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Forwarders Face Reduced Capacity, Rate Increases and Digital Threats

Capacity and rates are perhaps the biggest challenges for freight forwarders. Amplified even more in this year’s earnings reports, many forwarders struggled with profitability despite achieving year-over-year revenue increases and volume gains. Market trends such as ocean freight market consolidation, air carriers’ strategic removal of capacity and persistent high airfreight rates were among the contributing factors for many forwarders’ financial woes.

Trans-Pacific

Asia and the Trans-Pacific trade lane bore the brunt of forwarders’ frustrations during the first nine months of this year. Expeditors cited in its SEC filing that air carriers in North Asia and South Asia have increased pricing significantly as a result of higher demand relative to available capacity. DHL noted in its earnings presentation that exports from Asia are a challenge and especially worsened by carriers’ strategically decreasing capacity.

Indeed, the Association of Asia Pacific Airlines indicated that through September, cargo volumes are up 10.7% year-over-year. According to the Association, “Asia Pacific carriers remain under pressure in a market characterized by intense competition and robust growth of both passenger and cargo traffic.”

The Asian struggle, particularly South Asia, is real as noted in Expeditors’ SEC filing. The forwarder’s overall net revenue for its South Asia geography declined 3.0% YoY for Q3 (the only geography to record a net revenue decline) and declined 8.4% YoY for the nine month period ending September 30. It amazes us that air freight rates and reduced capacity could be the cause of this decline but it’s possible. In terms of ocean freight and services, Expeditors’ South Asia geography reported that net revenues increased 12% during Q3 and remained flat for the nine month period ending Sept. 30 due to primarily higher order management volumes and higher net revenue per container during Q3.

Digital

Among other concerns facing forwarders is the rise of digital players. We believe these digital forwarders are a threat to the larger, traditional forwarder particularly as they address specific customer needs that have not been addressed adequately by other forwarders. Based on our research, DHL appears to be the only forwarder to publically acknowledge this threat. Noted in their recent earnings presentation, the head of DHL’s forwarding unit noted that the threat is real. “Digital players address important customer needs such as visibility and invoice accuracy.” However, “pure digital does not seem to work – start-ups are shifting into physical models such as operations personnel and warehouses.”

This omnichannel (sound familiar?) approach is playing out by a number of forwarders. Investments along with rollouts were reported by Panalpina and DHL. Panalpina’s CEO stated “Low gross profit margins and low productivity resulting from the inefficiency of our legacy system will continue to hamper us in Ocean Freight, where for the time being we can only grow moderately to avoid incremental costs. It is therefore encouraging that our new operating system SAP TM was successfully implemented in Germany and that the roll-out in the U.S. will commence this year.” Despite the successful implementations thus far, Panalpina noted in their quarterly presentation that there were higher costs associated with the roll out.

Introduced in 2016, DHL’s IT Renewal Roadmap continues. Global TMS rollout is underway with successful implementations for ocean freight in pilot countries. In addition, further global deployment of selected systems are in progress including shipment visibility, electronic document management and harmonized quotations. Sounds a bit complicated to us but we applaud DHL on their success so far. We do have, however, questions about the several IT systems that DHL units have such as DHL Freight’s Saloodo, DHL’s visibility, tracking and management of shipments and inventory in its Supply Chain and Parcel and e-Commerce units – do they all integrate together? Or do customers log into each one separately even if they utilize more than one DHL solution? Please note, we’re not IT experts by any means (We still refer to coding as programming and remain fans of COBOL) and we could have simply overlooked these details so if anyone can educate us, we’d appreciate it.

Strategies

Moving into Q4 and beyond, there is a focus on profitability. Expeditors appears to have been working on this goal throughout 2017. As noted by its CEO, “This quarter (Q3) represents the culmination of the efforts from our staff over the last few quarters. We’ve spent a significant amount of time working with our customers to bring pricing back in line with the changes that have taken place in the market”. Indeed, for Q3, total net revenues increased 10% YoY while for the 9 month period, net revenue increased 5%.

Meanwhile, Panalpina’s strategy includes the following:

  • Focus on topline growth and further improvement of unit profitability
  • Improve EBIT in Ocean Freight
  • Accelerate growth through selected bolt-on acquisitions
  • Maintain cost discipline and push ahead operations transformation program

DHL’s strategy:

  • Increase air block space agreements for Asia export market
  • Introduce its own controlled capacity, ‘around the world’ and charters
  • Leverage lower ocean freight spot rates
  • Optimize ocean freight routing
  • Actively manage ocean freight carrier portfolio

Concluding thoughts

While we highlighted only a few freight forwarders, we feel their threats and concerns represent the overall forwarding market. Reduced capacity, higher rates for both air and ocean and the need to automate are challenges facing freight forwarders now and continuing into 2018.

 

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