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05-31-2003 LOBBYING: Air-Freight Fracas If war, as Carl von Clausewitz once wrote, is a continuation of politics by other means,
then in Washington, politics is often a continuation of business by other means. And over
the past two years, this dictum has been aptly illustrated by a fierce, internecine battle
among the corporate giants of the air-cargo industry. Since early 2001, FedEx and United Parcel Service-often bitter competitors-have been
squaring off against their mutual rival DHL over complex rules that determine whether an
air carrier has the proper American pedigree to fly its planes inside the United States.
More recently, Airborne Express has joined the fray on the side of DHL, its intended
merger partner, making this an all-out slugfest among the industry's heavyweights. The dispute has moved back and forth between the Transportation Department and
Capitol Hill, and is now before an administrative law judge at Transportation. Along with
a battalion of lobbyists, the fight has pulled in the chairmen of the House and Senate
Appropriations Committees, Secretary of Transportation Norman Y. Mineta, and even
Florida Gov. Jeb Bush, at one time or another. In April, the air-cargo conflict flared on Capitol Hill when an amendment favored by
FedEx and UPS was offered as part of the supplemental funding bill for the war in Iraq.
During that skirmish, one congressional aide described the amendment, authored by
Senate Appropriations Committee Chairman Ted Stevens, R-Alaska, as "a full-employment act for lobbyists." The aide said the intensity of the corporate lobbying by
both sides matched anything he had seen in recent years. That characterization might be regarded as an overstatement by someone recovering from
the heat of battle. But it underscores the principle that, in Washington, business rivalries
tend to play out as lobbying campaigns to influence politicians. The story began in 2000, shortly after the German postal and communications company
Deutsche Post bought DHL. In order to preserve DHL's right to operate within the United
States, the company was required to describe its new ownership structure to the U.S.
Transportation Department. This is because a decades-old law-which has been challenged periodically by
advocates of deregulation-mandates that any carrier(passenger or freight) that flies from
point to point within the United States must satisfy a threefold "citizenship" test. The carrier must be incorporated in the United States; its president and two-thirds of its
board members must be U.S. citizens; and Americans must own at least 75 percent of the
voting shares of the company's stock. Immediately, FedEx and UPS charged that DHL was now controlled by German interests.
Under the law, they argued, DHL should not be allowed to continue its operations in the
United States. FedEx and UPS insisted that if the government refused to recognize DHL's
foreign control, DHL, and thus Deutsche Post, would get greater access to the massive
U.S. market than U.S.-owned firms get overseas. Absolutely not, said DHL, arguing that FedEx and UPS were misconstruing an ownership
structure that, while complex, nonetheless abided by U.S. law. Its rivals, DHL contended,
were simply using the law as a pretext to muscle out a competitor that could cut into their
core business-the U.S. market, which DHL has long sought to crack. The dispute only
intensified in March when DHL announced that it would acquire Airborne Express in a
$1.1 billion merger. If completed, the deal would create a No. 3 air-cargo carrier with
significant reach both in the U.S., thanks to Airborne's routes, and abroad, because of DHL's. Most observers agree that DHL is part of a corporate structure that resembles a Russian
nesting doll. According to federal documents, this is how it works. Deutsche Post owns
100 percent of the Bermuda-based company DHL International Ltd. In turn, DHL
International Ltd. owns a cascade of subsidiaries: DHL Worldwide Express NV, based in
the Netherlands Antilles; which in turn owns DHL Worldwide Express BV, based in the
Netherlands; which in turn owns DHL Holdings (USA), incorporated in Delaware. DHL
Holdings (USA) is parent to two subsidiaries: DHL Worldwide Express Inc. runs the
business operations on behalf of the second subsidiary, a holding company known as
DHL Airways. This entity, DHL Airways, is at the heart of the matter. Before the proposed Airborne
merger, William Robinson, an American citizen, held 75 percent of the voting shares and
55 percent of the equity in DHL Airways. Moreover, DHL Airways' direct parent
company-DHL Holdings (USA)-is incorporated in the United States. To DHL Airways,
this seemed to satisfy the citizenship requirements of the law. But to FedEx and UPS, the company's structure was a shell game. They argued that because DHL Airways was so heavily dependent on contracts with German-owned affiliates, it was effectively controlled by Deutsche Post. For that reason, they said, the Transportation Department was required to conduct a full-blown inquiry into the citizenship issue. (Another wrinkle emerged in May, when DHL Airways announced that its new CEO,
John Dasburg, who is an American citizen, would purchase 100 percent of the company.
FedEx and UPS contend, however, that this development doesn't change their primary
objection. Even if Dasburg owns the company, they say, DHL Airways-which is soon to
be renamed Astar Air Cargo Inc.-will still rely heavily on its business relationship with
German-owned DHL Worldwide Express Inc.) FedEx and UPS urged the Transportation Department to review DHL Airways'
citizenship status. Transportation had already done an "informal" review, the usual
practice when dealing with companies such as DHL that already have the go-ahead to
operate in the United States. If the department had found reason to pull DHL's clearance
to operate, it would have been a massive blow to the company. But Transportation said it
found no problems. FedEx and UPS saw the decision as a whitewash. They called for a "formal" public
review process, which includes public comments and sworn testimony-something that
Transportation typically conducts only for first-time applicants. That wasn't necessary,
said department officials, who at the time were dealing with the aftermath of the 9/11
terrorist attacks and were trying to set up the new Transportation Security Administration. Then the department's inspector general got involved. On March 4 of this year, Inspector
General Kenneth M. Mead gave a boost to FedEx and UPS when he issued a nonbinding
opinion that the evidence in the case warranted a formal assessment of the DHL
ownership question. Two weeks later, DHL and Airborne announced their merger, with a projected completion
date of summer 2003. DHL said it would acquire Airborne's ground operations outright-since those operations do not have to pass foreign-ownership tests-but that it would spin
off the air operations to an independent company. The new company, called ABX Air,
would be wholly owned by Airborne's pre-merger shareholders, and have its own board of
directors, management, and independent auditor. DHL said it would then sign "arm's-length commercial agreements" with ABX. FedEx and UPS were not mollified. They argue that ABX's reliance on such a large
contract from DHL will make ABX, in effect, a captive to Deutsche Post. FedEx
spokeswoman Kristin Krause said her company is not challenging, at least for the
moment, the DHL-Airborne merger itself. UPS has taken the same stance. Krause said,
"It's hard to completely separate" the issues of DHL's ownership from those of the
DHL-Airborne merger, "but our focus right now is on the DHL [ownership] case." At that point, the plot thickened. This spring, a small Alaska company called Lynden Air
Cargo complained to the Alaska congressional delegation after Lynden lost out to DHL
on a military-cargo contract. Stevens, the powerful Senate Appropriations Committee
chairman, immediately went to bat for his home-state company. He placed language that
was favorable to Lynden in a mid-April supplemental appropriations bill that had been
designed primarily to fund the war in Iraq. The Stevens provision bars the U.S. military from using companies not "effectively
controlled" by U.S. citizens to ship its cargo. To remove any doubt about the amendment's
intention, Stevens included language ordering Transportation Secretary Mineta to assign
"docket number OST-2002-13089"-that is, the DHL case-to an administrative law judge. Both camps swung into action-FedEx and UPS on one side, the DHL-Airborne team on
the other. According to sources, while Stevens was promoting Lynden-a move strongly backed by
FedEx and UPS-his counterpart, House Appropriations Chairman Bill Young, R-Fla., and
Florida Gov. Bush were doing all they could to defend DHL and Airborne, which would
have a major facility in Fort Lauderdale. For their part, FedEx and UPS counted on the support of House Majority Whip Roy
Blunt, R-Mo., whose son Andrew is reportedly a consultant to UPS on state issues. FedEx
and UPS are legendary for their clout in Washington, which stems from their ranks of
savvy in-house lobbyists, their generous donations to political candidates, their CEOs'
renown, and the grassroots power wielded by their far-flung clusters of employees. But DHL and Airborne impressed some observers by marshaling their lobbying clout
quickly, and by articulating a pro-competition message. The DHL-Airborne team, said
one Hill aide, "hired all of K Street." After the merger was announced, Airborne retained
several well-known lobbyists from the law firm O'Melveny & Myers, including former
Ford administration Transportation Secretary Bill Coleman and former Clinton White
House aide Ron Klain. Airborne was already represented by the Petrizzo Group, which
has strong ties to congressional Republicans. Airborne also hired the lobbying firms
Preston Gates Ellis & Rouvelas Meeds, and the LeMunyon Group. DHL and its affiliates used the lobbying firm Kessler & Associates and three law firms:
Garfinkle, Wang, Seiden & Mosner, which includes Northwest Airlines' former vice
president for law and government affairs, Elliott Seiden; Lachter & Clements; and Quinn
Emanuel Urquhart Oliver & Hedges. Deutsche Post's U.S. lobbyists at Bergner,
Bockorny, Castagnetti, Hawkins, & Brain were also active on the case. "The merger would add a third major competitor to the parcel market, which will
ultimately drive down parcel prices," said Dan Moll, a vice president with Bergner,
Bockorny. The DHL-Airborne alliance got significant mileage out of an editorial in The
Wall Street Journal-an outlet widely trusted by congressional Republicans-that assailed
FedEx and UPS for alleged anti-competitive actions. As the fight was at its height, both sides touted statements by powerful figures. DHL and
Airborne highlighted a letter written by Mineta to Young pointing out that "changing the
standards that determine effective control could have serious, unintended consequences
for U.S. carriers," such as retaliation against American carriers by foreign governments
and additional bureaucratic obstacles for the Pentagon. The following day, FedEx CEO Fred Smith fired back with a letter reminding Mineta that
Transportation's own inspector general had found that "the department itself recently has
not applied [the citizenship] standards properly, as a matter of both procedure and substance." A congressional aide summed up the situation this way: "Both sides were able to distill
their positions into bumper-sticker slogans-are we going to enforce our laws on
citizenship versus focusing on the impact on the competitiveness of the marketplace. Both
of those messages are appealing to certain members." In the end, however, the clock ran out. "The negotiating was mainly done by a few
staffers," said the aide. "They locked themselves in a room, which is typically how most
of this stuff gets worked out." The Stevens language stood, with only minor concessions
to the DHL camp, and the matter is now before Transportation Administrative Law Judge
Ronnie A. Yoder. "Theoretically, it should not have been much of a contest," said one transportation
lobbyist. "On paper, FedEx and UPS are lobbying Goliaths. But while I think there are
bigger issues at play than just the idea of two big companies trying to clamp down on a
competitor, DHL and Airborne got a lot of traction out of that argument, and it resonated.
They deserve credit for that." The squabbling goes on. "The other side is working very hard at demagoguing the issue
and trying to make it about things it is not," said T.J. Petrizzo, a lobbyist who is
representing Airborne. "Clearly, it's about one issue: competition in the U.S. marketplace." FedEx and UPS vigorously disagree, painting themselves as the underdogs. "DHL is the
800-pound gorilla in the international delivery marketplace," said UPS spokesman David
Bolger. "They dwarf FedEx and UPS combined, so for them to say they're the new kid on
the block is laughable." Characterizing DHL as an oppressed minor competitor "is really a
falsehood," said FedEx's Krause. The issue before Yoder deals with the citizenship status of the pre-merger DHL. But some
suggest that a negative ruling by Yoder could also put the DHL-Airborne merger in jeopardy. Though Yoder is supposed to decide the case by October 31, few expect his ruling to end
the jockeying. Whatever Yoder decides must be officially implemented by the
department, and either side might choose to appeal the decision. Moreover, additional
opportunities to lobby Congress may be in the cards. "People are mindful that, at a time when the [Federal Aviation Administration]
reauthorization and Transportation appropriations bills are out there, everyone needs to be
playing defense and looking for opportunities to play offense," said one lobbyist. Still, if the battle so far has been a case study in how to use political and lobbying clout in
a marketplace fight, the current phase-the hearing by an administrative law judge-ironically removes it from the very realm, politics, in which FedEx and UPS have
operated so effectively for so long. "I think this is actually a neat example of our system of checks and balances," the lobbyist
said. "You will have this whole situation resolved on the merits. That's a testament to the
strength of our system." National Journal |