The news today that DHL was closing its parcel business in the US is not surprising (See It’s Bye-Bye for DHL Parcel Operations in US Market.)

Stock analyst Ed Wolfe noted strong rumors such a move would be made on October 22. Before the company’s May announcement of a restructuring of its US network that was to involve outsourcing airlift to UPS, among other changes, there were rmany rumors in the Spring that DHL might close down its US shop altogether.

While that didn’t happen then, the May plan seemed doomed to fail from the start, and indeed never really happened. Outsource a key element of your network to your largest competitor? I’ve heard of the notion of “co-opetition,” but this seemed taken to the extreme. And announcing the plan before the contract is signed? Now there’s a smart negotiating tactic. The UPS deal never was finalized.

I will assume they really did hope to make that deal work, and that the US DHL execs wanted to keep their jobs, but in addition to the oddness of the plan and the concerns the whole concept sent to DHL customers (which it immediately started losing), even under that plan DHL was expecting to lose $900 million in the US in 2009.

But it goes back further than that. I don’t know how well Airborne Express would have faired in stand-alone mode, but there have been lots of stories and finger pointing over the deal since it happened. Actually, in a sense, DHL did not buy Airborne’s air operation directly, since foreign companies can’t own more than 25% of US airlines, so it had to basically outsource the airlift from the beginning.

Insiders complained almost all of the Airborne execs were quickly shown the door after the acquisition, taking vital market knowledge with them. In addition to the $1.2 billion DHL spent to get Airborne, some believe they thought they could make major gains in the market too quickly, and added way too much cost to the business.

A former Airborne/DHL employee wrote to us in May that: “The ineptitude of the DHL senior management team was clearly demonstrated early on with a mindset that DHL was now a big player in the US market. They added on an unprecedented cost structure almost immediately; layers of personnel, new hubs, IT changes, significant service upgrades, etc, without the benefit of a dramatic increase in shipments.

“Airborne was methodical and cost conscious, so the culture was very unfamiliar and local managers often received conflicting messages regarding service and cost: a balancing act of two goals that can be mutually exclusive. Essentially, DHL brought on the cost structure of a FedEx-sized company with Airborne-sized revenue and units. Almost overnight they began to offer premium service to thousands of new zip codes in the US regardless of potential revenue, just to say they can compete head-to-head with UPS and FedEx. They became inundated with Ground Delivery Service to residential addresses which were initially designed to be B2B only. Their pickup and delivery routes became a mix of special services, express service, ground, 2nd day, next afternoon and pickups...all on the same driver. AM sort operations became clogged with ground and USPS shipments that were not due until afternoon. Service suffered so more and more routes were added, driving up cost.”

Supporting that notion, Wolfe says there is about $2.6 billion now (down from the announcement as customers defected) in express shipments for FedEx and UPS to divvy up. DHL expected its US operations to lose $1.3 billion this year.

Losses about equal to 50% of your revenue? Unbelievable.

So, like many things, it seems clear now the whole strategy had little chance of success. Airborne was feisty, both cost conscious and more willing to tailor services for customers than its larger competitors (it was actually cited in the famous book “The Discipline of Market Leaders” as an example of a “customer intimate” company, versus UPS’ “efficiency” focus).

It’s too bad. Whether it was Airborne, DHL or someone else, the market needs a third competitor. The cost to start something from scratch is simply beyond what anyone would do – the losses would be massive for years, even forgetting the level of upfront investment, to build a national network of any kind today.

Is the USPS a hope? It’s about the only one left.

I’d love your thoughts on this.