation on behalf of your constituents that you have
rendered today.
Mr. Raizk. Thank you.
Mr. Space. Lieutenant Governor Fisher, I have had the
pleasure of working with you and your staff on a number of
projects in southeastern Ohio in the past, and I have found
that you and your staff have repeatedly bent over backwards to
help those existing businesses as well as prospective
businesses that we are trying to draw. It has been nothing but
positive at every turn in dealing in very difficult
circumstances.
I just want to make sure I understand your testimony
correctly. It sounds to me, from what you have indicated, that
you have reached out to DHL in an effort to provide them with
information and specifics on what kind of incentives the State
of Ohio may be willing to offer in an effort to keep them in
their status quo or something like it and that they have
rejected that offer, that extension of an offer for help on the
basis that they can't about it due a confidentiality agreement
that they have signed.
Is that a correct representation?
Mr. Fisher. Congressman Space, let me back up and just say
a few things. First of all, thank you for what you said.
First to amplify on what Mayor Raizk said, prior to May
28th, we had several conversations with DHL on a variety of
different matters in which, although it was not necessarily the
subject at hand, we specifically asked the question: What was
the future of the Wilmington air hub? And I think it is fair to
say the answer was that they were experiencing some financial
challenges but led us to believe that the future was still
good, solid and bright despite those financial challenges.
Now I do want to say that I think Mayor Raizk is probably
right, that those with whom we were speaking at the time
probably did not have knowledge that superiors in Germany were
thinking something else.
In other words, I want to give them the benefit of the
doubt that they were not purposely misleading us. I have no
reason to believe they were misleading us. I do have reason to
believe that they had an opportunity to give us information
that the company itself clearly had even if the individuals
with whom we were speaking did not.
The second point I would want to make is that repeatedly
after May 28th, in meetings with senior executives of DHL and
in two conversations with Frank Appel, we have indicated that
we would like the opportunity to sit down with him and find
ways where the State could be a risk-sharing, collaborative
financial partner with them.
Now, no specific offer of a specific amount of tax credits,
grants or loans has been offered nor could it be until we were
actually in such discussions. But the point is we want to have
such discussions, and we have been rebuffed in our request to
have such discussions.
Mr. Space. Has that refusal to sit down been ostensibly
based upon the statement or the position that they can't talk
about it due to confidentiality provisions within an agreement
between them and UPS?
Mr. Fisher. Congressman, initially, no. Initially, the
response was simply that they believe that internally they have
already examined all their alternatives and do not believe that
there is any information that we, ABX or ASTAR could present to
them that they don't already have.
Later on, as the weeks went by, we learned that there was
apparently a confidentiality or exclusivity agreement with UPS.
That was confirmed publicly, I believe, by Mr. Mullen in his
testimony before the House Judiciary Committee last week.
I think it is fair to say that that is now an additional
reason that has been offered, but that was initially not the
reason that was offered, that was given to us why they wouldn't
consider the alternative.
Mr. Space. Okay. Thank you, Lee.
I yield back.
Mr. LaTourette. This is what they call a bloodless coup.
[Laughter.]
Mr. Petri. Congratulations, Mr. Chairman.
Mr. Oberstar. There will not be a coup. This is going to be
a long hearing. I need more coffee.
[Laughter.]
Mr. Oberstar. Now let's see. The gentleman from Ohio has
completed his questions. So, Mr. Petri.
Mr. Petri. Thank you very much, Mr. Chairman. I really just
have one question as kind of background for this and how it
fits in with the State of Ohio.
I wonder if you could, Governor Fisher, comment about the
state of the unemployment fund for people in Ohio and how this,
if it goes through, could affect that fund?
Mr. Fisher. Congressman, I think it is fair to say that it
puts it at serious risk. As the Mayor has indicated, we already
are facing some serious problems with regard to our
unemployment fund, and this would only exacerbate them.
I can't give you specific figures today, but I don't think
there is any question that in all my years in and out of public
service, which totals 28 in Ohio, I have never seen this kind
of job loss in one fell swoop like this. So it only goes to say
as a result, logically, that it is likely to have a very
significant negative effect on our unemployment compensation
fund.
Mr. Oberstar. Ms. Hirono.
Ms. Hirono. I note in the Mayor's testimony that,
Lieutenant Governor, you have confirmed that the Attorney
General of Ohio is looking at this proposal.
Does the State's antitrust laws mirror the Federal
antitrust laws?
Mr. Fisher. Yes, Congresswoman, it does. Ohio has an
antitrust law known as the Valentine Act which has very similar
provisions to the Sherman and Clayton Acts on the Federal
level.
And so, the answer is that the Ohio Attorney General, Nancy
Rogers, is currently conducting her own independent information
gathering. She is in a position really similar to the U.S.
Justice Department, and that is until there is an agreement, if
there is one, until there is an agreement with UPS, they have
nothing they can actually analyze.
The good news, however, is that both the Ohio Attorney
General and the U.S. Attorney General, at our urging, are
collecting facts. So they will be able to hit the ground
running if and when there is an agreement between UPS and DHL
to determine whether either a State and/or Federal
investigation are appropriate.
And, they are not dependent on each other. For example, if
the Federal government decides that they are not going to
pursue it, that would prevent or prohibit the State from
conducting its own antitrust enforcement action or an
investigation.
Ms. Hirono. So does that mean that if this agreement, once
there is something to look at and analyze, if the agreement
were to contravene the State antitrust laws, that Ohio could
prevent this agreement from going through?
Mr. Fisher. It is my belief that it could. Under Ohio's
antitrust laws, yes, I believe that is possible. It remains to
be seen whether that will be happening, but the answer is yes.
Ms. Hirono. Thank you.
Mr. Oberstar. Mr. Duncan, the gentleman from Tennessee.
Mr. Duncan. Governor Fisher, three of my dad's sisters
moved to Cincinnati when they were young, two of his brothers
to Dayton. A cousin on my mother's side is a car dealer in
Cleveland Heights. Our best friends in Knoxville are from
Cambridge. I think I have more connections to Ohio than any
State other than Tennessee.
Mr. Fisher. Wow.
Mr. Duncan. No Member on either side wants to see anybody
lose their jobs and especially a job loss of this magnitude.
Mr. Mayor, I will tell you I haven't voted for a lot of
this what some people have called globaloney. I heard you
mention the globalization.
But having said that, I haven't studied this to the extent
that you all have. I was told that DHL is losing a billion
dollars a year or perhaps even more. Common sense would tell
you, you can't force a company to keep losing money. They have
to, at some point, pull out or let people off or something.
I notice, Governor, that you said you don't know whether
they have really lost this money or not, but that assuming they
had you don't feel like they have looked at all the reasonable
alternatives.
What I am wondering about is what are the alternatives as
you see them?
What could they do if, as you said, assuming they are
losing this horrendous amount of money? What alternatives do
they have?
Mr. Fisher. Congressman Duncan, first let me just say that
I know lieutenant governors love to be called governor, but I
don't like being governor.
Mr. Duncan. Well, Lieutenant.
Mr. Fisher. We only have one governor.
Mr. Duncan. Okay.
Mr. Fisher. So Lieutenant Governor or LG or something like
that.
Mr. Duncan. All right. All right.
Mr. Fisher. The thing that I would say, Congressman, is
that every day we are working with companies that are facing
losses. That is not unusual.
What is unusual is that a company with whom we have ongoing
communication and, frankly, a good relationship, all of which
certainly typifies what we had with DHL, goes ahead and makes a
decision without discussing it with the State to see if the
State would be able to help them deal with their financial
challenges and makes a decision which has a seriously negative
effect on employment and Ohio's economy. That is unusual.
It is not unusual for us to sit down with a company and try
to work out their financial issues. Do we think the State, by
and of itself, can solve them? Of course not.
However, one of the things we specialize in is bringing
together resources from a variety of different sectors: the
Federal Government, the local government, the county
government, private equity, private sector, non-profit. That is
what we do every day in our department.
Do we always succeed? Of course not.
But are we given the chance almost 99 percent of the time?
Absolutely. We got no chance here.
I cannot tell you positively that had we been given the
chance or that if we were to be given the chance, that we could
address most or all of their challenge. But I know that given
our record of success, that DHL owes it to the people of Ohio
to give us a chance to see if we can.
Mr. Duncan. Do you have anything to indicate to you? I mean
if a company is losing a billion dollars a year here in the
U.S., do you have anything to indicate to you that they haven't
on their own explored every reasonable alternative?
When you say that you do this every day, have you ever been
able to save a company that is facing losses of this magnitude?
Mr. Fisher. Congressman, I think.
Mr. Duncan. I am not arguing with you. I am really asking.
Mr. Fisher. No. I know what you are asking.
Mr. Duncan. I don't really know.
Mr. Fisher. No. That is a fair question. I think it is fair
to say that it is rare, and I can't think of a precedent right
now where a company said they were losing as much as DHL was
losing. So I think that is a fair point.
But I would also tell you that let's take one possible
solution here. There was a point of time, I believe in the not
so recent past, where DHL wanted to deal with just one local
carrier as opposed to two. There are two today, ABX and ASTAR.
It is my understanding--and there are people sitting behind
me who know more about this than I do--that DHL, which has a 49
percent ownership share of ASTAR, attempted to purchase ABX. It
is my understanding that the primary motive for that was it
would make sense for them, apparently from a cost standpoint,
to be able to deal with one carrier as opposed to two.
That transaction was not consummated for a variety of
reasons that are known better by people sitting behind me than
me, but I think it is fair to say that there are people who
know both companies and know DHL who believe that if that had
happened, if ASTAR had purchased ABX, that we might not be here
today.
I don't know that to be the fact. I am just telling you
that there are people who are knowledgeable about the facts,
who tell me they believe that to be the case. So that in and of
itself points out that there might have been a solution in the
not so recent past that might have prevented us from being
here.
So, therefore, exploring a similar solution in the not so
distant future might also lead us to believe that perhaps there
is an alternative.
They have done their own internal analysis that they have
not shared with us and come to a different conclusion, but any
analysis that does not include the State of Ohio as a partner
is an incomplete analysis on their part.
Mr. Duncan. All right. Thank you.
Thank you, Mr. Chairman.
Mr. Oberstar. I thank the gentleman. Are there other
Members who wish to be recognized?
Mr. Westmoreland had his hand up.
Mr. Westmoreland. Thank you, Mr. Chairman.
Governor, have you met with ABX and/or ASTAR to ask them
what the failure was when they could not get together for a
merger or buy-out or whatever? Did you work with them to see if
there were any details you could work out in that relationship?
Mr. Fisher. Congressman Westmoreland, yes, I have had a
number of conversations with senior executives with both ASTAR
and ABX. There are some commonalities, but there are also
different perspectives, frankly, on what happened. There is, I
think, an agreement to disagree on why that transaction was not
consummated.
I do believe that given the circumstances today, I have
reason to believe that both ABX and ASTAR would be more than
willing to come to the table and explore every possible
alternative.
Mr. Westmoreland. I can believe that. I can believe that
now.
Mr. Fisher. Yes, right. All I am saying is whatever reason
it didn't happen in the past, I think it would not happen in
the future in some way.
Mr. Westmoreland. Yes, sir. Do you know what the total
employment of DHL is and is the 8,000 jobs just in the south
Ohio area or are there actually more jobs than that in that
area?
Mr. Fisher. I can only speak to the employment in southwest
Ohio. ABX, I believe, employs approximately 6,000 people at the
Air Park. I believe that ASTAR employs approximately 1,200 and
that DHL employs approximately 1,000.
But there are representatives here today from DHL, ABX and
ASTAR that can correct me if I am wrong, but I believe those
are the numbers.
Mr. Westmoreland. Okay. But from what you are saying and
what I hear the Mayor saying, I am assuming the Mayor, the City
and the State would sit down together with these companies and
try to work something out.
It seems to me as if $2 billion a year roughly, that would
be a hard nut to crack. I know this is a similar question to
what you have already been asked, but do you have experience in
doing this?
And, from the breaks that I heard you give, it totaled to
about $88 million in tax incentives, the employment credit and
so forth and so on, and this is a one-shot deal, right, the $88
million.
In just reading some of the testimony here, it has been
almost a $6 billion loss, I believe, over the last 5 years.
That is a lot of money for a State or a city to try to absorb,
and that would also be a lot of money for these two airlines to
try to absorb. Do you have any idea how you could go about even
trying to do that and is that even something that the State of
Ohio would want to do?
Mr. Fisher. Mr. Chairman and Congressman Westmoreland,
first, I have to say to you that we are not in a position to
accept the premise of the amount of the loss. In other words,
the first thing we would do as part of our due diligence is
work with the company, so we have a comfort.
In other words, when a company says to us, we are losing X
amount of money, we don't take that at face value. We can't. We
owe it to the taxpayers of Ohio to actually independently
verify that. So let's also focus on the fact that we don't know
whether that loss is, in fact, true.
I am not suggesting it is not. I am simply telling you that
we have no information that has been given us to allow us to
verify that. That is number one.
Number two is that I am not suggesting to you that we can
meet all those losses. Government should not be in the
business, I believe, of literally saying to a company, we are
going to deal with all your losses.
Our business is to be a risk-sharing collaborative partner,
and that means that the business is going to have to continue
to find some of their own internal ways to deal with those
losses, but we will help them.
So there is no time that we ever completely fill the gap,
whether it is $100,000 loss or a $1 billion loss. What we do is
we try to meet them in a sense, halfway--sometimes more than
halfway, sometimes less, but we are a partner.
Mr. Westmoreland. Governor, you or Mayor, either one, has
the State of Ohio or the City ever entered into any of these
agreements with any company before now that has been able to
save them from actually moving or relocating?
Mr. Fisher. To be honest, Congressman, we do it all the
time ranging from small and medium-size businesses to large
businesses that are saying to us, we are considering leaving,
folding, going out of business.
Do we always succeed? No.
But I can tell you our track record of success in helping
companies deal with their financial challenges--which often by
the way involves job retention, not job expansion--has been
quite successful. We believe that every job retention deal is a
future job creation deal and job expansion deal because you
have to hold what you got first and then focus on expanding
later.
So the answer is yes.
Mr. Westmoreland. Well, Mr. Chairman, I appreciate the
opportunity to ask the questions.
I think that sometimes we go down a real slippery slope
when we start trying to get government too involved with
private enterprise and different business deals that come
about, but I certainly appreciate the position you are in and
what the State of Ohio is in and what the Mayor of the City is
in as far as these job losses.
UPS happens to be a good Georgia company, and they are good
folks. So I appreciate there is nothing devious that is coming
out of this transaction that they are trying to do with DHL.
Thank you, sir, and I yield back.
Mr. Fisher. Thank you.
Mr. Oberstar. I thank the gentleman.
Mrs. Drake.
Mrs. Drake. Thank you, Mr. Chairman.
Certainly, I am from Virginia, so I am not familiar much
with the problem. But in listening to you talk, my question
would be it sounds like the deal with UPS is not finished, that
there have been these negotiations, but it is not complete yet.
I would make the assumption that any business owner has
looked at all the options and is trying to figure out how to
best support his business.
So the question that comes to mind is what if they come to
there is no deal with UPS? I wonder what your comments on that
would be.
The second thought would be if this does happen and this
cargo goes out of Louisville, would there also be the
opportunity of additional jobs in that area? Is this something
where people could be?
I don't even know the distance between the locations. I
think you said 125 miles. But would UPS logically need
additional employees to take on this work that has been done by
two airlines?
So I just wonder if any of that could be absorbed out.
Mr. Raizk. I think to answer your question and also the
other, it is important to understand a little bit of history
here.
The two airlines that we are talking about, ABX Air and
ASTAR Air Cargo, were created because DHL, which was the former
ASTAR Air Cargo, was acquired by Deutsche Post World Net. They
could not own an airline, so they had to spin the airline off.
So, essentially, they created this partner.
Then DHL acquired Airborne Express, the same situation
happened. They, because of their foreign ownership, could not
own the airline or have the certificate as I understand it and
had to create ABX Air. So the contractors were of the parent
company's own making to be able to do, to take their market
share.
Realize that the two American companies, prior to
acquisition, had 21 percent together of the air express market.
That is a significant market share. That market share is now
significantly reduced.
So these two companies were once very profitable and have
only recently become unprofitable.
When we look at those losses, it appears to me and I am no
expert, but I am just like you. I pick up the paper and read
that every day. It appears to me that how can we go from a
profitable situation to an unprofitable situation in such a
short period of time?
Mrs. Drake. Do you think it could be the price of jet fuel?
Mr. Raizk. Absolutely. I mean $4 plus of jet fuel certainly
is going to create a problem for everybody, and I mean there is
no getting around that.
But at the same time, have we looked at totally the
management of taking two profitable companies and then making
them all of a sudden unprofitable? I think there needs to be a
look at that in terms of that, but certainly jet fuel is a
problem and has created a lot of our problems.
If there weren't this increase in jet fuel, would we be
here today? Probably not. I doubt it, but maybe so. I don't
know.
Mrs. Drake. But one thing that could happen is there could
be no deal. I mean DHL could say we can't make the U.S.
profitable and leave. I mean that could happen.
Mr. Raizk. They could say that. They would be abandoning.
Mrs. Drake. Is one of the goals to have a better
conversation with DHL with the State of Ohio?
Mr. Raizk. Absolutely.
Mrs. Drake. From this hearing today?
Mr. Raizk. Absolutely.
Mr. Fisher. Yes, Congresswoman, I would say that,
absolutely. Our relationship and our conversations with DHL
prior to May 28th, I would consider to be very, very good and
very positive, very professional.
They continue to be professional, but they do not continue
to be productive.
Mrs. Drake. Thank you, Mr. Chairman. I will yield back.
Mr. Oberstar. I thank the gentlewoman for her questions and
the panel for their responses. Thank you very, very much for
all that you have invested, yourselves, in this issue and for
the continuing effort.
The Committee will continue to follow these matters very
closely, and you are dismissed.
Mr. Fisher. Thank you.
Mr. Raizk. Thank you, Mr. Chairman.
Mr. Oberstar. We are in the midst of a vote, the first of
four votes on the House floor, but I would like to invite Panel
Three to be available. I think we will recess.
Let me get the names of the panelists there, and everybody
can take a little break while we vote, and then we will resume
within five minutes after the last vote.
Our next panel consists of Mr. John Mullen, CEO of DHL;
Burt Wallace, President of Corporate Transportation for UPS;
Mr. Joseph Hete of ABX Air, President; and Mr. Gary Hammes,
Senior Vice President of ASTAR Air Cargo; Captain David Ross,
Airline Professionals Association, he is the President of
Teamsters Local 1224; Captain John Prater, President of the Air
Line Pilots Association; and Mr. Samuel Simon, the American
Antitrust Institute.
I think we will have a very interesting session with the
next panel.
The Committee will stand in recess, pending the four votes.
[Recess.]
Mr. Oberstar. The Committee will resume its sitting.
The Chair has already announced the next panel, the current
panel, and we will begin with Mr. Mullen.
TESTIMONY OF JOHN P. MULLEN, CEO, DHL EXPRESS; BURT WALLACE,
PRESIDENT OF CORPORATE TRANSPORTATION, UNITED PARCEL SERVICE OF
AMERICA; JOSEPH C. HETE, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ABX AIR AND AIR TRANSPORT SERVICES GROUP; GARY HAMMES, SENIOR
VICE PRESIDENT AND CHIEF OPERATING OFFICER, ASTAR AIR CARGO,
INC.; CAPTAIN DAVID R. ROSS, PRESIDENT, AIRLINE PROFESSIONAL
ASSOCIATION, TEAMSTERS LOCAL 1224; CAPTAIN JOHN PRATER,
PRESIDENT, AIR LINE PILOTS ASSOCIATION INTERNATIONAL; AND
SAMUEL R. SIMON, THE AMERICAN ANTITRUST INSTITUTE
Mr. Mullen. Thank you very much. Chairman Oberstar, Ranking
Member LaTourette, distinguished Members of the Committee, I
thank you very much for the opportunity to come to talk to you
today about the DHL situation in the United States and about
the proposed contract with UPS.
You will have received my written testimony already. I hope
that you have had a chance to read it.
Mr. Oberstar. Your entire testimony will appear in the
record as submitted, and the gentleman is welcome to summarize
the substance of the statement.
Mr. Mullen. Thank you. I will paraphrase it as quickly as I
can.
Firstly, DHL is in a very difficult situation here in the
United States. For over five years, we have battled to break
into this market and be successful here. By the end of this
year, we will have spent some $6 billion doing that.
We have made a huge amount of progress which we are very
proud of. We have built a strong brand. We have built out a
quality infrastructure. But the reality is it has come at a
very high price, and today we are losing some $5 million a day
or a projected $1.3 billion loss this year.
We are in a narrow express market that has been shrinking
since the late 1990s, and there is intense compensation for the
declining volume that remains. Now, on top of that, we are
facing a worsening economy and very high jet fuel costs as
well. We are a large company, but no company can lose this
amount of money and survive.
We are under intense pressure from shareholders, from
analysts, financial markets and others to address these losses
which have been going on for some time. There is considerable
criticism that we have not done this earlier. So we simply have
to take action and, with volumes declining, that simply means
taking out costs.
We have exhaustively examined all the options that we can
see open to us from various restructuring proposals,
discussions with private equity and other players,
partnerships, even through to closing this business altogether
in the United States.
From that analysis, on May the 28th, we announced a
restructuring plan for our U.S. business that had two key
parts. The first was a major restructure of our ground
operations from closure of some stations, reduction in trucking
network and other measures. The second was the intention to
enter into this contract with UPS to replace two existing
aviation subcontractors with UPS itself.
The goal of that is to save $1 billion per annum. Of all of
the options we have studied, we believe that this represents by
far the best chance that we have to remain a viable competitor
in the U.S., thereby preserving competition.
I would just like to quickly highlight a few points in
respect to this contract. Firstly, it is not a merger. It is
not a joint venture. It is not an alliance. It is not a
transfer of assets.
We are simply replacing two existing third party
subcontractors with a different subcontractor for one part of
our business.
DHL remains as independent afterwards as it was before. Our
pickup and delivery fleets, our billing systems, our customer
service, our telephone routing, all of these things remain as
they were previously.
Customers will not see any difference. A package moving
from New York to Los Angeles, the customer today doesn't know
whether we use ABX, whether we use ASTAR, whether we use DHL
aircraft, whether we use UPS aircraft. It will be picked up by
a DHL courier and delivered by a DHL courier.
There is no need for us to and we will not share
confidential customer information. Some of the suggestions that
UPS will have access to pricing and things like that are just
simply not true. The only data that we will make available to
UPS is sufficient data for them to sort and transport those
packages. There is no IT link being envisaged as might have
been suggested.
Now this type of solution, we believe, is common in high
capital equipment business: in the airlines where there is
code-sharing amongst passenger airlines, in the shipping
industry where shipping companies for many years have carried
each other cargo, through telecoms where the last mile carriage
on fixed copper lines is one carrier provides for many and so
on.
And, in our own industry here in the United States, there
is an exact parallel where the United States Postal Service
some years ago closed its hub and outsourced their aviation
lift to FedEx, a very similar parallel to what we are
discussing today.
Now, obviously, all of that said, no such change comes
without an impact. We are hugely sensitive to the impact that
this decision will have on Wilmington, on the local community,
on our subcontractors and many, many individuals.
It is absolutely not a decision that has been taken
lightly. We have agonized over this. We have been hugely
criticized for taking as long as we have for making a decisive
move. However, we believe we absolutely have to do this.
So we formed a team which is putting a huge effort now into
mitigating the impact of these changes. We realize, of course,
that there is nothing we can do to entirely mitigate the impact
on individuals and working families, but we are working to put
in place a plan that we believe goes well beyond what is usual
in this type of situation and well beyond what our contractual
and legal obligations might be.
What does that mean in practice? Well, we have allocated
some $260 million in severance, retention and health benefits.
Of that $260 million, only $35 million are actually contractual
obligations. The other $225 million or nearly a quarter of a
billion dollars are benefits over and above that we are paying,
and I might add mainly to the employees of other companies,
those of our subcontractors, not actually DHL employees
themselves.
In addition, we are working with local, State and community
officials to try to help in as many other ways as we can,
including we are discussing the possible donation of the Air
Park to the local community.
So, in conclusion, Mr. Chairman, may I just summarize
again?
This has been an exceptionally difficult decision. We are
losing $1.3 billion in a declining market, and we have no
option but to cut these costs.
We have considered every option that we think is available
to us, and we have talked to every party we think can help, and
we now plan to implement a solution that addresses the
situation.
Such a plan will obviously not be liked by those affected,
of course, but it is not a merger. It is not anticompetitive.
It is common in many industries, and it exists here in the U.S.
in our own industry.
Hopefully, this leaves us as a viable competitor and will
preserve competition in the U.S. market.
Last, but most importantly of all, we are doing our very
best to mitigate the impact by going well beyond our
contractual and legal obligations as well as well beyond
comparable benchmarks.
Mr. Chairman, distinguished Members of the Committee, thank
you very much for your attention, and I look forward to
responding to any questions that you may have.
Mr. Oberstar. Thank you for your testimony.
Mr. Wallace.
Mr. Wallace. Chairman Oberstar and Members of the
Committee, UPS welcomes the opportunity to appear before you
today to present as clearly as possible the facts regarding
UPS's proposed agreement with DHL.
On May 28th, 2008, UPS and DHL announced that the companies
were working toward an agreement for UPS to provide airlift of
DHL's express, deferred and international package volume within
the United States and to and from Canada and Mexico. We are
still negotiating this agreement.
The proposed agreement is part of a larger restructuring by
DHL designed to reduce its costs and to help the company to
remain competitive in the U.S. It has been widely reported that
this restructuring has several elements including engaging the
U.S. Postal Service to provide last mile delivery of some of
DHL's packages.
DHL has stated very publicly and clearly that it would not
be able to compete effectively or perhaps remain in the U.S.
without restructuring its operations and costs. The company has
reported it expects to lose $1.3 billion in the U.S. this year.
Mr. Chairman and Members of the Committee, let me state as
clearly as I can the anticipated agreement between UPS and DHL
is not a merger or a joint venture. It is not an acquisition.
It is not a consolidation.
UPS and DHL continue to compete independently, and we will
each price and market our brands and services. We will not
share profits, costs or information about pricing of services
to each other's customers.
Under the proposed agreement, UPS will act as a vendor to
DHL providing contractual services in the same way that
carriers in our industry, including UPS and Federal Express,
provide services to the United States Postal Service.
This type of arrangement, where one company provides
services to a competitor, is found throughout the
transportation industry including in trucking, rail and ocean
carriage. It is also found in other industries such as natural
gas and telecommunications.
UPS will not provide pickup or delivery of packages to DHL
customers. DHL will deliver packages to UPS's airport locations
for movement through UPS's air network to destination airports.
DHL will then pick up the packages from the destination
airports for final delivery to its customers. This is the same
service currently being provided to DHL by two vendors, ABX and
ASTAR.
The anticipated agreement, in short, is simply an airlift
contract, one part of a restructuring that DHL has concluded
will significantly reduce its costs in the United States.
There has been a great deal of discussion about the impact
of DHL's restructuring on the job market of Wilmington, Ohio.
UPS is a company that has a long history of providing good jobs
and benefits for employees. We understand the importance
communities place on attracting and retaining employment
opportunities for their residents.
It is very important to note in this regard that the
expected result of DHL's restructuring will be to preserve
approximately 40,000 DHL-related jobs in the U.S. that would
otherwise be at risk. Further, the agreement with DHL will help
to bring additional job security to more than 14,000 UPS
employees in Ohio and 358,000 UPS employees in the United
States.
I should note that in 2003 UPS employed 317,000 people in
the U.S. Since then, we have added more than 41,000 employees
to our payroll which is 14,300 more people than the average
total number of employees among the Fortune 500.
It is our hope that growing our business will allow UPS to
continue to increase the number of UPS jobs throughout Ohio,
the Country and the world.
Any suggestion that UPS could somehow manipulate the way in
which DHL packages move through our system to gain a
competitive advantage is simply untrue and gives DHL far too
little credit for being able to protect itself. Let me assure
you that DHL is a tough negotiator, fully able to protect its
own interests.
UPS will continue to compete vigorously with DHL and others
in the U.S. and around the world, and we fully expect DHL to
compete vigorously as well. DHL's restructuring, including its
agreement with UPS, actually preserves competition in the
package delivery business in the U.S.
Now you might ask, why would UPS want to do something that
helps a competitor remain in the market? For UPS, our goal is
to find profitable opportunities such as this to better utilize
our existing capacity, which makes us a more efficient
competitor and allows us to create and provide career stability
for our employees.
In short, the proposed agreement represents a wise and
efficient use of our assets, helps to protect the jobs of
358,000 UPS employees in the U.S., and if we didn't pursue this
agreement one of our competitors would have.
Mr. Chairman, thank you for the opportunity to share UPS's
perspective on an agreement that helps to strengthen a U.S.
company that provides career opportunities to hundreds of
thousands of people.
I hope the facts I have outlined today address the
questions and concerns of the Committee. I stand ready to
answer any further questions that you and the Committee may
have.
Thank you.
Mr. Oberstar. Thank you very much, Mr. Wallace.
Mr. Hete.
Mr. Hete. Chairman Oberstar and Members of the Committee, I
am privileged to serve as the CEO of ABX Air and President and
CEO of Air Transport Services Group, the parent company of ABX
Air. Thank you for the opportunity to tell you about our work
to help DHL compete more effectively in the U.S. market.
Senior management of DHL and its parent company, Deutsche
Post World Net, have asserted their only economically viable
alternatives in the United States are an alliance with UPS or a
complete withdrawal from the U.S. market.
Like many in our industry, we believe that there are other
alternatives. These other alternatives will ensure competition
in the express delivery market and preserve American jobs.
My remarks focus on the events during the past year that
demonstrate how ABX Air has been very eager to help DHL
overcome its structural inefficiencies and reduce its losses in
the United States and, second, that ABX Air can provide DHL
better value than UPS. If this is of interest to the Committee,
I would be happy to expand on my remarks afterwards.
We knew that DHL had not been meeting its business
objectives in the United States for some time, but ABX Air
leadership became especially concerned about DHL's situation
over a year ago. Seeing their losses in the U.S., a softening
economy and rising fuel prices, it was clear to us that DHL had
to change and quickly.
Because DHL is our largest customer providing 92 percent of
our business and because we are their largest vendor, we
brought our concerns to their attention and offered our help.
In August, 2007, we had our first discussions with senior
DHL Express management. We asked how ABX Air could help DHL cut
costs in their U.S. network. In our discussions with senior DHL
leaders, we offered to change every element of our agreements
if we could help DHL stem its losses.
DHL leaders offered us no information on what changes we
might make to help them save money.
By November of 2007, we had conducted several conversations
with senior DHL leaders about our concerns, each time offering
to help DHL lower its domestic costs, asking for specific ways
we could help and asking about their plans for the future.
Each time, DHL leaders thanked us for our willingness to
help and told us they were still studying the situation.
Though DHL has never shared its internal concerns or plans
with us, when we saw their 2007 losses in the U.S., we knew
something had to change. We built our own plan to dramatically
cut DHL's domestic costs.
Airborne Express had run a business similar to DHL's
domestic one for over 23 years and, with the exception of the
impact of September 11th, 2001, Airborne Express had never
sustained an annual loss.
We felt we understood something of DHL's issues. On March
31st, well in advance of the May 28th announcement, I traveled
to Bonn, Germany, and presented a proposal to John Mullen, DHL
Express' global CEO.
Our proposal provided DHL's network with over 250 million
in annual savings based on the DHL domestic network then in
place. Given how DHL has reduced its domestic network since
then, we believe our plan would save DHL even more money now.
After DHL's May 28th announcement regarding cuts from its
domestic network, ABX Air went back again to DHL with a revised
proposal. That proposal was very close in cost to what DHL
intended to spend with UPS but provided DHL and its customers
considerably higher value.
DHL reported that it will pay UPS over a billion dollars a
year to handle its freight. Our plan came in less than $100
million above that but provided DHL the flexibility of
maintaining its own sort and airline capacity in the U.S.
Since we made that proposal, Deutsche Post World Net has
declined to meet with us.
The deal we have presented to DHL is so close in cost to
what we understand DHL and UPS are discussing, so superior in
value and so far less damaging to Ohio, that it invites
discussion. We respectfully request that you strongly encourage
DHL to negotiate with ABX Air to determine whether we can offer
a solution. We urge you to do this before DHL and UPS take
steps that will have an irrevocable effect on competition in
the United States express delivery market as well as an
unprecedented job loss impact.
With more information about DHL's needs and cooperation
from our organized employees, ABX Air can provide an
alternative to the DHL/UPS agreement that sustains DHL as a
true competitor with a proprietary network.
As business people, we prefer solutions achieved through
direct discussions with our customers. In the absence of that,
we understand that government intervention may be required to
produce an outcome that supports the viability of a principal
air carrier in the express delivery market and provides long-
term stability to southwest Ohio, the State and the Nation.
Finally, Mr. Chairman, I want to acknowledge the
contributions of more than 10,000 ABX Air employees, the
majority of whom directly serve DHL in the U.S. Their
professionalism and strong work ethic has sustained DHL's
reputation for high quality service over the years.
In spite of the layoffs we are now making across our DHL
system, our people have delivered 99 percent plus on-time
reliability since DHL's restructuring announcement in May.
As John Mullen himself acknowledged in his Judiciary
Committee testimony last week, the cooperation DHL has received
has been, to echo his words, simply outstanding. We appreciate
that he shares our view, that the issues we are discussing here
today are in no way a reflection on the commitment and
dedication of the fine people who support DHL every day.
On behalf of the employees and shareholders of ABX Air,
please accept our sincere appreciation for the opportunity to
testify before the Committee.
We recognize that your responsibility in part is to monitor
and promote a healthy U.S. airline industry and review the
potential impacts of any consolidations on consumer choice and
American jobs. ABX Air urges you to exercise your oversight
role in seeking to promote strong, viable carriers as well as
the American jobs that they represent in the express delivery
market.
Thank you, Mr. Chairman, and I stand ready to answer any
questions of the Committee.
Mr. Oberstar. Thank you very much for your testimony. We
greatly appreciate it.
Mr. Hammes.
Mr. Hammes. Thank you, Mr. Chairman and Members of the
Committee.
My name is Gary Hammes, and I am the Chief Operating
Officer of ASTAR Air Cargo.
Thank you for inviting ASTAR to this hearing today and
giving us the opportunity to explain why the DHL/UPS joint
venture is not in the best interest of competition, customer
service or employment. I would also like to explain that we
believe there are alternatives to the UPS deal that could meet
DHL's legitimate business needs to reduce its costs without
producing the adverse effects I have identified in my prepared
remarks.
Although our primary focus is the welfare of ASTAR's 1,000
employees, including over 300 military veterans, the
ramifications of the DHL/UPS deal go far beyond our company to
include the entire industry and its many millions of parcel
customers.
If DHL is permitted to outsource its primary and most
important business and operational functions to UPS, it will
compromise DHL's ability to remain an independent competitor,
creating a UPS/FedEx, two-company marketplace. With only FedEx
and UPS providing overnight package express services, those
companies will be able to control pricing.
One thousand good jobs at ASTAR Air Cargo will have been
lost. Many thousands of jobs at ABX Air will have also been
lost. Almost 10,000 of these jobs will be located in the
Wilmington, Ohio area. That community will be devastated.
DHL's overnight package delivery business, from pickup to
delivery, is a tightly integrated system that relies on
proprietary systems that are unique to DHL. The real-time
tracking of packages and providing the tracking data to
customers is a critical business function and a point of
differentiation between corporations.
DHL cannot hire UPS to transport its air transport and hub
sorting without inserting a major competitor into the middle of
its tracking system. By turning over this key differentiating
activity to a competitor, DHL will have compromised its ability
to continue to aggressively compete as an independent
corporation.
If linked to UPS, DHL's ability to continue to compete will
diminish. DHL will find it more difficult to offer later
pickups or earlier deliveries than UPS unless it can convince
UPS to adjust its flight schedules to accommodate DHL's
business requirements.
UPS may well be reluctant to add capacity or tailor
schedules to accommodate the unique needs of DHL customers
particularly if DHL is seeking to take the business away from
UPS. Indeed, just the act of conducting advance schedule
discussions with UPS will tip off UPS to DHL's business
strategies.
UPS's first and controlling responsibility is to get its
own packages to their destinations on time and to outperform
its rivals, one of whom is DHL. Thus, if DHL contracts with UPS
to transport its packages, UPS will have an inherent conflict
of interest between meeting DHL's legitimate business
requirements and meeting its own business requirements which
include outperforming DHL.
There is concrete evidence that UPS has embarked on an
aggressive campaign to steal DHL customers based on the
announced DHL/UPS joint venture. A UPS salesperson recently
made a sales call on ASTAR, trying to convince ASTAR to switch
its business from DHL to UPS.
[Laughter.]
Mr. Hammes. In this call, the UPS salesperson argued that
once integrated into UPS's operation, DHL's service would be
substandard.
We have seen other evidence that UPS is aggressively making
such calls on other DHL customers.
DHL claims it needs the UPS deal to lower its costs. We
agree fully that DHL should explore every opportunity to reduce
its costs, but we also believe there are alternatives that DHL
could pursue without compromising its competitiveness.
When DHL purchased 49 percent of ASTAR last year, ASTAR
committed to DHL that it would aggressively pursue every
opportunity to control its own costs and pursue other
strategies to help DHL control its overall air transportation
costs. We have already made significant strides in this regard.
For example, the new four-year collective bargaining
agreement with ASTAR and ALPA signed last February specifically
was structured to ensure that ASTAR crew costs would remain
lower than that of UPS, and they are.
In addition, last year, ASTAR approached ABX Air with an
expression of interest to purchase that company with the intent
of consolidating all of DHL's North American air transport
functions into one company, thereby achieving significant
efficiencies and cost savings to DHL. ABX Air rejected ASTAR's
expression of interest, but DHL recognized then and I believe
continues to recognize that this transaction would have made
significant inroads in addressing DHL's efforts to contain and
reduce its costs.
ASTAR would be interested in renewing an effort to acquire
the DHL-related portions of ABX Air if DHL were to advise that
it would join ASTAR and ABX Air in such an effort.
Thank you, Mr. Chairman. I would be happy to answer any
questions you or other Members of the Committee may have.
Mr. Oberstar. Very interesting testimony. I wonder how that
transaction turned out or proposal turned out. We will find
out.
[Remarks off microphone.]
Mr. Oberstar. I think you are right.
Captain Ross.
Captain Ross. Mr. Chairman, Mr. LaTourette, Members of the
Committee, thank you for holding this hearing. You are
performing a truly important service for thousands of workers
and small businesses in America and for America's vital
transportation industry.
The proposed anticompetitive transaction between DHL and
UPS rocketed to the top of the 2008 Presidential Campaign. I
have had the privilege of personally briefing both Senator
Obama and Senator McCain. I have heard them express their
concerns about job losses and reduction in services to the
customers and harmful impacts this de facto merger will have on
our Nation's transportation sector.
Mr. Chairman, I respectfully request that this Committee:
One, oppose this proposed deal as destructive to U.S.
aviation policy to promote competition;
Two, request that the Justice Department immediately
initiate an antitrust investigation;
Three, request that the parties refrain from implementing
the proposed alliance until the Justice Department concludes
its investigation; and,
Four, oppose any attempt to grant DHL a waiver of the
citizenship laws that keep this Nation safe.
I represent almost 700 pilots who fly for ABX Air, but I am
also here to support more than 10,000 hardworking Americans
who, like our pilots, will lose their jobs, lose their health
insurance and their ability to support their families if this
transaction is not stopped.
Despite assertions by DHL and UPS to the contrary, the
proposed deal will effectively reduce competition in the air
express market from three to two. DHL, the firm with the
smallest market share and the greatest incentive to compete on
service and price, will be neutered as a legitimate competitor.
Why? First, if this transaction is consummated, DHL will be
forced to rely on its supposed competitor for its most crucial
operations: air transport, package sorting and tracking.
Second, a key element of the express delivery business is
package tracking. It is the backbone of the service process. By
combining efforts in this process, whether they admit it or
not, DHL will be transferring highly sensitive proprietary
commercial information about its customers and about its
markets to UPS.
Having watched express packages go through the sort for 16
years and being in constant contact with the people doing the
sorting, I can tell you there is no way UPS can transport, sort
and track DHL packages without material and proprietary
commercial information being transmitted by DHL to UPS.
It makes no sense to rely on a major competitor for key
elements of your service, especially in a highly consolidated
marketplace. Indeed, there is every incentive for DHL's
proprietary information to be disseminated through the sales
and corporate organization of UPS to the competitive detriment
of DHL.
Perhaps DHL will insist that UPS construct a Chinese wall,
maybe in the form of confidentiality agreements, to limit that
dissemination. Unfortunately, Chinese walls leak and
confidentiality agreements are breached.
DHL CEO John Mullen testified last week before the House
Judiciary Committee that it was UPS that approached DHL about
merging their services.
While I understand DHL's financial predicament and am
actively trying to help them resolve it, I do not understand
UPS's incentive. Why would UPS help the competitor in the only
market in the world where that competitor is not number one?
Mr. Wallace, why don't you waive the confidentiality
agreements you have with DHL, so I can talk to them about
saving jobs in Ohio?
Our national transportation policy calls for placing
maximum reliance on competitive market forces and on actual and
potential competition to prevent unfair, deceptive, predatory
or anticompetitive practices in air transportation. Regardless
of how they label their deal, this transaction between DHL and
UPS would clearly violate the letter and the spirit of that
well-conceived national transportation policy.
Through mismanagement of its North American operation, DHL
is losing money. Rather than fix the underlying problem of poor
management, DHL somehow would rather further undermine its
position in the American market by essentially turning over its
book of business to one of its competitors.
Just last week, the Financial Times reported that DHL plans
to further erode their business prospects in the American
market by further reducing service. It was reported, DHL now
plans to reduce their delivery capacity by half and also have
UPS cover part of their ground deliveries as well.
Mr. Chairman, we need your help to save them from
themselves. DHL's proposed solution is a recipe for even
greater failure. It is a potential death spiral.
We, the employees of ABX, stand ready to help DHL fix their
revenue and cost problems by working with them to increase
efficiencies, improve service and move toward profitability. We
stand ready to help them reverse their dim prospects instead of
going forward with a self-destructive strategy that would
improve the business prospects of their major competitor, UPS.
Mr. Chairman, according to DHL's own web site, if you were
to send an overnight package to each of your district offices
today, the package to your district office in Duluth wouldn't
get there until 5:00 p.m. tomorrow. For Chisholm, it wouldn't
get there until 5:00 p.m. on Thursday. And for your Brainerd
district office, I am sorry to say, sir, it won't get there
until next Tuesday by 5:00 p.m. All of these arrival times are
listed under DHL's next day 12:00 p.m. services.
There are other Members of this Committee who have the same
loss of service.
On behalf of the tens of thousands of workers in Ohio and
around America who will be dramatically harmed by this
transaction and on behalf of all American small businesses and
consumers, I urge this Committee to stop this potential
violation of our vital national air transportation policy.
Thank you very much for this opportunity, sir, and I am
pleased to answer any questions you may have.
Mr. Oberstar. Thank you very much, Captain Ross.
I am rather surprised and impressed that you got these
figured out, the shipping times to my various district offices.
You probably can do the same for the rest of the Members of the
Committee. It is very intriguing.
Captain Prater.
Captain Prater. Good afternoon, Chairman Oberstar. Thank
you for allowing us to testify on behalf of our 53,000 airline
pilots and especially the 500 pilots who fly for ASTAR Air
Cargo, many of which have shared the afternoon with the
Committee.
For more than 30 years, these men and women have worked to
make their company one of the most reliable cargo airlines in
the world. Sadly, it appears that a corporate decision made in
an office building in Germany could shut down ASTAR forever.
What Deutsche Post, the owner of DHL, is saying is that
your job does not depend upon your performance. It depends on
the whims of a corporate bean counter who treats workers as
just another expense to be cut in the name of restructuring.
In fact, we heard from DHL that they don't even know what
to call this. They sure have said what it is not to be called.
What it will be: It will lead to more industry
concentration, higher costs for consumers and more good jobs
lost.
I would like to take just a moment to thank the delegation
from Ohio which has given so much effort to investigating this
issue, and certainly this Committee as well as the Judiciary
Committee, but the truly bipartisan effort from the Ohio
delegation and the Governor's office as certainly been noted by
our union.
This proposal, there seems to be an assumption here that
DHL is somehow addressing its problems through this arrangement
with UPS. But where is the proof?
What we are seeing out on the line is that DHL is actually
already losing more business because of the uncertainty of what
type of business they are going to run here in the United
States.
Second, there seems to be misunderstanding. While people
throw out big numbers like a billion dollars a year--and I
could certainly say if I was losing a billion dollars a year,
that would be significant--is this arrangement going to cut all
that billion dollars a year?
Of course not. In fact, by what little public information
is out there, we may be talking about a difference of $200
million a year of savings.
Certainly, we have committed to DHL to looking at any which
way we can, along with our friends and brothers at ABX, to find
the solutions to keep the business as is.
What we are seeing is an awful lot of secret and double
backstabbing dealing. While we are in negotiations with ASTAR,
which is of course owned 49 percent by DHL, we are negotiating
to protect our jobs. That happens to be the function of the
union. At the same time that we are signing agreements with the
company to protect our members' jobs, they are dealing with UPS
to actually kill our jobs.
In fact, what DHL is proposing me reminds me an awful lot
like the defendant who shoots both of his parents and then
cries for lenience for being an orphan.
Well, in this case, we have a German company that buys two
U.S. companies, wants to put a bullet in their head and then go
on about their business. That just shouldn't be. We have men
and women, communities that are deeply affected by these
decisions that are being made.
We have heard certainly from Congressman Westmoreland that
he was proud of the corporate citizen of UPS. I guess maybe it
is because I am married to somebody from Missouri, but I say:
Prove it. Show me. Where are the jobs that come along with
this?
We are not seeing or hearing from UPS about any jobs for
the displaced thousands of workers if this deal goes through.
We have asked this Committee and the Justice Department to
insist on reviewing these supposed firewalls that they are
talking so much about.
Last week, the Financial Times over in Germany made it
clear that the deterioration in DHL's situation has actually
accelerated since May.
As to the failure for DHL to think and constructively deal
above board, the facts are clear. We have made our effort and
our commitment to finding a solution to their problems well
known, but again they don't want to deal with us. They prefer
to deal in secret with UPS.
DHL's solution will ensure that the two companies, both of
which were viable competitors when purchased by DHL, are put
out of business.
Mr. Chairman, there has to be more to this than meets the
eye. After all, both ASTAR and ABX have met all performance
targets set by DHL and provide 99 percent on-time performance.
The pilots at both carriers, while reasonably compensated--
and you won't hear a union leader say this very often--make
less than the pilots at UPS or FedEx. We are efficient, and we
are safe, and we have been reliable, and that should go into
the thinking here.
The bottom line is that DHL's problem in North America is
not the cost or the effectiveness of its air operations. Its
problem is that it cannot compete with UPS and FedEx on the
ground. They can't restructure their way out or call it
something else other than that.
What they need to do is work with their current suppliers
and their employees to prevent customer flights away from their
business.
For all these reasons--I will summarize, Mr. Chairman--the
transfer of DHL's lift to UPS requires, at the very least,
careful scrutiny by this Committee, the Judiciary Committee and
the Department of Justice. Further, as suggested by Chairman
Conyers last week, this deal should be delayed, pending such
scrutiny.
And, given the stakes for workers and competition, any
confidentiality restrictions entered into by the parties should
be voided. Let's put it on the table. If DHL and UPS won't
operate in the open, we ask you to step in and restructure
their thinking.
Thank you for your interest in this important matter, and
we would be glad to answer any questions.
Mr. Oberstar. Thank you, Captain Prater.
As we began to put this hearing together and listen to the
concerns expressed by the Members of the Ohio delegation and
others affected by the transaction, I wasn't convinced there
was a very solid case. But as the testimony has been submitted
and as the testimony has unfolded, it appears to me there are
some very serious antitrust implications. That is why we
invited Mr. Simon, our next witness, to address these issues.
Mr. Simon. Good afternoon, Mr. Chairman and Members of the
Subcommittee.
My name is Samuel Simon, and I am a private attorney in
Philadelphia at the National Securities and Antitrust Bar.
These are courses that I also teach at Rutgers Law School as an
adjunct professor.
I am here today speaking for the American Antitrust
Institute which, as many of you know, is an independent
research, education and advocacy organization founded in 1998
that frequently comments on developments relating to antitrust
laws and to competition policy in general.
Our analysis and concerns relating to the proposed
strategic alliance between DHL and UPS are set forth in detail
in our written comments.
In connection with my appearance before you today, I would
like to stress the following crucial points:
Let me take one second and talk about what antitrust law
is. Antitrust law can be summarized very simply as dealing with
the power of market participants to distort the competitive
process. The Supreme Court has often described the antitrust
laws as the Magna Carta of the free enterprise system.
Now the single most important component of the antitrust
laws is that competitors must compete.
The converse of that is equally applicable and equally
opposite. Competitors must not agree not to compete. The less
competition in the market, the less price and service quality
customers receive.
Now the air express package delivery market, in effect, has
only three competitors: DHL, UPS and FedEx. Because of this
lack of significant competition, this tight little grouping can
easily lead to cartel behavior in the best of times. By cartel,
I mean simply a small group of competitors acting as a single
unified entity.
The strategic alliance that has been talked about this
afternoon would mean that DHL uses UPS's air transport. This
means that DHL would have a large part of its costs somewhere
perhaps around 60 percent, controlled by its direct competitor,
UPS.
Now we can postulate two scenarios:
Number one, DHL ultimately intends to exit the market.
Under this case, the strategic alliance reduces DHL's ability
to set its own competitive retail price because DHL would have
no ability, none, to reduce pricing on its air linkage
component, again about 60 percent of its total costs.
The strategic alliance simultaneously increases--
increases--UPS's ability to charge itself increasingly lower
internal prices for its own air transport costs. This, by
definition, would permit UPS to undercut DHL in its retail
pricing until DHL has to exit the marketplace. Once that
happens, you have an effective duopoly.
Under either version, reduction or increase or some
synergistic combination of both, two of three competitors would
have essentially agreed to cease competing against each other.
And, as Mr. Hammes discussed a few minutes ago, there is always
the possibility of a service squeeze, not just a price squeeze.
Now let's take the other scenario, DHL intends to remain in
the market. Under these circumstances, DHL will benefit from
the higher prices in the market because it is far easier for
two rivals to tacitly collude on prices than three rivals.
Mr. Mullen, a few moments ago, said, well, this only
substitutes one vendor for another.
Respectfully, I suggest to you, Mr. Chairman and the
Committee Members, that this is categorically contrary to the
United States antitrust laws. It is the exact opposite to what
the antitrust laws say. You cannot substitute one competitor
for another.
Now what are legal remedies?
DHL, if it is dissatisfied with what is going on, can bring
a breach of contract suit against UPS. But you know they build
court houses, and in the courts of law there is often great
difficulty in showing an actual contractual breach, and the
harm that DHL is talking about may be impossible to measure or
to quantify.
The other possibility we see is that DHL brings an
antitrust suit against UPS. This is even more cumbersome and
more enervating. Moreover, UPS is not a monopoly in the fact it
doesn't even have 50 percent of the market share. So a Federal
judge is likely to toss any such suit right from the beginning,
saying there is no monopolization and there is no attempt to
monopolize.
So, in our opinion, the best approach would be for the
Federal Trade Commission, for the Federal Trade Commission to
seek an injunction against this deal going forward under
Section 5 of the Federal Trade Commission Act, charging unfair
methods of competition.
And, let me quite clear. The unfair method of competition
would be an allegation that the strategic alliance constitutes
what is called a facilitating practice, making it easier,
making it simpler for firms in an oligopoly to coordinate their
prices.
Now, if the Federal Trade Commission won't do it, perhaps
the Ohio State Attorney General's Office can do it, but that
would be our thought as to where this matter should be
proceeding.
This concludes the oral portion of our testimony, and I
respectfully refer you to our written submission for a detailed
discussion and an explanation of matters from our perspective.
Thank you, Mr. Chairman, for permitting me to testify on
behalf of the American Antitrust Institute and for your time
and attention this afternoon.
Mr. Oberstar. Thank you very much.
Your entire testimony and the testimony of all the
witnesses will appear in full in the record.
We have had several statements about the effect of this
transaction to be to reduce competition.
Let me ask you, Mr. Simon, supposing DHL waited to the
point of bankruptcy. No longer could they continue their
operation. The next step is bankruptcy, and they seek the
protection of bankruptcy court, and then they disappear from
the marketplace, say, Chapter 7, liquidation bankruptcy.
Would that have changed the market effective of the
situation?
Mr. Simon. It would certainly change the litigation
posture. If you are talking, sir, Section 7 and not Section 11,
the reorganization, once a company files for bankruptcy,
Section 362(A), the Bankruptcy Act, prohibits it from being
sued or from suing. So the judicial approach would no longer be
applicable.
Mr. Oberstar. But would it change the market structure?
That is their business then could be picked up by anybody
else. It would leave then only two major competitors in the
market place.
Mr. Simon. That is right. It would become an effective
duopoly.
There is a number of witnesses who said, Mr. Chairman,
there are pretty high entry barriers here. The average Joe
Schmoe simply can't go in and start this business because you
have an enormous amount of work to do on the land linkage side
and the air linkage side, enormous sunk costs and a great deal
of effort.
So you would have an effective duopoly if they went
bankrupt, did not reorganize and eventually disappeared.
Mr. Oberstar. Since this is not a classic case of
acquisition or merger but a contractual relationship, to rise
to the level of antitrust concern, does the air transportation
portion of the delivery have to rise to a level or percent of
the cost of package delivery to quality as violation of
antitrust?
Mr. Simon. Well, I would answer that your question really,
sir, has two parts.
There is no acquisition of assets. So the standard classic
tool for stopping this sort of things in their incipiency,
Section 7 of the Clayton Act, simply does not apply.
The other part of your question, I would say that there is
no threshold formulation because injunctions are often designed
to stop impending antitrust conduct from occurring shortly
before the time that they are going to incur.
If I own a house and somebody is going to run a bulldozer
through it wrongly, I can get a court injunction stopping them
from doing so before the bulldozer rips out my house.
So I would suggest to you that my personal opinion,
personally, you don't need any particular threshold of dollars
or percentage in order to seek an injunction from the
appropriate governmental agency, which I would suggest to you
is much more likely to be the Federal Trade Commission which
more and more has shown itself independent from, as someone
said earlier today, a somnolent Department of Justice.
Mr. Oberstar. Yes, that was my comment. I think we can
apply the same term to the Federal Trade Commission.
[Laughter.]
Mr. Oberstar. Mr. Mullen, earlier, the Lieutenant Governor
of Ohio said, we were never given the opportunity to offer good
faith alternatives.
What alternatives could the State offer that would dissuade
DHL from this transaction or make it attractive for DHL to
remain independent and without a contractual arrangement with
UPS?
Mr. Mullen. Mr. Chairman, we would have liked nothing more
than to find a solution that kept the status quo of Wilmington
and the people affected by these changes. We spoke to numerous
parties.
I, personally, spent a lot of time in the U.S. and
elsewhere, speaking to as many parties as I could to try to
find a solution to our situation. I have spoken to competitors.
I have spoken to private equity players. I have spoken to third
parties.
Now, several people are saying, well, we would have liked
the time to discuss and we can find alternatives, et cetera.
With the greatest of respect, we had discussions with those
people at the time. We had discussions with the two major
airline subcontractors at the time, and we were not able to
reach any agreement.
We facilitated an offer from ASTAR for ABX and $7.75 a
share. I point out I think the share price today is 95 cents or
something. We were prepared to back that, to allow the two
airlines to come together to make, as others have said,
substantial savings.
But that was rejected at the time for reasons you will
obviously have to ask them. It was rejected, and they weren't
even willing to discuss.
So we then moved on, and we have found another solution
that is a very solid solution to the problem that we have.
Now, obviously, I can understand people's angst and
disappointment about it. But to come back now and say, if only
we had time or if only we had allowed to have this discussion
or that discussion, we did speak to every party that we could
see could offer any sort of solution.
Now, in fairness to the Lieutenant Governor, we did not go
to the government of Ohio because we simply felt that it was
unrealistic to expect that taxpayers' money would be used to
subsidize private company losses of this magnitude.
If our problem had been $20 million or $50 million, I am
sure that we might have been able to find something. But a $1.3
billion problem every year, year in, year out, we felt was
beyond a credible expectation that taxpayers' money would be
used for that. So we did not, in all fairness, discuss with
them, but we did discuss at length with all the other parties.
Mr. Oberstar. Thank you very much, Mr. Mullen.
I now yield to the distinguished gentleman from Ohio, our
very keen legal analyst on this Committee.
Mr. LaTourette. Well, I don't know about that, but thank
you, Mr. Chairman.
For the members of the panel, I chatted with the Chairman
that because there are seven of you I don't want anybody to be
neglected. He has indicated that if time permits, we may come
around again. So, if I don't get to you now, it is not because
I don't like you. I will get back to you.
I want to begin, Mr. Hete, with you on Mr. Mullen's last
point.
A couple of people, and I know the Lieutenant Governor said
it. Maybe somebody else talked about this attempt by ASTAR to
make an offer to purchase ABX. Mr. Mullen just said $7.75 a
share. First of all, is that accurate?
Did ASTAR offer to buy ABX at $7.75 a share?
Mr. Hete. It was not an offer. It was an indication of
interest at $7.75.
Mr. LaTourette. Okay. ABX is a publicly traded company, is
it not?
Mr. Hete. That is correct.
Mr. LaTourette. And you trade on NASDAQ?
Mr. Hete. Yes.
Mr. LaTourette. Did you know when that interest was made,
when they made that intention?
Mr. Hete. Yes. It actually occurred June 19th of 2007. I
received a call from John Dasburg, the CEO of ASTAR, and this
was basically a week after DHL had made their investment in
ASTAR, acquiring 49 percent of the ownership and 24.9 percent
of the voting shares of ASTAR.
I received a call from John Dasburg that said he wanted to
start a discussion in regards to the potential acquisition of
ABX.
I have to digress a little bit because the initial attempt
to put the two air carriers together was initiated by ABX back
in the fourth quarter of 2006. We had approached John Dasburg
and asked if he would be interested in having ABX acquire ASTAR
to consolidate the two airlines under ABX.
We spent probably four or five months working on that deal,
and the offer that we put on the table was rejected by ASTAR.
So about three months went by when ASTAR turned the tables
and said, we would like to acquire ABX. The actual indication
of interest occurred on June 26th when John Dasburg went public
with that indication of interest which was a little bit
surprising because he and I had set a private meeting for a
couple of days after that, June 28th, to have a discussion
about the viability of that potential acquisition.
So, you see, we viewed it as a potential hostile takeover.
We employed the services of Goldman Sachs to assist us in the
analysis of the ASTAR indication.
As a result of the analysis looking at the potential
synergies that would be gained by DHL who, as Mr. Mullen
already testified, they would be funding that acquisition.
Based on the synergies that would be gained by DHL, we did not
feel and advised ASTAR Cargo that the offer or the indication
of $7.75 did not represent adequate value for our shareholders.
The following day, ASTAR said, well, they will pursue other
alternatives then, and that was the end of any discussions.
Mr. LaTourette. Do you know on that date in June what ABX
stock was trading at?
Mr. Hete. At the time they made the indication of interest
at $7.75, the $7.75 was about a 15 percent premium to the
average price for ABX in the previous 30 days and it was about
a 6 percent premium over what the price was on the date that
ASTAR had made the announcement that DHL had made the
investment in them. So it wasn't much of a premium compared to
what the market price was prior to that indication.
Mr. LaTourette. But since that time, the fortunes at least
of the stock price have declined. The last date that I have is
May the 12th, 2008, and I have ABX stock trading at $2.44.
Mr. Hete. No. Today, it is actually less than a dollar. It
is 90-some cents.
Mr. LaTourette. Mr. Mullen, to you just a question on
behalf of the folks in Wilmington. You all own the Wilmington
Air Park, and regardless of what happens here it is my
understanding that that ownership presents an obstacle to the
efforts by the community to move ahead with redevelopment
proposals if this is the ultimate decision.
The question is can you offer us some insight relative from
your perspective as to your plans to relinquish the facility as
part of a settlement with Wilmington and Clinton County?
Mr. Mullen. Yes. We have continually maintained from the
outset that as and when this transaction is concluded, we would
very willingly sit down with the community, with the State and
discuss the future of the Air Park, including the possible
donation of the Air Park to the community.AFTER 6:00 PM
Mr. LaTourette. Okay. To you, Mr. Mullen and to you, Mr.
Wallace, well, this one is just to you, Mr. Mullen.
I have been trying to think of the movie--and sadly the
only movie that comes to my mind is Tommy Boy and I know that
is not it--where they invite the big guys to town and they have
the big party and the brass bands playing and everything else.
The Mayor here, you know was in Leipzig, he claims.
First of all, I would ask you if his testimony was not
accurate, that there were meetings in February and April. Then
he is over in Leipzig to see the grand opening of this new
thing, and then on May the 28th you sort of said: Oh, we are
restructuring. Although we didn't know it at the time, it is
where we are today
Can you just from a company's perspective, just like when I
was talking to Mr. Hete about not taking 7.75, what happened?
How did you go from welcoming the Mayor to Leipzig to I
can't think of the word that I can use on the record but sort
of not being so welcoming?
[Laughter.]
Mr. LaTourette. What happened?
Mr. Mullen. Well, firstly, I would like to say that
everybody involved, from employees to the pilots to the Mayor
to the State, I mean we have had wonderful support throughout.
There are no criticisms of any form from us. This is purely
economics, I am afraid.
But in that particular instances, there were several
references to meetings I think in Ohio where people made
various statements about our ongoing future, et cetera. At that
time, those individuals did not know of the decisions being
discussed at a board level about the future of our U.S.
business. So they acted in good faith.
Mr. LaTourette. Well, let me just be clear, and I will let
you finish the answer because that is an answer.
So you don't dispute that the Mayor and our Governor were
on the telephone with people at your company who said: Don't
worry about it. We are in for the long haul. We are staying
there. We have great employment.
The problem, as I understood your answer, is that the
people who were having those conversations didn't know that
other things were going on within the company. They weren't in
a position to know.
Mr. Mullen. Obviously, a decision like this is an extremely
sensitive decision for all the people involved. We are a
publicly quoted company, a stock market quoted company. So,
obviously, the sensitivity is huge.
We kept a fairly tight circle of those people involved. So
I am not sure of every single conversation or who said what to
whom, but certainly on the DHL side the people talking at that
time were not aware.
Mr. LaTourette. Okay. I thank you for that.
Now to Mr. Mullen and Mr. Wallace. And, Mr. Wallace, let me
just say that this is my 14th year in the Congress. I don't
know if UPS has a bigger defender when it came to postal
reform, when it came to your dust-up with FedEx. I think you
are a great company that has great employees, and you do a
great job.
But I have been handed a sheet, and I don't know who. I
think Mr. Hammes was talking about how somebody from UPS came
in to pitch ASTAR on switching to UPS.
I have been handed a little card that apparently I don't
know if it is handed out to your drivers or not. Are you
familiar with this?
Mr. Wallace. I am not familiar with that.
Mr. LaTourette. Okay. I would ask the staff to make a copy
of it and provide it to you. I don't want to sandbag you, Mr.
Wallace.
But I think it answers the professor's concern. It doesn't
demonstrate to me that you are rolling over and not wanting to
compete with DHL. It indicates something else.
Let me ask, before I ask you about that, to this MOU, the
memorandum of understanding. I think that in these cases and
where I would take our Lieutenant Governor to task is I think
it is boilerplate for a memorandum of understanding to say that
you are not going to discuss what it is you are discussing as
you try and finalize a deal.
I also think it is boilerplate that you don't talk to other
people and competitors when you are in serious negotiations. I
don't think there is anything sinister about that.
But having said that, I think that the other witnesses have
indicated to us that DHL's answer now is, well, we can't talk
to you because of the MOU that we have with UPS.
Maybe the professor can chime in on the antitrust or the
Federal Trade Commission implications of this.
I would tell you that what is the matter with DHL receiving
100 different offers because at the end of the day if it is
going to come down to?
I would think the answer would be what Mr. Mullen is trying
to say here today, and that is it is the only thing we could
do, but I don't know that you can say that unless you have
listened to everybody.
I have to tell you, I have been in this business 20 years.
When I want to steer something to my friends, I invite 100
people. And guess what, my friend still wins, but I have
listened to 100 different people.
[Laughter.]
Mr. LaTourette. The question I have is I think your
company, which is a wonderful company, and I said in my opening
statement that I know why you are doing this. You have excess
capacity at Louisville.
So sadly, Captains, for the people who are talking about
job transfers, I don't think there are going to be job
transfers because you have excess capacity and this is a boon
to your business. I get why you are doing it.
But what is the danger when 10,000 or 12,000 people are
losing their jobs in southwest Ohio? Let the Lieutenant
Governor come in and pitch Mr. Mullen. Let whoever come in and
pitch Mr. Mullen--say, here is the package and what do you
think?
Do you think we can get there, Mr. Wallace?
Mr. Wallace. Well, I can't speak for DHL in that regard.
First of all, thanks for the compliments regarding UPS. I
thank you for that.
Mr. LaTourette. Oh, you are a great company.
Mr. Wallace. I can't speak for DHL.
Our position on this proposed agreement is to pursue it
vigorously, to get the agreement done as quickly as possible.
We believe it is in the best interest of UPS. We believe it is
in the best interest of competition and good for our people and
good for our future.
The provisions that we have with DHL in regards to the
referenced exclusivity discussion that was made earlier, we
believe these are typical commercial provisions, and it remains
in our best interest at UPS to stay focused on completing the
transaction and keeping those in place.
We have invested resources as part of this negotiating
process and time, and we believe it is in our best interest to
continue to maintain that relationship.
Mr. LaTourette. And I get it. That is why I called it
boilerplate. I think your shareholders would probably shoot you
if you didn't have this in the agreement.
I guess what I am asking is in light of this isn't just a
swap of something where nobody is affected. I mean you are
going to turn a town, not you, but this deal will turn a town
into a ghost town.
I just would ask for you to go back to the lawyers and see
if you can permit in just that section, not to talk about the
details of your deal, but just that section of the MOU that
would let DHL receive Lee Fisher to come in and offer a million
dollars or whatever he wants to do or this person comes in,
that you consider that.
I bet that your lawyers, if they hooked up with Professor
Simon over here, might say, you know what, that puts you in a
better posture when they come flying at you with antitrust and
anticompetitive provisions. So I would ask you to consider
that.
Now do you have this little card that I was talking about?
Mr. Wallace. Yes.
Mr. LaTourette. Okay. On the issue, I guess I just want to
express disappointment because this clearly--well, first of
all, have you ever seen it before?
Mr. Wallace. No.
Mr. LaTourette. Okay. It has been represented to me that
this is, and I don't know if the guy that came to pay the call
on ASTAR had this card, but it looks like it is titled Turning
DHL Restructuring Into UPS Opportunity.
It looks to me like it is a document that is given to UPS
employees when they are calling on customers. To me, if this
was just a deal to help DHL out, I mean I think that this card
instructs people making customer calls to tell them to dump DHL
because of potential rate fluctuations, pickup and delivery
time issues, single carrier responsibilities and customer
service.
So I really think that that blows the professor's argument
that you are not still competing with DHL out of the water. But
it looks to me like with one hand you are making a deal to do
the air side of DHL's business, and on the other side you are
trying to kill them.
Mr. Wallace. Yes, I think that this is an example of likely
some of our local people, who are always trying to compete and
grow our business, doing that. This is not something that is
sanctioned by us at the higher level.
But I do think it is an example of the fact that we are
competitors, and our people continue to attempt to gain
business wherever they see the opportunity to do so.
Mr. LaTourette. Fine. I think you are exactly right. I
don't think this is a competitive business thing. I think you
want to club these guys like a baby seal and get them out of
the business, which makes me wonder why they are giving you
their air business, but I will leave that as it may.
I yield back, and maybe we can come back again, and I thank
you, Mr. Space.
Mr. Space. [Presiding.] Thank you, Mr. LaTourette.
Now I would like to follow that same line if I might.
Mr. Mullen, in your testimony, one of the first things you
emphasized was that this was not a merger. Rather, you
indicated this was simply an act of replacing two separate
independent contractors with one.
Apart from the concerns that Professor Simon has registered
regarding the very propriety of that conduct, I just beg to
differ with you. I think this is something far greater than
simply replacing two independent contractors with another
independent contractor.
We are dealing with replacing two independent contractors,
that are not competitors and with whom DHL has had a long and
intimate and storied history, with a direct competitor who this
documentation clearly reveals is involved in a very intense
competitive race. That, to me, speaks loudly and causes me some
concern over the fact that you have dismissed almost out of
hand.
The agreement that forms the basis of all of this, the
transactional agreement, the thing that is not a merger, I am
not quite sure what it is. My understanding is it is a 10-year
contract with UPS under which your company will pay UPS about a
billion dollars a year. Is that correct?
I know it is a very general statement. Is that a correct
assertion?
Mr. Mullen. That is correct in broad terms.
I must stress, though, one of the great attractions of this
solution. We would much rather be successful in the United
States and not have to do a deal with anybody. That would be
our first choice, of course.
We compete vigorously in 220 countries in the globe, and we
have a big problem in this Country. We need to find a solution,
which is what has led to this.
But one of the key aspects of this arrangement for us is
that it is not just a price issue. There are two other major
factors.
One is that it takes a fixed cost that we have today of
aviation and turns it into a variable one.
One of the problems of this market has been declining now
since 1998. We look back at the volumes of Airborne before we
acquired it. Their air volumes were declining before we even
bought it, and the market has continued to decline since that
time. We have less volumes today than we had in 2000 as an
industry.
Whatever structure wherein we place ourselves, even were to
adopt one of these other solutions, we would still have a fixed
cost.
Mr. Space. I understand.
Mr. Mullen. If volume continues to fall, we can't reduce
the cost. In this proposal with UPS, we can. So that billion,
if our volume drops, comes down.
Mr. Space. Sure. The reasons as to why you have lost so
much volume share in four or five years are matters that are
probably outside the ambit of this hearing and aren't directly
related.
But my question is this: You have entered into an agreement
with a competitor to essentially provide a significant
percentage of market share, and I am curious as to what
consideration was flowing in the other direction. What did you
get out of the deal?
Mr. Mullen. We are not giving up any market share. We are
contracting one piece of our operation, the flying of
airplanes, to another company. It has nothing to do with market
share.
Mr. Space. Right. Well, you are giving up the air cargo
portion of your business to one of your most serious
competitors or your biggest competitor.
Mr. Mullen. We are giving up air carriage between key
cities, yes.
Mr. Space. Right. For that, was there any consideration
flowing in your direction apart from just getting this
nightmare that is causing a loss of money at epic proportions
off of your hands?
Mr. Mullen. We get three things back in return: The first
is we save a considerable amount of money.
The second is we take a fixed cost and turn it into a
variable.
The third is we have some 100 plus aging aircraft in the
United States, all of which will have to be replaced in due
course with a huge capital expenditure requirement ahead of us
in a business where we are already losing billions, that we are
facing further investment to maintain those air fleets, further
investment to maintain the hub, and we can replace that with an
outsource contract to UPS where we do not have to meet any of
that further capital expenditure.
So there are three aspects: saves us money, turns a cost
variable and eliminates a very significant billions of dollars
of additional cap ex.
Mr. Space. You heard the testimony of Professor Simon. Are
you at all concerned about the implications of now essentially
being at the mercy of a competitor who appears to be gaining in
strength and has a stronger position on the market than you?
Mr. Mullen. Obviously, as I said, we would much rather not
have had to make any arrangements with anybody.
That said, we don't feel that we are at the mercy of UPS.
We spend a lot of time, what is still ongoing at the moment, in
the negotiations to protect ourselves as fully as we possibly
can from any such threat.
Mr. Space. Now we have heard some testimony from some of
the other gentlemen at the table that would seem to indicate
that they have attempted to present concessions and a package
that would have cost about $1.1 billion as opposed to $1
billion per year you are paying with UPS. Do you refute that?
Mr. Mullen. Yes. We have not seen this final proposal.
What has happened is, yes, there has been a backwards and
forwards between two subcontractors over which we do not have
direct control.
I take it on good faith from what Mr. Hete says that he
maybe first approached ASTAR. Then ASTAR approached him. Then
subsequently in March, we had another meeting where they
proposed to take over ASTAR again or first eliminate ASTAR, the
same deal back in reverse.
But at the end of it all, our $5 million a day is still
taking over, and they have not reached agreement between them,
and we had to take other action.
Mr. Space. The confidentiality agreement that has been
discussed at length during this hearing today, is that
something that you felt prohibited you from entering into
discussions with ABX or ASTAR regarding these proposed
concessions?
Mr. Mullen. We have had, let me repeat myself, extensive
discussions with both ABX and ASTAR. We do not see any solution
that solves our problem in the United States.
Subsequent to that, we have now entered into a transaction
that we believe will help, and that includes the normal
exclusivity provisions that go with any contract like that once
you get into the final stages of negotiation. So right now,
yes, we are bound by that, but we have already in our view
exhausted the discussions that we have had with the other two
companies concerned.
Mr. Space. Where are you in terms of the agreement with
UPS? What stage of negotiations are you in?
Have you got a signed, sealed and delivered contract or are
you continuing to negotiate?
Mr. Mullen. We are continuing to negotiate final terms and
conditions of that contract.
Mr. Space. Mr. Wallace, the question was raised earlier by
one of the gentlemen concerning a lack of any testimony
concerning the number of jobs that may be created as a part of
all this transaction at UPS. Do you have any assessments that
you can offer us with respect to that?
Mr. Wallace. We are still in negotiations. So it is very
difficult to estimate the number of jobs that could be created
or even the type of jobs that could be created at this point,
although generally an increase in our volume in our system, in
our network does give us the opportunity to create new jobs.
Just at this point, I can't give you an estimate on that number
of jobs.
Mr. Space. Okay. That is all the questions I have.
At this point, I would recognize the gentlelady from Ohio,
Jean Schmidt.
Mrs. Schmidt. Thank you, Congressman Space.
I have so many questions and so little time. I may put them
in writing and ask the gentlemen at the table to answer them.
But before I begin, one of the things that was stated by
Mr. Mullen, he compared this to the U.S. Postal Service. That
is an unfair comparison because the U.S. Postal Service is a
government monopoly, and books on this sort of subject will say
that you really can't use the Postal Service when you are
talking about a free market because it is not a free market for
reasons I could go into for a long time.
The second thing that I have a problem with your testimony
is that you are pretty some subjective remarks into it when you
say that you have looked at every option we think is available,
but I am not sure that you have looked at every option that is
available.
The third is that you haven't seen the final proposal from
the players in Wilmington, but in actuality you are not willing
to see their final proposal.
So I have some problems with your testimony, and I have to
be really honest with you with it.
Mr. Wallace, I don't blame you for going full force on
this. I think this is a great deal for you, and I have seen
that card. Before I even saw that card, I kind of figured that
your sales force was going to be out there trying to undercut
the competition.
I did door to door sales a long, long time ago. I know what
it is like. It is a cut-throat business, and I applaud your
folks for doing that.
But it concerns me about what is going to happen with DHL,
and the thing that really concerns me is I really think we are
creating a duopoly here.
Beyond that, I do have some questions that I would like to
ask you, Mr. Mullen. There are a lot of other assumptions that
you have made in your testimony. One of those is that you are
assuming that when you have this contract with at UPS, that at
the time it is concluded, that you are going to continue to be
able to opt in or out at your will, I believe.
I haven't seen your contract. But if I were you, that is
the kind of contract I would want, an opt in or opt out on your
terms.
But UPS is going to have to have that same agreement, that
after 10 years there is going to be an opt in or an opt out
with them because what if they can no longer carry and they can
only carry their goods.
So what is your fallback position if after 10 years UPS
pulls the rug out from under you?
Mr. Mullen. Yes, you are absolutely right in presuming that
is part of the negotiations at the moment. Both sides need a
considerable amount of warning towards the end of that contract
as to what the next step is. Is it renewed or do we go our
separate ways again?
We are building provisions of ample warning, two years or
more out, to allow were we not to continue to ask to put
alternative lift back in place.
Mrs. Schmidt. A follow-up to that, we have heard a great
deal of testimony from just virtually everybody on this panel
and the folks before that the barriers that are in place right
now, if you don't get a fallback position, a guarantee for the
next 100 years with UPS, if they shut the door on you, you are
really going to be out of business because it is going to be
very difficult for you to find another player in the market and
especially in 10 years when we don't even know where this
market is going to be.
Mr. Mullen. We don't think so, no.
We believe that we can build in enough security that eight
years or more down the track from today, were that to be the
case for some reason we don't renew. I guess we would hope that
we would renew, but if we were not able to we are confident
that we will be able to put alternative arrangements in place
on time.
Mrs. Schmidt. Another question for you, sir, I understand
that DHL also owns 49 percent of Polar Air Cargo and has an
agreement with Polar for air services in and out of the United
States. Can we expect DHL to try to get out of that contract
and switch volume to UPS as well? Is that part of your deal?
Mr. Mullen. No, that is not part of any deal with UPS.
Mrs. Schmidt. A follow-up, are you going to continue
working with Polar Air Cargo or are we going to sit here and
have another hearing when you want to switch gears out of Polar
Air Cargo? I think we have a right here to know that.
Mr. Mullen. At this stage, we have no intention of changing
the relationship that we have with Polar Air Cargo.
Mrs. Schmidt. Okay. Another question for you, sir, I
understand that cost of doing business is a very sensitive
subject. When you can own most of your resources, generally,
you can control most of your costs, but you are going to take
60 percent of your business and give it to your competitor.
So when your competitor has to raise their costs, what is
your reaction going to be?
Mr. Mullen. Well, firstly, it is not 60 percent. It is sort
of in the 25 to 30 percent area.
But, secondly, the contract will build in price protection.
So there is only CPI type increases. UPS is not able just to
raise its costs at will. We have certainty of our cost position
for the duration of the contract.
Mrs. Schmidt. Okay. Another question for you, sir, folks
have been coming through my door, as you can tell, and telling
me how this operation works and that you have this bar code
situation that is put on the packages that shows where the
logistics of the packages are going to go, what the price was
paid for the package because some of these folks have computer-
generated software that they can actually put the packages at
their own business and not have to go to you to pay for the
packages up front.
But in that capacity, when it goes onto the airplane,
before it gets onto the airplane, there is a scanner that
actually relooks at those to make sure that everything is
correct, including the price point of it. It appears that you
are going to have to take that function and give it to Mr.
Wallace because you are no longer going to be able to be in
control of that package.
What are you going to do to stop UPS from getting that
sensitive information and, in addition to the card that I have
also seen, having their sales force go right out and undercut
DHL?
Mr. Mullen. With respect, this keeps getting repeated, but
it is just a falsehood. We are not going to make pricing
information available to UPS.
All the data that they will receive is sufficient data to
be able to move it from Airport A to Airport B. Yes, they will
know the customer name. They will know where it was picked up,
and they will know where it is delivered to.
But they know that now. Our sales force, as you can see,
are in the street every day. They know which our accounts are.
So that won't change, but they will not get access to any data
that gives them competitive advantage with that information.
Mrs. Schmidt. A follow-up, so they won't have any
opportunity to know any of your costs involved, either hard,
soft or whatever in this arrangement?
Mr. Mullen. Well, they will know what the cost is because
they will be charging us the cost, but they will not have
access to any of the rest of our cost base or any pricing
information with that customer.
Mrs. Schmidt. And, sir, with that cost, they are going to
know what the cost is. You are going to know what their cost is
to you. You don't think that that is going to build you into a
disadvantage because they are going to be charging more than it
is going to cost them to move their own goods?
I mean that just make sense. If I am using a taxi to get
across town instead of using my own car to get across town, it
costs me more to get across town.
If I am using UPS to carry my goods across the United
States, it is going to cost me more because they are going to
charge me just as a taxi charges me to sit in the back seat of
the car. They are going to charge me more than what the base
cost would be.
That is the part that I am not understanding, and I know
you are going to come back and say, but your overhead is so
much larger and therefore you are going to cut that cost. I am
not sure that really works. I think school systems are seeing
that in renting buses versus owning their own buses.
So I have real problems with how. I am concerned how you
are going to create an opportunity into the future to remain
competitive with UPS and FedEx.
Sir, what I don't want to have happen is a duopoly because
nobody wins in a duopoly. This is beyond the cost to Wilmington
and devastating that town and the almost 1,000 jobs that
devastate my district because my district is impacted as well.
This is beyond that. This is what is it going to do to the
moms and pops across the United States that are trying to make
ends meet now and want to have a package delivered to their son
or daughter across the ocean or across the United States and
suddenly they see that price continue to go up and up and up.
Mr. Space. The gentlelady's time is expired.
At this time, the Chair recognizes the gentlelady from
Hawaii, Ms. Hirono.
Ms. Hirono. Thank you, Mr. Chairman.
Mr. Mullen, you said that one of the pluses of this
arrangement would be that you would turn a fixed cost into a
variable. Can you explain to me what is the fixed cost just so
I am very clear?
Mr. Mullen. Yes, indeed, Congresswoman. That ties actually
exactly into the discussion I was just having with
Congresswoman Schmidt.
When we fly our own aircraft, those aircraft fly every day
whether we have 1 package on them or whether we have 1,000
packages on them, and the cost is pretty well the same.
Ms. Hirono. Okay.
Mr. Mullen. Obviously, you know in a falling volume
environment, that continually increases the impact to us.
In a variable cost situation, if we pay UPS X dollars per
package, if we don't have the package, we don't have the cost.
Ms. Hirono. But right now, you are paying ABX and ASTAR for
that portion of your business. So that, you consider a fixed
cost?
Mr. Mullen. Yes, because we pay them for the full cost of
flying that airplane whether we put any packages in them or
not.
Ms. Hirono. But with the arrangement that you are going to
have with UPS, it is dependent on the number of packages. That
is what you are saying?
Mr. Mullen. Yes. It is basically a per piece charge.
Ms. Hirono. I appreciate your position that you said that
you have exhausted all of your discussions with ASTAR and ABX,
but clearly the fact that they are here testifying as well as
the State of Ohio, they do not believe that the discussions are
exhausted.
I can only suggest that having heard all the testimony,
sitting here, that I hope that you will enter into discussions
with them because they obviously don't agree with you that they
have exhausted all possibilities. Also, the State of Ohio has a
tremendous interest in this.
Mr. Simon, you noted that you thought that this agreement,
on its face, raised certain antitrust concerns, and your
suggestion is that an injunction be pursued. Now it is not that
easy to get an injunction, and were an injunction to be pursued
I would expect that DHL and UPS would raise some kind of
irreparable harm argument.
Would you say that based on what you say is the facial
appearance of this agreement, that an injunctive action would
prevail?
Mr. Simon. Well, I would answer the question this way,
Congresswoman, when one seeks an injunction, the first thing
that happens is if you can prove your case you can get what is
called a preliminary injunction halting the arrangement for a
reasonably short period of time until the parties can gather
their data and their evidence and their testimony and present a
full panoply of witnesses and evidence to the tribunal, a
commission or a court, whatever tribunal is hearing it.
At that time, the ordinary standards of full, permanent
injunctive relief have to be satisfied, which are not so easy
to get but which depend on a case by case basis, applying the
standard law of what injunctive relief is to the facts as
developed in an expedited discovery program.
So I would not feel comfortable being put in the position
of saying could the full, permanent injunction prevail, but a
temporary hold entered by a tribunal or a competent court would
give the parties time to gather the facts, data and evidence
that they need to make a full presentation and a full
adjudication before a neutral fact finder. That is why court
houses are built.
Ms. Hirono. So, based on what you already know about the
circumstances of the situation, you feel, you believe that a
temporary injunction could be obtained?
Mr. Simon. By a government agency?
Ms. Hirono. Yes.
Mr. Simon. Absolutely, yes. I would add two points to that
very briefly if I might.
We have heard a number of very avuncular homilies today
such as such and such may completely dissipate a certain
argument. But the core of this hearing is what happens when one
competitor agrees not to compete with another competitor, and
no turning around and no pleasant talk can alleviate that.
Companies acquire competitors all the time. They purchase
competitors all the time, and they do it in secrecy. There is a
nice cloak of darkness there.
But when one competitor agrees to take an essential
facility that it needs to keep in business and give it over to
another competitor in an oligopoly situation where there are
only three competitors to begin with, it raises some very
significant antitrust concerns as a matter of substantive
jurisprudence going back to the year 1890.
Ms. Hirono. You are saying that this horizontal collusion
situation that could be set up, it is not just on the basis of
price because Mr. Mullen mentioned that it is not as though UPS
can totally control the prices. They have to do it within a
certain limited range, perhaps CPI indexes.
So does that assuage some concerns you have, antitrust
concerns you have about the horizontal collusion?
Mr. Simon. No. With great respect, it does not because if
there is anything that is prohibited in the antitrust laws, it
is a flat-out prohibition against competitors agreeing not to
compete head-on with each other at all facets and aspects of
their business.
If you say, well, we are going to adjust at this percentage
or that percentage and with a contractual arrangement, that
doesn't answer the question that has been a substantive part of
American jurisprudence since the year dot, and that is
competitors have to go all out and compete against each other.
If this were another carrier, not UPS, there would be far
fewer concerns. But even putting aside the service squeeze
concerns that Mr. Hammes discussed, the price concerns in a
tightly integrated, little marketplace--only three essential
carriers now with a strong possibility that it might whittle
down to two--is what raises the concerns of the Antitrust
Institute and my personal concerns.
Ms. Hirono. I think it is important, what you are pointing
out, because although Mr. Mullen says this is a solid solution,
how solid can it be if it raises all kinds of antitrust and
competitive concerns?
Mr. Simon. But look, we are a neutral agency. We don't take
positions to help or hurt one party or another, and we have
substantial concerns that there are serious antitrust problems
here.
If I could add one very quick point, a lot of talk has been
mentioned about losing stratospheric, catastrophic amounts of
money. When you lose money in an organization, you have to
juxtapose the revenues you are getting in against the costs
that you are incurring.
Now continental systems of accountancy may and probably do
allocate costs differently across the spectrum than American
systems. So I would suggest that people here take a good hard
look at which system of accountancy is being used.
I am not a CPA, but I have litigated dozens and dozens of
these cases across the Country.
Which system of cost allocation is being used and is that
allocation appropriate and proper under the laws that govern
the conduct in our Country?
Ms. Hirono. Mr. Mullen and Mr. Wallace, I have to assume
that you have talked with your lawyers extensively about the
antitrust issues. So all I can say is that based on the
testimony that we have heard, that those are very, very serious
concerns that should definitely concern you as you move forward
with further discussions regarding this agreement.
That is not a question. That is a statement.
Mr. Mullen. Indeed, Congresswoman, we have taken extensive
antitrust advice from some very highly qualified, a range of
highly qualified antitrust lawyers, and our advice is
different.
Ms. Hirono. Thank you, Mr. Chairman.
Mr. Space. The Chair now recognizes the gentleman from New
York, Mr. Kuhl.
Mr. Kuhl. Thank you, Mr. Chairman.
It is a very interesting conversation that we have heard
all day, but I am still a little bit confused about some of the
issues. One of the issues has to do with the actual negotiation
between Mr. Hete, your group and certainly Mr. Hammes.
Nobody has really given you the opportunity to kind of, I
think, give your viewpoint as to how these discussions have
either been just neglected. I am talking about the discussion
that you had offered to Mr. Mullen and certainly his group.
I would be interested in your perspective, and I am not
trying to get to an issue of fault. I just want to get to what
a number of my colleagues have mentioned, and that is there
seems to be one side an inconclusive determination as to
whether or not the negotiations from your side of it have
concluded or whether they have been concluded because of some
agreement between UPS and Mr. Mullen's organization.
So I would just give you a couple of minutes, and I don't
want you to take all my time because I have a couple other
questions I would like to address to Mr. Mullen.
If you could, gentlemen, just kind of tell me from your
perspective actually where the negotiations fell apart if they
did. I am also interested in the last offer that you put
together as to how that actually equates with the offer for
cost savings that Mr. Mullen is looking to actually be able to
have his business survive and be successful.
Mr. Hete. If I would, Congressman, I think after the ASTAR
indication of interest in which we said it wasn't sufficient
and they determined to take an alternative course, from that
point forward, the ABX team had put together numerous proposals
up to and including the one that I had presented to Mr. Mullen
in Bonn, Germany, on March 31st.
October 31st of 2007, we presented to them some proposals
to get to a single carrier.
We did that again in February of 2008. We presented them
another set of alternatives that would get them to a single
carrier.
Now the single carrier concept was one that should have
been initiated right from the get-go with the merger between
Airborne and DHL, and unfortunately it didn't start off that
way. I first proposed that opportunity to Mr. Mullen back in
January of 2005 to get to a single carrier, and ABX would have
been the surviving carrier at that point.
We spent approximately 15 months and probably spent eight
to twelve million dollars in terms of putting aircraft back in
service in order to be able to facilitate that move towards a
single carrier. Unfortunately, after 15 months of work, DHL
elected not to go for that option. Of course, by that point in
time, we are in the second quarter of 2006.
So we fast forward into 2007 or late 2006. We attempted to
acquire ASTAR. That offer was rejected by ASTAR.
ASTAR came back in 2007 and attempted to acquire ABX, and
then we went through those various options in October of 2007
and February of 2008.
With the presentation we gave to Mr. Mullen on March 31st
of 2008, it was quite a detailed presentation. As I mentioned
earlier in my testimony, we presented on the 31st of March, and
on May 28th we got the word from DHL that they were going to
transition that piece of business to UPS.
Not once during that roughly two-month period was there any
inquiries, questions, suggestions or recommendations in regard
to that March 31st proposal. So, essentially, it sat there to
the best of our knowledge.
We do good work at ABX, but I am not sure we are quite that
good that someone wouldn't have had a few questions or possible
tweaks. I think the key element there is that the presentation
we gave to them protected the network that they had in place.
It was implied by Captain Ross earlier, things like
Congressman Oberstar's, Chairman Oberstar's packages to him in
some of his offices still would have been on an overnight basis
as opposed to taking two, three, four or five days.
The last proposal that we initiated, once we heard about
the potential deal between UPS and DHL, we got within roughly
$100 million of the $1 billion that they said they would be
paying UPS. At that point in time, we had presented that to Ken
Allen, the CEO of DHL U.S., to take to the folks in Germany
which he said he would do, but then the word came back that
they weren't in a position where they could review that
proposal in total.
The difference between that and the March 31st proposal,
and it was a couple hundred million dollars less I believe, was
that we cranked into that wage and benefit cuts for employees,
for example, a reduction in the network coverage somewhat,
trying to figure out exactly what markets DHL was going to pull
back from because the less markets you service via air the
lower your cost is going to be. But we have never had one
single discussion in regards to that alternative proposal.
Mr. Kuhl. Okay. Thank you.
Mr. Mullen, I would like to just kind of understand your
restructuring agreement if you would. I thought I heard you say
in your initial testimony that you have been facing, at least
in the last year, roughly $1.3 billion in losses in your
operation in the United States. Was that number correct or did
I misunderstand you?
Mr. Mullen. No. That number is correct. That is our
estimate for this year. It hasn't been as high as that.
It was still a huge amount, around $900 million last year.
This year has been exacerbated by customer losses from all of
the speculation and media coverage and other interest in what
we are doing.
Mr. Kuhl. Now does that mean that with the restructuring,
that you are actually cutting your costs by a billion dollars
or am I confusing numbers here, so that you still will be
operating in a deficit of about $300 million?
Mr. Mullen. That is correct.
Mr. Kuhl. So you plan to move forward with a company
reorganization, immediately facing a significant loss in
revenue.
Mr. Mullen. Yes. We are prepared to pay a price for
maintaining our business in the United States. Three hundred
million is still a very large sum of money, and obviously we
hope ultimately to eradicate that altogether.
But the immediate objectives over the next two and a half
years of this program will be to get the loss down from the 1.3
of this year to around 300 which is at least manageable in the
interim.
Mr. Kuhl. Did you ever look at the offer that came from Mr.
Hete relative to his last offer that was, as he said, close to
$100 million difference?
I am just wondering. If you are still looking at a $300
million loss on an annual basis, what is the difference between
$300 million and $400 million if you plan to balance it out
over the next several years?
Mr. Mullen. I do have to beg to differ with Mr. Hete. That
proposal of March 31st was extensively analyzed. I have two
documented detailed meetings between his teams and our teams
going through that proposal.
By this stage we had the UPS alternative. We actually
delayed our negotiations with UPS in order to give full time to
study that opportunity.
As Mr. Hete said, it saved some $250 million was the
proposal, which was a lot of money. But it was not sufficient
together with the other factors that I pointed out of capital
expenditure avoidance and variability of costs, and it was
considerably less in actual savings. For those reasons, we
declined to go that way.
Mr. Kuhl. Mr. Chairman, if I might, I just have one further
area.
I am also interested in what I heard from my colleagues
from Ohio about the tremendous devastation if this whole
proposal goes through as to the impact from a personal
standpoint, from a human side standpoint.
I heard just very briefly in the testimony I heard today
very little consideration about the employees that are going to
lose their jobs. Can you tell me what you are going to do?
Are there going to be, if the proposal goes through,
severance pay packages? Are there going to be retirement pay
packages kept intact?
Are there going to be all the kinds of things when you are
looking at seven, eight, nine, ten, twelve thousand people who
are going to be terminated?
It is a human suffering of really dramatic kinds of
proportions. It is not the kind of thing that we are used to
seeing when you see transfers of operations, and I am just
curious as to what.
I know that you will probably set some form of a program in
place to find new jobs, but how about for those people who
don't have new jobs?
They are in a position. Maybe they are like I am at 65.
They don't want to retire. They are still healthy and things
like that, but at the same point they don't have the economic
wherewithal to retire, and they are going to have a very
difficult time relocating. Have you thought about that?
Have you started to put packages together for those
employees?
Mr. Mullen. Of course, Congressman. You know this is an
extremely difficult thing. I am an employee too.
Mr. Kuhl. But Mr. Mullen, you are going to have a job after
this. This is several thousand people who are not going to have
a job. You are not looking at termination like they are.
Mr. Mullen. Of course.
Mr. Kuhl. So you have a little different perspective. You
are looking at a $300 million loss and carrying that forward.
Mr. Mullen. Indeed.
Mr. Kuhl. These people don't have a dollar to carry
forward.
Mr. Mullen. Indeed, but I would not wish it to be suggested
or intimated that we do not care about the human side of it. We
do very much.
As I put in my written testimony and also in my opening
verbal statement, we are going well beyond what we have
benchmarked as a standard in these sort of circumstances and
well beyond what our contractual and legal obligations are.
Mr. Kuhl. Can you quantify that for me so I understand?
Mr. Mullen. Yes. We are putting forward a package of $260
million. Our contractual and legal obligation is $35 million.
So the other 225, we are voluntarily contributing for exactly
the reasons that you say. We are extremely mindful of the
impact that this has on the community.
And I would add, as I said earlier, that the majority of
that is actually not even going to DHL employees. It is going
to the employees of subcontractors and others who are impacted
by it, for whom we have no contractual obligation to make that
payment. Our subcontractor companies have that obligation.
Mr. Kuhl. If I was a pilot for one of these subcontractors
and looking at having my job terminated, what would I be
looking at under that package?
Mr. Mullen. Every single person employed by ourselves or
employed by one of the subcontractors who is impacted by this
is entitled to some of that severance entitlement. Now it
obviously varies between part-time and full-time and pilots, et
cetera. I couldn't give you an individual amount per person,
but every single person is covered by that, what we believe is
an extremely generous settlement.
Mr. Kuhl. And insurance covers for any period of time?
Mr. Mullen. Yes, health care benefits and similar factors.
Mr. Kuhl. Retirement benefits of any sort?
Mr. Mullen. I would have to come back to you, sir, with the
specific details on each of those.
Mr. Kuhl. Could you do that because I would really be
interested in that?
Mr. Mullen. Yes, very happy to do that.
Mr. Kuhl. Okay. Fine.
Thank you, Mr. Chairman. I yield back.
Mr. Oberstar. [Presiding.] The gentleman's line of inquiry
is one of great importance to all those who are directly
affected by this proposed transaction. I think they would all
rather have their jobs rather than their benefits.
Mr. LaTourette, a second round of questions.
Mr. LaTourette. Thank you, Mr. Chairman.
Mr. Mullen, I asked Mr. Hete about his stock, and now I am
going to ask you about yours.
You testified last week that the decision was based upon
the best interests of your stockholders which is, of course, a
company's fiduciary responsibility. Since the May 28th
announcement, how has your stock price reacted to that
announcement?
Mr. Mullen. Our stock price has been I can't say exactly
from that announcement because we have had so much turmoil in
financial markets and some other major transactions that our
company has done, including selling the bank which has been a
huge overhang in the stock. But what I can say is in line with
all the other transports, the major transport stocks, we are
materially down from where we were six or nine months ago.
Mr. LaTourette. All right. Let me just close the loop on
this offer to Mr. Hete and ABX. If ASTAR had been successful in
acquiring ABX for $7.75 a share, is it your opinion we would be
here anyway?
Mr. Mullen. That is a very difficult question, but I think
it is likely not, no. I think that would have been a solution
at the time.
Mr. LaTourette. And likely not because you would have
achieved the savings that you are hoping your deal with UPS is
now going to achieve for the company?
Mr. Mullen. No. We would not have saved the savings that we
are now going to save. But at that time, of course, we didn't
know about the UPS opportunity. It wasn't there on the table,
and we would have had to make a business judgment at the time.
I would also say that our business has deteriorated sharply
in the last year because of the ongoing speculation as to the
future, publicity, media, political inquiry and others which is
now exacerbating the problem that we already had.
Mr. LaTourette. To both you and to Mr. Wallace, the
announcement on May 28th was the announcement that you are
going to work with UPS on domestic shipping and sorting of your
packages.
When did the UPS opportunity present itself and when did
your two companies begin discussions?
Mr. Mullen. The first contact was on February the 13th,
from memory, when I met with my opposite number in New York.
Mr. LaTourette. Was that February the 13th of 2008?
Mr. Mullen. Yes, correct.
Mr. LaTourette. Did you initiate the contact or did UPS?
Mr. Mullen. No. The contact came from UPS through a phone
call to our Chief Financial Officer, and then I followed up
with a call back which led to a meeting on the 13th.
Mr. LaTourette. Following the meeting on February the 13th,
well, that meeting, I assume that was: Are you interested? Yes,
I am interested.
So when did it get down to discussions?
Mr. Mullen. Well, we signed a confidentiality agreement at
that meeting to start exchanging data, and from there on it
started to gather pace as it became clearly of interest to both
sides to go further.
Mr. LaTourette. Obviously, the exchange of data is
important. When you looked at their stuff, they looked at your
stuff, when do you think, if you can give me just an
approximate time frame that you all sat down and started to
talk turkey?
Mr. Mullen. Well, we really started from that meeting.
Obviously, as we got further and further into the operational
capabilities, UPS, I can't speak for them. I am sure Mr.
Wallace would.
They had to work out whether they could move the volume,
what sort of operational changes they would need to make. We
had to do the same on our side. Gradually, the working groups
were formed to develop the process and the proposal into
something concrete.
Mr. LaTourette. Let me ask you this. Have you ever entered
another confidentiality? The memorandum of understanding that
we have been talking about here for the last couple of hours,
is that the confidentiality agreement we are talking about?
Mr. Mullen. No. Well, there are lots of documents being
talked about.
We signed a basic confidentiality agreement at the
beginning. We ended up signing, effectively, a letter of intent
or memorandum of understanding which was what we announced on
May the 28th as a result of all of those discussions
Mr. LaTourette. The confidentiality agreement that you
signed, that was entered into on February the 13th, one, I
assume that it prevented you from talking about the details of
your discussions. Did it also prevent you from talking to
people like the State of Ohio or anybody else that wanted to
present alternative offers to you?
Mr. Mullen. No. That only came into place with the letter
on intent on May the 28th.
Mr. LaTourette. I don't know if it was in your testimony or
whether I got it some place else, but I have a note that
according to DHL the integration of the Cincinnati hub into
Wilmington did not go well, resulting in customer service
issues and lost contracts. Is that DHL's position and, if so,
could you describe what happened?
Mr. Mullen. Yes. We had the original DHL business in the
United States had a hub in Cincinnati. When Airborne was
acquired, we then ended up with a second hub being the one in
Wilmington, and we had to make a decision to consolidate into
one or the other location.
After a lot of discussion, it was decided to do that in
Wilmington. We then went through a long period of significant
capital investment where we upgraded the facilities.
Then finally in September, we moved the business from
Cincinnati across which was a very, very major move. I think we
had some 180 massive trucks carrying all the equipment, and we
literally had to switch off on a Friday and start on a Monday
with everything integrated in one location.
It was a very difficult period. I would pay tribute to Mr.
Hete and his team, and everybody worked long, long, long hours,
night and day to make that thing a success, and we did. We
eventually got on top of it.
But it was like any move of that size. It was a massive
logistical exercise, and it took some time to get it right.
During that period, of course, we suffered service delays which
affected our customers.
Mr. LaTourette. Mr. Hete, did you work for Airborne
Express?
Mr. Hete. Yes. I have always worked for ABX Air, the
subsidiary, but it was a wholly owned subsidiary of Airborne
Express prior to the sale to DHL.
Mr. LaTourette. Again, my notes say with the lone exception
of 2001, Airborne Express was profitable for the entire time it
was in business prior to the acquisition of DHL. Is that
accurate?
Mr. Hete. That is correct.
Mr. LaTourette. Can you tell me what business practices you
changed after the acquisition which caused DHL to lose $1.3
billion?
Mr. Hete. Well, I certainly can't attest to all of the
business practices that changed, but those that did that
impacted ABX, for example, were things like the ground
business, the traditional UPS stronghold.
For example, we had 11 Airborne/ABX. We had 11 regional
facilities that we had in place in order to cover the areas of
the Country that we thought we could make money off by
servicing a limited scope, not matching every zip code across
the U.S. that UPS services.
In 2004, DHL expanded that network by 7 additional
facilities and pretty much did it all in the fourth quarter. Of
course, the cost of expanding a network comes immediately, and
then you are hoping that the revenue will follow soon in order
to support those costs. I think that was one key element was
rapid expansion of the ground network.
In addition to that, one other key change was that
throughout its lifetime Airborne always focused on trying to
wring out all the nickels of cost that they could, especially
when you talk about the fixed costs, as Mr. Mullen referred to
earlier, in terms of an air network because it is a fixed cost.
So if that airplane is flying with one package on it or a
thousand packages on it, the cost is roughly the same. There is
a little bit more fuel burned when you are carrying extra
weight.
When you are servicing things like a deferred product or
something that would normally move via truck, from the Airborne
perspective, we always focused on maximizing the sunk costs of
the air network as opposed to adding an incremental truck.
DHL did a radical shift in that they wanted to cleanse the
air operation of any potential ground shipments, and so what
that precipitated was a marked increase in trucking costs to
support that ground network.
I think those are probably the two key elements.
The other piece was that from a fleet perspective the ABX
fleet, for the most part, consisted of two-engine, two-man
cockpit aircraft. They, well, we have the backbone of the fleet
is a 767.
We have heard a lot of comments about an aging fleet, but
the 767 in the ABX fleet, the predominance of which service the
DHL network, is the same type of aircraft that is a key part of
the UPS network. It may not be the 300 series. It is a smaller
series. It is a dash 200. But essentially it is just about as
fuel efficient as anything that UPS will have of comparable
size in its network.
The balance of the fleet consisted of the DC-9 which is
probably the smallest aircraft out of the combined fleets
between ABX and ASTAR. But the advantage it had is it is a two-
engine aircraft, of course, at a point in time when you have
fuel prices between three and four dollars a gallon.
If you have 1 more engine back there, it is costing you
probably $1,500 to $2,000 an hour for every hour of flight that
you fly, having a 3-engine aircraft like a 727 versus a 2-
engine like a DC-9.
The primary focus for that in the DHL network is that they
want to focus on the standard industry cargo container, what is
referred to as the A container. The aircraft has a large cargo
door.
The Airborne system was unique in that it was built around
the small package, and so the DC-9 fleet was primarily operated
with its own unique container system that went through the
passenger door.
Now you could carry a chair, for example, in one of the C
containers as part of the legacy Airborne network, but if you
wanted to carry something the size of this table you would have
to have the standard industry A container. So going to that
type aircraft was focused on a three-engine aircraft because
you want the accessibility of that larger container size versus
a DC-9 which doesn't have that and only two engines.
You are going to have a cost increase. Unless you can fill
up that airframe to offset that additional cost, you are just
basically pouring more money out the tail pipe.
Mr. LaTourette. I thank you for that.
One of the problems that I had with the United State Postal
Service, and I concede Mrs. Schmidt's observation it is a
governmental entity.
But one of the, I think, legitimate criticisms that I think
people had with the sole-source contract that was given to
Federal Express was the fact that the Postal Service was paying
for the airplane whether there was 1 package on it or 150
packages on it, and that didn't seem to be a good use of the
Post Office's money.
Mr. Mullen, my last question, I am going to give you a
shot, I guess. Well, my last question for you, and I do have a
question for the professor.
I have heard you say you lost $1.3 billion and you are
losing $5 million a day. Most companies sort of break out when
they are losing money and say: Okay, this division is doing
okay. This one is not doing okay.
One, is Mr. Hete's observation correct that some of the
loss you have suffered is because of capital expenditures to
ramp up that revenues didn't catch up, one?
Two, did Airborne Express/ABX, your subcontractor, go from
profitable? In other words, did you lose money on the air side
here with ABX or were you losing money on the ground side,
capital expenditures and other things?
Did, all of a sudden, this fleet that had profitably
performed all of a sudden become a drain on your system?
Mr. Mullen. Yes. The answer is a complicated one, of
course. There is no one single reason as to why DHL is in this
situation.
We started with too sub-scale and either at best break
even, if not loss-making, businesses. We had an existing DHL
business that was loss-making, and Airborne, with the greatest
respect, was very close to not being able to compete any
further in the United States.
It was in the segment of the market that has been
declining, in the small package area. It didn't have a ground
network. We had to compete with a bundled product offerings of
UPS and later FedEx, and it was very under-invested.
So we took a major strategic decision that would combine
these two businesses. We would invest in a ground network, and
we would try to compete head for head with Federal Express and
UPS. Obviously, now with hindsight, we realize that we haven't
been successful in doing that which is why we are all sitting
here today.
Airborne had a low quality service and therefore lower
pricing. So, today, we do not command the same level of pricing
with all of that legacy book of business as our competitors do.
It was also very oriented towards major customers who always
demand very, very low pricing.
The lack of DHL brand strength meant that we had a very
small share of the full tariff small shipper because when they
think of a name for shipping in the United States, they don't
think DHL. They think Federal Express or UPS first.
So there are many, many factors. Basically, we don't have
enough revenue, and we too high costs, and we don't have the
volume to be able to get the productivity on the costs that
obviously an organization like UPS will do.
A UPS driver, virtually, I am paraphrasing your business. A
UPS driver will stop at Number one, Number Three and Number
Five down one side of the street and the same in reverse.
Our lack of volume means that we have a driver stopping
here on this street and then going two blocks over there, and
we just don't have the productivity that our major competitors
do.
Mr. LaTourette. I asked before about if Mr. Hete's
operation had accepted the $7.75 for the stock offer, then
maybe we wouldn't be here.
Let me ask you this. You own, you being DHL own 49 percent
of ASTAR, the stock of ASTAR. People have indicated to me that
the reason you only own 49 percent is we have a rule against
foreign ownership of airlines, but I assume you are aware that
the Bush Administration had offered up new regulations that
would have permitted that in some situations.
Was DHL waiting or hoping that the rules would change
relative to the ownership of airlines and, if they had and DHL
was able to become the majority of ASTAR, would we be here
today? I mean was that part of your plan?
Mr. Mullen. Well, we have always hoped that foreign
ownership rules would be restricted because we think it would
be good for the business, for industry and for the consumer in
the end. However, we never worked towards a belief that that
was going to happen. So we have always had to run our business
on the assumption that would not be the case.
Mr. LaTourette. Thank you for your indulgence, Mr.
Chairman.
Professor, in the dozens and dozens of cases that you have
litigated, are you on both sides of those or are you always
advocating a problem?
Mr. Simon. I would say approximately two-thirds to three-
quarters of my work over the many years I have been doing this
has been plaintiff side, and the remainder, about 30 percent,
has been strictly defense work. So the answer in one word is
yes.
Mr. LaTourette. Okay. Perfect. You gave me more than one
word.
Mr. Simon. Sir, if I could add one quick point.
Mr. LaTourette. Whatever you want.
Mr. Simon. My apologies. You said earlier that you believe
that corporations have fiduciary duties to shareholders.
Mr. LaTourette. Right.
Mr. Simon. There is a very substantial body of law that
says that corporations owe duty to shareholders which are not
fiduciary in nature. They are not fiduciary duties at all. They
are simply duties imposed by Federal law and occasionally by
State law. They don't rise to the level of a fiduciary
obligation.
Mr. LaTourette. I got you. I wasn't attempting to be
exclusive. I was trying to indicate that they had that
responsibility as one of their many responsibilities.
Mr. Simon. Right, but not up to a fiduciary nature which is
the strongest duty possible in the law. I don't mean to sound
like Dr. Pedagogic at all. I just picked up on the point that
you made.
Mr. LaTourette. I had a lot of professors like you in law
school.
[Laughter.]
Mr. LaTourette. But let me see. When I first looked at this
and Congressman Turner came and so forth and so on and your
whole discussion about price squeezing and so forth and so on,
I thought I heard you say because UPS doesn't have the lion's
share of the market it is not a monopoly. Some of that price
squeezing analysis sort of falls by the wayside.
This isn't a great antitrust case. This is a better
restraint of trade case perhaps.
Mr. Simon. I agree with that. The bottom line is yes,
because unless you are in a monopoly position or threatening to
get a monopoly position, then your customer who is also a
competitor can simply go somewhere else.
Mr. LaTourette. Right.
Mr. Simon. But if you are in a monopoly position, that is
where the classic price squeeze comes along.
So, yes, I would say it is more likely to be a restraint of
trade case, an unfair trade practice as a facilitating practice
permitting the very few companies in a small, tight, little
oligopoly to facilitate the possibility of collusion or price
fixing.
Mr. LaTourette. Right. So if you were retained and were
advising people to believe that they were aggrieved by this
situation, you would recommend some petition to the Federal
Trade Commission.
Mr. Simon. Or the Attorney General of Ohio if they have the
statutory or common law obligation or responsibility to do
that, yes.
Mr. LaTourette. I thank you for those answers.
Mr. Wallace, again, nobody knows how a case would turn out.
I am sure you all have wonderful lawyers that are as gifted as
Professor Simon.
Just sitting here at 10,000 feet, giving the people the
opportunity that are about to lose their livelihood, the chance
to just make a presentation, I don't think costs anybody
anything. I would hope that you would think about that and chat
with your lawyers.
So, thanks so much.
Mr. Oberstar. I thank the gentleman for his very thoughtful
and persistent questioning and opening up some avenues of
thought.
Mrs. Schmidt, do you have any further questions?
Mrs. Schmidt. Thank you, Mr. Chairman. I want to shift
gears to Professor Simon.
You have heard a lot of dialogue today. You also talked
about and you brought up a point that I didn't even consider,
that different countries look at the bottom line in a different
way. I think that is what you were trying to say.
So you are not always comparing apples to apples when you
look at the bottom line cost, say, of doing business in Europe
versus doing business in the United States. But we have an
obligation in the United States to only look at it from our
bottom line, and I think that is where trade agreements across
the ocean get us into trouble sometimes.
Could you please elaborate a little bit on that for me?
I really want to understand why DHL would look at this as a
good deal when I feel that we are going to be either, in a few
years, talking about the fact that we have a collapse and now
we have a duopoly, that we only have two players in the system.
Mr. Simon. Sure. Now look, I am not a CPA, Congresswoman,
and I haven't been trained to be an accountant, but I have
litigated enough cases to know that when you have a loss
situation or a profit situation, you get that bottom number
only by juxtaposing all your costs against all your revenues.
The way you allocate costs, particularly when an operation
has multiple components--ground, air, ground intermediary
points--can vary widely from one accounting system to another,
particularly from the United States accounting system to
systems that are more commonly employed in foreign countries.
Where you allocate the costs can go an enormously long way
to determining whether you are at a major loss situation, a
small loss situation or an actual profit situation.
That would be more or less the extent of how I can help
you. The rest, you would need CPAs highly competent in the
field of allocating costs and where they go on the different
lines of a company's balance sheet to determine whether a
profit really was a loss or whether a loss really was a profit.
Mrs. Schmidt. Okay. I have one last question, and this is
for both Mr. Mullen and Mr. Wallace.
You have heard Congressman LaTourette say, can we just open
it up and allow these folks in Wilmington to give it their best
shot?
I am asking you, would you please let the folks from
Wilmington give it their best shot and, Mr. Wallace, would you
agree to let that happen?
We are talking about a lot of lives here and a lot of jobs,
and there is a human component. Not everything in a bean
counter can be about the beans. It has to be about the folks
behind the beans.
I am just asking you as one of those people that has to
worry about, in my past life, making ends meet. I am just
asking both of you if you would be willing to let these folks,
with a sincere heart, and the State of Ohio helping them give
it our best shot?
Mr. Wallace. Well, I think I have already responded to that
question.
I just want to once again emphasize the fact that, first of
all, from a UPS perspective we are always concerned about job
loss. Also, part of our responsibility is to protect our
current employees and grow our business to provide job security
for those employees.
In terms of consideration, we will certainly have that
discussion within our organization and be able to respond.
But at this point, we feel strongly that the transaction
and the proposed transaction negotiations should be allowed to
move forward. We have been open with the Department of Justice,
keeping it informed of the status of our transaction.
We believe that it is in the best interest of our
organization and competition in general to allow us to move
forward, but we will have further discussions on it.
Mrs. Schmidt. Before Mr. Mullen answers, look, I get why
you don't want to open the discussions. This is a great deal
for UPS, and if I were you and I held the ball, as Lieutenant
Governor Lee Fisher said, I wouldn't want to give that ball up.
But I am just asking you to put a human face on that ball
because there are between eight and ten thousand folks that are
going to be in serious problems.
When you look at where this region is in Ohio, this is not
a place where growth occurs naturally. It has to really be
cultivated, and it is just so hard to get a job once a job is
lost. I am just asking you to put a human face on it.
Mr. Mullen, what about you? Are you going to take one for
the Ohio team and let negotiations reoccur with Mr. Hete and
Mr. Hammes and Captain Ross? I am just asking you.
Mr. Mullen. Could I just very quickly answer the first part
of your question as well, just respond on that?
We are a publicly traded company. Accounts are audited by
PricewaterhouseCoopers. We follow the International Accounting
Standard or IFRS which is also followed by many American
corporations, and the U.S. is actually moving in the future to
that standard as well.
I would love to think there was some magical bookkeeping
change that would eliminate our $1.3 billion and turn it into a
profit. I am afraid I don't think that exists.
To answer your other point, I just echo what my colleague
says here. We are bound by that agreement. It is a legally
binding agreement, but certainly we will discuss it with them,
and we will get back to you.
Mrs. Schmidt. Thank you. Just because it is a legally
binding agreement, you know you always have a chance to change
agreements. That is the great thing about the United States.
Thank you.
Mr. Oberstar. I thank the gentlewoman for inquiry and the
witness for his response.
I ask unanimous consent to include in the record the
statement of Congressman Robert Latta. Without objection, so
ordered.
Captain Ross. Mr. Chairman?
Mr. Oberstar. Yes.
Captain Ross. Sorry to interrupt you. I know it is getting
late. I would just like to address a couple things before we
finish, given the broad scope of the Committee if I have a
chance.
Mr. Oberstar. We are not concluded yet.
Captain Ross and Captain Prater, in your analysis and you
have great resources. Especially ALPA has staff analysis and
resources to review these and other agreements that you have
testified on over the years.
Where do you think the failure occurred? Let's call it that
or the loss of market share. On the air side or on the ground
side of the DHL equation?
Captain Ross. Sir, I think on the air side, we lost a lot.
When we first started, when DHL came and made the move to
Wilmington, they had run an outstanding ad campaign. It was a
great ad campaign. Everyone loved it, and they picked up a
large portion of new customers.
During that sort change, when bringing the entire sort from
Cincinnati up to Wilmington overnight, our on-time performance
dropped from over 99 percent down to 70 percent, and it took
months to recover that. We lost a large portion of those
customers.
The new customers were all gone, and then a large chunk--I
think it was 25 to 27 percent--of the current book was gone
following the Wilmington event as we will call it. I think a
large chunk came out of that one move right there.
Mr. Oberstar. And on the ground side, do you think there
were shortcomings there?
Captain Ross. Sir, I can't really address that. I am not
that familiar with the ground. So I am not sure if Captain
Prater is.
Captain Prater. Obviously, not as much because we track the
air side quite a bit, but it does come down to the fact that
these companies, both companies, were operating well until the
takeover by Deutsche Post.
What happened then, I don't think they need any more
ownership rules when they can kill a company. With just owning
49 percent of it and 24.9 percent control, having a member
sitting on the board of directors, and yet they can still kill
these two U.S. competitors, clearing the way for the duopoly
that we have talked about.
We have heard many, many reports that maybe management
should be looking at itself for the way they have tried to run
the business since taking it over.
We fly the airplanes, and we deliver a good product, both
my members and Captain Ross' members and yet all to naught. We
can't make up for management decisions to destroy a business so
that they can then give it away to another customer, in this
case, UPS.
Mr. Oberstar. Well, I concur about the foreign ownership
issue, and I think that is kind of a red herring here.
You heard the Lieutenant Governor earlier say, we were
never given an opportunity to offer good faith alternatives
were his words.
What good faith alternatives do you think could be
presented at this point to save DHL from losing the billion
dollars a year that they are losing?
Captain Prater. Well, in negotiations, we indicated our
support for a combination of ASTAR and ABX so that there would
be efficiencies there.
Obviously, we don't control the management of those two
companies, but in both day to day labor negotiations, our
contract negotiations, we indicated our full support for it a
year ago. We have continued to indicate that we are more than
willing to try to make that work so that there would be an
efficiency, and it would result in the continuation of a third
strong carrier in this Country.
What we have to realize is that there are two points: DHL
is losing customers every day since they have announced this
business plan because their customers aren't willing to pay DHL
for UPS service.
The second one is I have heard lots and lots of different
numbers. The numbers that we have seen are the transfer of air
operations to UPS will save DHL some two, maybe three hundred
million dollars a year. That is not going to make up for their
stated $1.3 billion or $900 million annual loss. So some of
these numbers are not just adding it up.
And with the revenue that DHL is losing by proposing this
transaction, they are not going to be any better off. They are
just going to trash two airlines.
Captain Ross. Mr. Chairman, also, on the loss of $1.3
billion, understand that this company made 3.2 billion Euros
last year, 3.8 billion Euros the year before. The reason that
Mr. Mullen and DHL are willing to absorb a $300 million loss
per year in the United States is because they are making all
that revenue in Asia shipping to the United States, the revenue
in Europe shipping to the United States.
So what is lost in this number of $1.3 billion is how much
revenue they are making around the world because they support
the U.S. network. That is why they are willing to take a $300
million.
I support Captain Prater. We are talking about a $300
million difference, and I think Mr. Mullen has testified to the
same.
We have never shut the door in working with ASTAR. We are
willing to work together with UPS, to give them the flexibility
they need. I'm sorry. UPS, where did that come from?
With DHL to give them the flexibility they need. We don't
shut the doors. We like flying for DHL.
Airborne Express was a great company, a lot of niche stuff.
DHL could be a great company. Our doors are open for talk, sir.
Mr. Oberstar. There are significant differences between the
DHL service and the UPS service, correct?
That was spelled out in earlier testimony, the type of
service that DHL offers and that of UPS. By combining the two,
you lose essentially what DHL offers in the marketplace.
Captain Ross. Yes, sir. Part of Airborne Express, we had a
lot of neat little stuff we do.
There is a company called Lab Corp in Kansas City,
Missouri. They do drug testing, urine testing. We have a
separate airplane that flies there every morning by 4:30 in the
morning to get that lab test. Those lab tests, they can be out
by noon that day.
There is a cancer treatment company in Nashville,
Tennessee. The life of the drug they create is 24 hours. We
take a separate aircraft as late as we can out of that city to
accommodate those.
It is that little thing that was neat with Airborne
Express. It was neat with ABX Air. It is neat with DHL.
That now DHL is going to hand that off to UPS, UPS is not
going to put an airplane where we ask them to put it. We are
going to get space on UPS's aircraft.
That is why the market suffers like that. You lose the
niche ability that comes with DHL, that came with the Airborne
Express before. That is the fun part of the flying, when you
are doing something special like that.
Captain Prater. As well as we will lose another civilian
craft service provider to the military, with ASTAR being put
out of business, one less supplier/vendor airline for our
military.
Mr. Oberstar. That is a very significant factor. Thank you
for that.
Captain Ross. Sir, in a 50 metric ton line haul, there are
34 aircraft between these two airlines, actually 17 aircraft
apiece, that are at risk for losing CRAF.
Another point I wanted to bring up and I am sorry I
interrupted before, we have to look at what if our brothers at
UPS go out on strike or our ground delivery people at UPS go
out on strike. You effectively shut down two of the three
competitors in the overnight market.
I mean there are a lot of outside and small things. It is
craft.
What if there is a strike? What does that do to the
Nation's economy to shut down two of the three overnight
providers? I think it is things like that this Committee needs
to look at, sir.
Mr. Oberstar. Should this go forward, you would have FedEx
with 43 percent of the market. If you simply add the numbers,
you would have UPS with 40.5 percent market share and a little
bit left over for the U.S. Postal Service. That is not a
healthy competitive market in the deregulated era of aviation
trade.
Mr. Simon, does it make a difference in consideration of
restraint of trade whether the problem is on the air side or
the ground side?
Mr. Simon. Actually, no. As a matter of pure analysis under
the antitrust laws, if you and I are competitors and I give
away a portion of my business to you and say, please do it for
me, when our soul goal in life is to compete with each other,
it doesn't make a difference which aspect of my business I have
asked you to assume.
It can be air. It can be ground. It can be intermediate
steps, handling, for examples, sorting. It doesn't make any
difference from an antitrust perspective.
And if I could add one sentence to an answer I gave earlier
to Congressman LaTourette, I tried to make it very plain and I
want to do so now.
When you spoke about unfair methods of competition, the
concept would be an injunction action under Section 5 of the
Federal Trade Commission Act which prohibits unfair methods of
competition.
This particular unfair method of competition, as a classic
antitrust restraint, it is a classic facilitating practice that
permits two direct competitors in a tight, little oligopoly to
collude to facilitate price increases.
Mr. Oberstar. Thank you very much. I want to thank all of
the panelists for their presentation.
Having listened to this testimony all through the afternoon
and read over much of it previously, I think there is a prima
facie case made for restraint of trade, and I think the
Committee in consultation with the Minority and Majority should
consider a formal referral to the Federal Trade Commission for
action.
Mr. LaTourette, what do you think?
Mr. LaTourette. Thank you.
Mr. Oberstar. With that, the Committee stands adjourned.
[Whereupon, at 7:23 p.m., the Committee was adjourned.]
[GRAPHIC] [TIFF OMITTED] 45107.009
[GRAPHIC] [TIFF OMITTED] 45107.010
[GRAPHIC] [TIFF OMITTED] 45107.011
[GRAPHIC] [TIFF OMITTED] 45107.012
[GRAPHIC] [TIFF OMITTED] 45107.013
[GRAPHIC] [TIFF OMITTED] 45107.014
[GRAPHIC] [TIFF OMITTED] 45107.015
[GRAPHIC] [TIFF OMITTED] 45107.016
[GRAPHIC] [TIFF OMITTED] 45107.017
[GRAPHIC] [TIFF OMITTED] 45107.018
[GRAPHIC] [TIFF OMITTED] 45107.019
[GRAPHIC] [TIFF OMITTED] 45107.020
[GRAPHIC] [TIFF OMITTED] 45107.021
[GRAPHIC] [TIFF OMITTED] 45107.022
[GRAPHIC] [TIFF OMITTED] 45107.023
[GRAPHIC] [TIFF OMITTED] 45107.024
[GRAPHIC] [TIFF OMITTED] 45107.025
[GRAPHIC] [TIFF OMITTED] 45107.026
[GRAPHIC] [TIFF OMITTED] 45107.027
[GRAPHIC] [TIFF OMITTED] 45107.028
[GRAPHIC] [TIFF OMITTED] 45107.029
[GRAPHIC] [TIFF OMITTED] 45107.030
[GRAPHIC] [TIFF OMITTED] 45107.031
[GRAPHIC] [TIFF OMITTED] 45107.032
[GRAPHIC] [TIFF OMITTED] 45107.033
[GRAPHIC] [TIFF OMITTED] 45107.034
[GRAPHIC] [TIFF OMITTED] 45107.035
[GRAPHIC] [TIFF OMITTED] 45107.036
[GRAPHIC] [TIFF OMITTED] 45107.037
[GRAPHIC] [TIFF OMITTED] 45107.038
[GRAPHIC] [TIFF OMITTED] 45107.039
[GRAPHIC] [TIFF OMITTED] 45107.040
[GRAPHIC] [TIFF OMITTED] 45107.041
[GRAPHIC] [TIFF OMITTED] 45107.042
[GRAPHIC] [TIFF OMITTED] 45107.043
[GRAPHIC] [TIFF OMITTED] 45107.044
[GRAPHIC] [TIFF OMITTED] 45107.045
[GRAPHIC] [TIFF OMITTED] 45107.046
[GRAPHIC] [TIFF OMITTED] 45107.047
[GRAPHIC] [TIFF OMITTED] 45107.048
[GRAPHIC] [TIFF OMITTED] 45107.049
[GRAPHIC] [TIFF OMITTED] 45107.050
[GRAPHIC] [TIFF OMITTED] 45107.051
[GRAPHIC] [TIFF OMITTED] 45107.052
[GRAPHIC] [TIFF OMITTED] 45107.053
[GRAPHIC] [TIFF OMITTED] 45107.054
[GRAPHIC] [TIFF OMITTED] 45107.055
[GRAPHIC] [TIFF OMITTED] 45107.056
[GRAPHIC] [TIFF OMITTED] 45107.057
[GRAPHIC] [TIFF OMITTED] 45107.058
[GRAPHIC] [TIFF OMITTED] 45107.059
[GRAPHIC] [TIFF OMITTED] 45107.060
[GRAPHIC] [TIFF OMITTED] 45107.061
[GRAPHIC] [TIFF OMITTED] 45107.062
[GRAPHIC] [TIFF OMITTED] 45107.063
[GRAPHIC] [TIFF OMITTED] 45107.064
[GRAPHIC] [TIFF OMITTED] 45107.065
[GRAPHIC] [TIFF OMITTED] 45107.066
[GRAPHIC] [TIFF OMITTED] 45107.067
[GRAPHIC] [TIFF OMITTED] 45107.068
[GRAPHIC] [TIFF OMITTED] 45107.069
[GRAPHIC] [TIFF OMITTED] 45107.070
[GRAPHIC] [TIFF OMITTED] 45107.071
[GRAPHIC] [TIFF OMITTED] 45107.072
[GRAPHIC] [TIFF OMITTED] 45107.073
[GRAPHIC] [TIFF OMITTED] 45107.074
[GRAPHIC] [TIFF OMITTED] 45107.075
[GRAPHIC] [TIFF OMITTED] 45107.076
[GRAPHIC] [TIFF OMITTED] 45107.077
[GRAPHIC] [TIFF OMITTED] 45107.078
[GRAPHIC] [TIFF OMITTED] 45107.079
[GRAPHIC] [TIFF OMITTED] 45107.080
[GRAPHIC] [TIFF OMITTED] 45107.081
[GRAPHIC] [TIFF OMITTED] 45107.082
[GRAPHIC] [TIFF OMITTED] 45107.083
[GRAPHIC] [TIFF OMITTED] 45107.084
[GRAPHIC] [TIFF OMITTED] 45107.085
[GRAPHIC] [TIFF OMITTED] 45107.086
[GRAPHIC] [TIFF OMITTED] 45107.087
[GRAPHIC] [TIFF OMITTED] 45107.088
[GRAPHIC] [TIFF OMITTED] 45107.089
[GRAPHIC] [TIFF OMITTED] 45107.090
[GRAPHIC] [TIFF OMITTED] 45107.091
[GRAPHIC] [TIFF OMITTED] 45107.092
[GRAPHIC] [TIFF OMITTED] 45107.093
[GRAPHIC] [TIFF OMITTED] 45107.094
[GRAPHIC] [TIFF OMITTED] 45107.095
[GRAPHIC] [TIFF OMITTED] 45107.096
[GRAPHIC] [TIFF OMITTED] 45107.097
[GRAPHIC] [TIFF OMITTED] 45107.098
[GRAPHIC] [TIFF OMITTED] 45107.099
[GRAPHIC] [TIFF OMITTED] 45107.100
[GRAPHIC] [TIFF OMITTED] 45107.101
[GRAPHIC] [TIFF OMITTED] 45107.102
[GRAPHIC] [TIFF OMITTED] 45107.103
[GRAPHIC] [TIFF OMITTED] 45107.104
[GRAPHIC] [TIFF OMITTED] 45107.105
[GRAPHIC] [TIFF OMITTED] 45107.106
[GRAPHIC] [TIFF OMITTED] 45107.107
[GRAPHIC] [TIFF OMITTED] 45107.108
[GRAPHIC] [TIFF OMITTED] 45107.109
[GRAPHIC] [TIFF OMITTED] 45107.110
[GRAPHIC] [TIFF OMITTED] 45107.111
[GRAPHIC] [TIFF OMITTED] 45107.112
[GRAPHIC] [TIFF OMITTED] 45107.113
[GRAPHIC] [TIFF OMITTED] 45107.114
[GRAPHIC] [TIFF OMITTED] 45107.115
[GRAPHIC] [TIFF OMITTED] 45107.116
[GRAPHIC] [TIFF OMITTED] 45107.117
[GRAPHIC] [TIFF OMITTED] 45107.118
[GRAPHIC] [TIFF OMITTED] 45107.119
[GRAPHIC] [TIFF OMITTED] 45107.120
[GRAPHIC] [TIFF OMITTED] 45107.121
[GRAPHIC] [TIFF OMITTED] 45107.122
[GRAPHIC] [TIFF OMITTED] 45107.123
[GRAPHIC] [TIFF OMITTED] 45107.124
[GRAPHIC] [TIFF OMITTED] 45107.125
[GRAPHIC] [TIFF OMITTED] 45107.126
[GRAPHIC] [TIFF OMITTED] 45107.127
[GRAPHIC] [TIFF OMITTED] 45107.128
[GRAPHIC] [TIFF OMITTED] 45107.129
[GRAPHIC] [TIFF OMITTED] 45107.130
[GRAPHIC] [TIFF OMITTED] 45107.131
[GRAPHIC] [TIFF OMITTED] 45107.132
[GRAPHIC] [TIFF OMITTED] 45107.133
[GRAPHIC] [TIFF OMITTED] 45107.134
[GRAPHIC] [TIFF OMITTED] 45107.135
[GRAPHIC] [TIFF OMITTED] 45107.136
[GRAPHIC] [TIFF OMITTED] 45107.137
[GRAPHIC] [TIFF OMITTED] 45107.138
[GRAPHIC] [TIFF OMITTED] 45107.139
[GRAPHIC] [TIFF OMITTED] 45107.140
[GRAPHIC] [TIFF OMITTED] 45107.141
[GRAPHIC] [TIFF OMITTED] 45107.142
[GRAPHIC] [TIFF OMITTED] 45107.143
[GRAPHIC] [TIFF OMITTED] 45107.144
[GRAPHIC] [TIFF OMITTED] 45107.145
[GRAPHIC] [TIFF OMITTED] 45107.146
[GRAPHIC] [TIFF OMITTED] 45107.147
[GRAPHIC] [TIFF OMITTED] 45107.148
[GRAPHIC] [TIFF OMITTED] 45107.149
[GRAPHIC] [TIFF OMITTED] 45107.150
[GRAPHIC] [TIFF OMITTED] 45107.151
[GRAPHIC] [TIFF OMITTED] 45107.152
[GRAPHIC] [TIFF OMITTED] 45107.153
[GRAPHIC] [TIFF OMITTED] 45107.154
[GRAPHIC] [TIFF OMITTED] 45107.155
[GRAPHIC] [TIFF OMITTED] 45107.156
[GRAPHIC] [TIFF OMITTED] 45107.157
[GRAPHIC] [TIFF OMITTED] 45107.158
[GRAPHIC] [TIFF OMITTED] 45107.159
[GRAPHIC] [TIFF OMITTED] 45107.160
[GRAPHIC] [TIFF OMITTED] 45107.168
[GRAPHIC] [TIFF OMITTED] 45107.169
[GRAPHIC] [TIFF OMITTED] 45107.170
[GRAPHIC] [TIFF OMITTED] 45107.171
[GRAPHIC] [TIFF OMITTED] 45107.172
[GRAPHIC] [TIFF OMITTED] 45107.161
[GRAPHIC] [TIFF OMITTED] 45107.162
[GRAPHIC] [TIFF OMITTED] 45107.163
[GRAPHIC] [TIFF OMITTED] 45107.164
[GRAPHIC] [TIFF OMITTED] 45107.165
[GRAPHIC] [TIFF OMITTED] 45107.166
[GRAPHIC] [TIFF OMITTED] 45107.167
[GRAPHIC] [TIFF OMITTED] 45107.173
[GRAPHIC] [TIFF OMITTED] 45107.174
[GRAPHIC] [TIFF OMITTED] 45107.175
[GRAPHIC] [TIFF OMITTED] 45107.176
[GRAPHIC] [TIFF OMITTED] 45107.177
[GRAPHIC] [TIFF OMITTED] 45107.178
[GRAPHIC] [TIFF OMITTED] 45107.179
[GRAPHIC] [TIFF OMITTED] 45107.180
[GRAPHIC] [TIFF OMITTED] 45107.181
[GRAPHIC] [TIFF OMITTED] 45107.182
[GRAPHIC] [TIFF OMITTED] 45107.183
[GRAPHIC] [TIFF OMITTED] 45107.184
[GRAPHIC] [TIFF OMITTED] 45107.185