FedEx, UPS scramble to reassess strategy in Astar case
The U.S. Department of Transportation's administrative law hearing into foreign ownership and control questions related to Astar Air Cargo unexpectedly adjourned four hours early Wednesday after lawyers for FedEx Corp. and United Parcel Service asked for more time to rethink their strategy.
Administrative law judge Burton Kolko granted the adjournment request after ruling he would not allow certain documents into evidence. The two U.S. express carriers are trying to show that Astar's relationship with express delivery company DHL Worldwide Express is no different than the close one between DHL Airways and Worldwide Express before DHL Airways was sold to a group of American investors in July. Their case hinged in large measure on including the old service contract, as well as certain investor stock options and other agreements between DHL Airways, its principle investor and Worldwide Express in the record.
'We believe this ruling greatly prejudices the case,' FedEx counsel Jeffrey Kelsey told the judge, and suggested the decision could help build a case for an appeals court.
The FedEx-UPS motion to adjourn 'suggests that he has dealt them a lethal blow at least from their perspective,' said Terrence McTigue, an attorney for the International Brotherhood of Teamsters who is following the case.
FedEx/UPS made their request following a 90-minute lunch break.
'When you proffer an exhibit and the court denies admission, it's not normal to stop in your tracks and spend a full day to re-gather yourself,' McTigue said.
The long-awaited public hearing into Astar Air Cargo's (formerly DHL Airways) compliance with U.S. nationality requirements for airline ownership began Tuesday with Astar accusing FedEx and United Parcel Service of using the regulatory process instead of the market to beat back competition. The two U.S. logistics giants fired back that Deutsche Post is trying to game the system to gain access to the U.S. market.
The case boils down to whether former airways minority owner and Deutsche Post subsidiary DHL Worldwide Express actually controls Astar operations through indirect financial or contractual arrangements.
'This proceeding is an effort by UPS and FedEx to eliminate and suppress the competition of DHL Airways so they can maintain their cozy little duopoly in the U.S.,' DHL counsel Sanford Litvack, told Kolko. 'If George Washington bought this company they would claim it's controlled by foreign interests.'
UPS and FedEx lawyers countered that the Miami-based airline is trying to shift the focus from its compliance with U.S. law to the public policy question of whether the government should remove restrictions on foreign ownership of domestic airlines. Congress, not the administrative court, is the proper place for that debate, they said.
'Astar has been reduced to arguing that U.S. law should be waived because they believe Deutsche Post's access to the U.S. domestic air market will serve the greater public good,' said Steven Okun, UPS vice president, in his opening statement.
After heavy lobbying by FedEx, UPS and Lynden Air Cargo, Congress in April ordered the DOT to conduct a formal review of DHL Airways ownership structure with the help of an administrative law judge. U.S. law limits foreign ownership to 25 percent of the voting stock of an airline, and requires U.S. citizens to hold two-thirds of the company's executive positions.
Ever since new Astar Chief Executive John Dasburg completed the purchase of DHL Airways in July from a U.S. investor and a U.S. subsidiary of DHL Worldwide Express, the Brussels, Belgium based express delivery provider, Astar has tried to get the case dismissed on the grounds that the review of DHL Airways is old history and no longer germane since Dasburg and fellow Americans Richard Blum and Michael Klein now own Astar. With Astar in technical compliance with the law, the case has focused on whether DHL Worldwide is exerting indirect control of Astar on behalf of parent company Deutsche Post, the semi-private German logistics provider and mail carrier.
The FedEx/UPS team said the Dasburg ownership group is beholden to DHL because it helped arrange a sweetheart deal for Dasburg to buy the airline at the undervalued price of $60 million; is Astar's main customer and principle source of revenue; and signed an 11-year contract for dedicated service that guarantees Astar at least $15 million profit per year, and that Deutsche Post will backstop DHL’s payments.
In cross-examination of Astar witness, FedEx and UPS claimed that in meetings Dasburg had with DHL and Deutsche Post executives prior to being hired as president of DHL Airways in April sale terms were also discussed without the direct involvement of William Robinson, the company's majority owner and a man FedEx and UPS have long claimed has acted as a front for DHL and Deutsche Post. Dasburg said Robinson had representatives at two of the three meetings and gave authority to DHL to sign off on the final deal without him. In either case, Robinson apparently went from seeking a sales price of $100 million to $118 million to going along with the $60 million deal without much fight, according to both sides.
Dasburg also testified that he never spoke directly with Robinson about becoming chief executive of DHL Airways, and that he was originally interested in acquiring both Astar and ABX Air, the Airborne Express airline that was spun off when Deutsche Post acquired Airborne in August.
Dasburg and his partners rejected the notion that there were any side deals and that Astar was immune from DHL pressure because the wet lease (in which Astar owns and operates the aircraft, and provides maintenance and insurance) could only be terminated if Astar did not meet certain on-time performance criteria over a specified period of time.
'What disturbs me is that they are flying under false colors,' Litvack said of FedEx and UPS. 'Don't sit here and pretend to wrap yourself in the American flag when your motive is to knock these guys out of the box.'
Kolko must issue a recommendation on Astar's citizenship by Dec. 1, after which the DOT will make a final decision in the matter.