Consultant Insight: Forwarders end 3Q uncertain of what 2020 may bring

Declining volumes, profit improvements and a pessimistic outlook for 2020 pretty much sums up the latest earnings reports from major freight forwarders.

Earnings reports from Kuehne + Nagel, DSV Panalpina, Expeditors, C.H. Robinson and DHL Global Forwarding and Freight were reviewed and while there was some positive news, overall, there is concern for the freight forwarding market for 2020. “The third quarter presented challenges that were not unexpected in terms of growth in the global economy and ongoing trade disputes that extend well beyond just the U.S. and China,” said Expeditors President and CEO, Jeffrey Musser.

Volumes

Ocean freight volumes held up fairly well during the third quarter. While little, if any, peak was observed, most of the major forwarders reported positive volumes. DSV Panalpina reported the strongest year-over-year growth, up 6.9%. Including Panalpina, volumes increased by almost 41%. Kuehne + Nagel followed with volume increases of 3.9% and DHL Global Forwarding’s ocean freight volumes were up 2.8%. C.H. Robinson and Expeditors reported flat volumes 2.0% decline, respectively, for the quarter, due to their high exposure on the trans-Pacific lane.

Airfreight volumes, once again, declined for all major forwarders except DSV (when Panalpina’s air volumes are added). Kuehne + Nagel noted volume pressure in the automotive and high-tech sectors while pockets of growth were highlighted in pharma, aviation, healthcare and e-commerce fulfillment. Still, Kuehne + Nagel plans to adjust its airfreight volume expectations in line with the market.

Meanwhile, C.H. Robinson experienced less demand for pricier expedited services, in line with what integrators UPS and FedEx have observed as well.

While the trans-Pacific has always been a competitive and profitable lane for many forwarders, the China-U.S. trade war has muted demand. As a result, forwarders are on the hunt for other promising lanes. Kuehne + Nagel reported good air and ocean freight growth on the eastbound trans-Atlantic and Europe to Asia routes. C.H. Robinson benefitted from its presence in Southeast Asia, where net revenues and volumes outperformed the rest of its group.

Profits

In general, revenue increased for many forwarders; However, it was a mixed bag in terms of profits and net revenues. Kuehne + Nagel reported a 17.3% increase in EBIT per Twenty-Foot Equivalent Units (TEU) for ocean and a 10% increase in EBIT per 100 kg for air. Cost management, significant increase in air gross profits in the areas of pharma and health, perishables and time-critical shipments.

Meanwhile, DHL Global Forwarding reported a 2.1% increase in gross profit for air but a 2.4% decline in gross profit for ocean. DSV Panalpina reported a 17.2% increase in gross profit per air tonne and a 4.6% increase in gross profit per ocean TEU.

C.H. Robinson reported mixed figures in which net revenues increased 4.1% for ocean and declined 7.2% for air while Expeditors’ overall operating income declined 2% for third quarter.

Outlook

Forwarders will face a questionable global economy in 2020. International organizations such as the IMF and the WTO have downgraded trade forecasts, recession risks are increasing and trade barriers including tariffs remain in place for many parts of the world.

Musser of Expeditors said in the company’s third-quarter earnings press release, “the trade environment has placed an increased need for products such as customs brokerage. A broad range of solutions, technology and expertise has never been more important to help mitigate the uncertainty and ambiguity of the current market.” Indeed, customs brokerage revenue increased over 17% for the quarter, the only segment to report positive year-over-year growth.

In a difficult environment, value-added services such as customs brokerage and focusing on industry verticals that promise both volumes and good margins are equally important. Promising areas may be difficult for many forwarders to identify as we head into one of the most uncertain years in recent memory, however.

Instead, it is likely that M&A activity may pick up as forwarders struggle to find their way and thus, present opportunities for those that have successfully maneuvered through the uncertainties. “The closing of the Panalpina transaction on Aug. 19 was the all-important event in the third quarter,” said Jens Bjørn Andersen, Group CEO for DSV. Indeed, as DSV spends the next 12-18 months integrating Panalpina, the fragmented forwarding market will be ripe for consolidation and 2020 may be the year for acquisitions.

Among the acquirers may be Agility Logistics, which lost out to DSV for Panalpina. The company’s Vice Chairman & CEO Tarek Sultan said in its third quarter earnings report, “We are also accelerating in-house development, acquisitions and partnerships to grow our digital logistics platform, Shipa. We believe this is the key to differentiating Agility and positioning us for future growth.”

Kuehne + Nagel may also be looking for acquisition targets as it too lost out on a bid for Panalpina. In late 2018, the company acquired Quick International Courier, a provider of time-critical deliveries. EBIT and volumes have benefited from this acquisition and it’s probable that Kuehne + Nagel may be on the hunt for additional niche businesses.

One company that is looking – but not necessarily in the forwarding space – is XPO Logistics. According to a recent Morgan Stanley note, XPO is probably focusing on smaller companies and individual opportunities. The note also said it likely will stay clear of freight forwarding operations because of secular disruptions in that market.

Forwarders will probably end 2019 on a much lower note as market volumes falter further and costs rise. The first half of 2020 looks to be the same story. Those forwarders that will prove successful will be those willing to take risks and think creatively about the forwarding business. Lastly, “secular disruptions” – those likely to continue moving in the same direction for the foreseeable future – will present opportunities for those looking to take advantage of a fragmented market.