Forwarders’ focus turns to margins in the uncertain global environment

Now that the major freight forwarders have reported their earnings for the first half of 2019, a look at the market finds one of lower airfreight volumes and positive oceanfreight volumes. However, the lesson learned from years past was that volumes do not always equate to profit. Today, the focus is on profits.

Simple common sense is playing a role as forwarders such as DSV cull high-volume, low-margin contracts. Also, as part of this focus on profits, we’re beginning to see technology investments driving positive margins.

As noted by DHL in its latest earnings report, the market environment remains “marked by slowing growth and a high level of uncertainty.” Meanwhile, Kuehne + Nagel commented in its earnings report that the global airfreight market continued to be “under pressure in an economy characterized by growing trade barriers.”

Indeed, trade barriers are a concern with tariffs in particular often being used as a political tactic. The mere suggestion of a tariff sends shippers into a mad scramble to import goods before any actual deadline is set. The result of this is no surprise – full warehouses not only here in the U.S., but also as witnessed with the original March Brexit deadline that has since been delayed until October. It’s a trickledown effect and the forwarder is often caught up in this chaos by sourcing the transportation, regardless of mode, at the best rate and for the right timing; often responsible for the customs; and obtaining temporary warehousing of goods. As a result, the need for freight forwarders has never been more important than now in this uncertain global environment.

Against this backdrop, our select forwarders reported declines in airfreight volumes for the first half of this year:

Panalpina was the anomaly of the group, reporting strong volume growth. However, the growth was primarily due to an exceptionally strong first quarter with airfreight volumes up 8%, compared to the second quarter, which saw only a 1% increase. Of the healthy 8% volume gain in Q1, 6% of the total came from recent acquisitions that were mostly in the niche perishables sector. However, Panalpina paid the price of this volume gain during Q1 with a 10% decline in gross profit per tonne, which led operating income to decline by 7%. Declines in gross profit per tonne and gross profit continued into second quarter.

DSV and DHL were among the forwarders that did report strong increases in airfreight gross profits, of 6.7% and 4.5%, respectively. DHL credited its Simplify program for gradual improvements in the group. For DSV, a continuation of its focus on the bottom line as it looks to make its acquisition of Panalpina official in the third quarter.

Turning to oceanfreight, volumes for our select forwarders for the first half of this year (note that all report volumes in TEUs except Expeditors, which reports in FEUs) were as follows:

  • DHL down 0.8%
  • Kuehne + Nagel up 4.5%
  • Panalpina down 3%
  • DSV up 5%
  • Expeditors up 4%

Despite an increase in revenue, DHL reported oceanfreight gross profit declined 2.1% for the first half of the year. Panalpina also reported a decline in gross profit, down 2% – but, EBIT increased 5.5%. Meanwhile, through what it described as a “selective growth strategy, focus on customer service and effective cost control,” Kuehne + Nagel reported an 11.9% increase in EBIT and a higher EBIT per TEU.

Expeditors International of Washington mostly followed the air and ocean markets as it reported a 5% decline in airfreight revenue and an almost 11% increase in oceanfreight revenue for the first half of 2019. But, its customs brokerage and other division sheds light on the geopolitical environment, with a 21% increase in revenue. The second quarter alone saw revenue for this group increase 19.9%. Furthermore, net revenue by geography finds that its largest geography segment, North Asia, declined 3.3% for the first six months of the year while South Asia increased 7.8%, the largest increase of its geographic segments and perhaps the most telling, as manufacturers moved either all or part of their production to such countries as Vietnam, Malaysia, Thailand and Indonesia.

For the rest of the year, freight forwarders remain optimistic despite the uncertainty in the global environment. Many will continue to focus on improving operations and profitability with any emphasis on volumes likely taking a back seat.

Cathy Morrow Roberson is founder and president of the logistics-focused market research firm, Logistics Trends & Insights, based in Atlanta. Previously, Cathy spent several years with consulting firms, as well as with UPS Supply Chain Solutions, where she supported its market, operations, competitive and mergers & acquisition research and analytics. She also is a Senior Consultant at Cargo Facts Consulting and writes a weekly column for Air Cargo World.

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