Top 25 Freight Forwarders: Top 25 prevail despite market divergence

Despite the uncertain global economy, opportunities are still plentiful for the world’s top freight forwarders, with new geographies to cover and value-added, industry specific service offerings to create to meet evolving shipper demand.

Much of this optimism in the market can be attributed to news that the U.S. trade deficit narrowed a whopping 22 percent this past summer to $34.2 billion after surging close to 10 percent in the spring. The narrowing was expected, but the magnitude was not, says Gregory Daco, senior principal economist, IHS Global Insight. “Total exports rebounded strongly in June, July, and most of August, up 2.2 percent, thanks to stronger goods and services exports,” he says.

Draco adds that industrial supplies had a great season on strong fuel and petroleum products exports, while capital goods benefited from strong aircraft—a volatile category—and solid telecommunications equipment, computers, and semiconductors exports.
“Consumer goods also had a good summer, rebounding strongly after a lackluster performance in the spring,” says Draco. “Automotive exports, meanwhile, declined after strong gains.”

According to IHS data, imports slipped 2.5 percent—or $5.8 billion—this past summer, with a third of the import drop coming from an expected decline in the oil import bill following a spring surge. Non-petroleum imports also cooled across the board after two strong months. Consumer goods led the declines on a sharp dip in cell phone imports, while non-petroleum industrial supplies and automotive imports also cooled.

Economists say that the foreign trade contribution to real GDP growth in the third quarter is likely to be revised from a 0.8 percentage point drag to a small boost of around 0.2 percentage point.

However, freight forwarders should note that this tidal surge is not one that will lift all boats. Transport Intelligence (Ti), a London-based logistics research and consultancy group, recently published a report that reveals the full extent of the increasing divergence between the air freight and sea freight forwarding markets as global shipper demand shifts.

Sea freight dominance
Although the overall freight forwarding market grew by 3.1 percent to $125.85 billion in 2012, Ti’s new research suggests that this figure is misleading, as the positive growth was entirely attributed to the sea freight sector.

The report found that while the sea freight forwarding market grew by an impressive 11.5 percent to $63.23 billion in 2012, the air freight forwarding market declined by 4.2 percent to $62.62 billion as a rsesult of overcapacity, rising fuel prices, and other operational costs. This has led many shippers to opt for alternative methods for transporting their goods.

However, Cathy Roberson, lead author of the Ti report, introduced a word of caution. “Despite double-digit growth in 2012, the sea freight forwarding market is still vulnerable to long-term overcapacity and erratic rates,” she says. “Forwarders have benefited from the modal shifts experienced in 2012, but there could be serious problems if these issues are not addressed.”

Roberson says that although the air freight market was weaker in 2012, airlines are removing capacity across the world. “If it wishes to continue its impressive growth, the sea freight sector should not continue to ignore these problems,” Roberson adds.

Asia Pacific accounts for the largest freight forwarding market with a 32 percent share, and Ti expects Asia to hold a 37 percent share of the market by 2016. Although its economy is still heavily reliant on exports, domestic demand is growing, and therefore intra-Asian services are becoming more sought after.

It’s anticipated that this will be of particular detriment to the European market, currently the second largest, which will decline from 31 percent to 26 percent in 2013 as a result of its ongoing economic issues.

As a consequence of the new market dynamics, the air and sea sectors have undertaken contrasting strategic focuses to increase volumes and profitability. The air freight sector has experienced a significant decline in volumes due to the modal shifts and, as a result, forwarders are having a hard time filling up aircraft. Therefore, forwarders in the sector have started to focus on higher margin commodities, such as pharmaceuticals and other temperature-controlled goods.

Conversely, Ti notes that sea freight forwarders are expanding their less-than-container-load (LCL) offerings, particularly on Asia Pacific trade lanes. The service offers reduced shipping costs, increased flexibility, and improved transit times over full-container-load (FCL) services. Carriers have also developed expedited multimodal offerings such as sea and road transport to provide a door-to-door service and a combined air and sea service that reduces costs—and still provide the faster transit time of air.

Resurgent air
Ti’s new study suggests that the overall freight forwarding market will grow by 6.8 percent between 2012 and 2016. “Although we expect the sea freight forwarding market to develop more rapidly, we also anticipate that the air freight forwarding market will recover over the next five years, as shifting trade lanes result in new opportunities in emerging markets,” adds Roberson.

Analysts at IBISWorld, an industry research firm based in Santa Monica, Calif., agree that the global air freight industry is poised for a comeback. “Air cargo is essential to international trade, granting it a degree of demand stability,” says Lauren Setar IBISWorld industry analyst. “As a result, air cargo industry revenue is expected to grow at an annualized rate of 2.1 percent in the five years through 2013 to reach $75.4 billion.”

Trade analysts observe that during the global downturn of 2008 and 2009, demand for goods and services weakened worldwide. This low demand led to a fall in production activity from manufacturing giants, like China, and a drop in the quantity of goods traded. Overall, demand for air freight declined considerably due to poor economic conditions in 2009. As a result, air cargo’s revenue plummeted 24.6 percent that year.

“However, companies around the world replenished their inventories in 2010, causing a dramatic rise in cargo demand, enabling revenue and profit margins to rebound,” says Setar. “Due to greater freight volumes and higher prices, the industry has returned to a more sustainable growth rate, which includes an estimated increase of 2.9 percent in 2013.”

Brandon Fried, executive director of the Washington, D.C.-based Airforwarders Association, admits that as manufacturing activity from many of the traditional sourcing countries has decreased due to reduced global demand, freight forwarders have responded by offering less expensive alternatives that meet shipper budgets while maintaining their customer deadline commitments.

“This has created an understandable shift to slower, less costly sea freight shipments,” says Fried. “As always, the forwarder multimodal business model is responding to market changes driven by the economy.”

As noted by analysts, many airlines have reduced capacity in response to this lessened demand from the cargo sector. Many passenger airlines, including all those based in the U.S., no longer fly freighter aircraft due to their high cost and the introduction of new, larger planes able to satisfy current cargo demand.

“Many assume that a shift to ocean shipping is strictly a decision based on financial savings, but this is not always the case,” says Fried. “Changing from air to ocean can also be a function of demand and inventory space constraints where customers depend on ships as virtual warehouses constantly feeding distribution centers on arrival.”

Fried concludes that the “uptick” in sea transport is a good indication that the economy is slowly showing signs of improvement. And as demand increases, Fried believes that forwarders will respond by shifting more cargo to air freight.

Top 25: Who’s on first?
Granular modal observations aside, analysts maintain that the mega-forwarders will just keep rolling along. Momentum, they say, is clearly on their side.

Evan Armstrong, president of the third-party logistics (3PL) services analyst firm Armstrong & Associates, says that no one should be surprised that DHL Supply Chain (DSC) leads the Top 25 Freight Forwarders list again this year. He says that the company is, by far, the world’s largest third party service provider and contract logistician. 

“DHL Global Forwarding (DGF) grew through the acquisition of highly respected companies like Danzas,” says Armstrong. “DHL and Danzas have strong branches in Europe and Asia and currently have 31 global carrier partners with 81 contracts on a multitude of trade lanes and more than 330 gateway facilities. This scope of operations allows its customers to more easily adjust its vendor supply chains as well.”

Kuehne + Nagel (K+N) also benefitted through an acquisition, says Armstrong. With the addition of the ACR group, contract logistics operations at K+N more than doubled in 2006 and are 50 percent of net revenues.

“Kuehne + Nagel is one of the world’s leading logistics companies providing services from more than 1,000 locations in over 100 countries,” says Armstrong. “Its strong market position lies in the sea freight, air freight, contract logistics and overland businesses, with a clear focus on providing IT-based integrated solutions.”

The performances of K+N’s sea freight and air freight business units were again the main pillars of success, contends Armstrong. In both areas, high internal productivity and strict cost management compensated for the costs of investments made in technology and product development and strengthening of niche segments. 

Amstrong notes that DB Schenker has also made significant purchases from 2006 to 2008 to double the size of its operations. The purchases include BAX in 2006, Spain-Tir in 2007, and Romtrans in 2008. Romtrans was the largest forwarding company in Romania, with $140 million in revenue, 1,500 employees, and with operations that go as far east as Georgia. Spain-Tir had over 700 trucks and 16 million square feet of warehousing space covering the Iberian Peninsula. BAX added significant North America and Asia capacity. 

“DB Schenker is significantly expanding its contract logistics operations,” says Armstrong. “Dave Bouchard was added to lead the Americas effort, and Detlef Trefzger leads global contract logistics and is spearheading expansion efforts. And with those to two in those positions, North American contract logistics operations are now 42 percent consumer goods, 30 percent High-Tech, 16 percent industrial, and 12 percent automotive.”

Armstrong adds that overall, his company’s research continues to confirm that the freight forwarding industry is continuing to stabilize, with these market leaders staying on top with mergers and acquisitions.

“The most unexpected findings in our study is that everyone is performing as expected,” adds Armstrong. “That doesn’t mean, however, that some companies will not climb up the list by exploiting niche markets with specialized services—that’s the beauty of this business.”