Expeditors 1Q17: Volume and revenue rise as net income drops

Although Expeditors International of Washington, Inc., transported significantly more air and ocean freight during 1Q17, compared to 1Q16, Expeditors’ operating margin (operating income as a percentage of net revenue) fell below the company’s 30% benchmark, to 28%. Of course, most companies would kill for a 28% margin, but for Expeditors, falling below 30% is a rarity.

Back to the good news, air freight volumes jumped 16%, and even ocean freight tonnage rose 7% y-o-y during the 1Q17. Larger volumes boosted net revenues, which rose 2.0% to $528 million, though operating income for the quarter dropped 3.8% to $146 million. Net income meanwhile, was 3.4% lower y-o-y, at $93 million.

Although it is reassuring that in monthly comparisons with 2016, Expeditors’ airfreight volumes saw double-digit growth each month during the first quarter of 2017 (and 20% in March), a tougher pricing environment caused expenses to rise more steeply than revenue. Expeditors is well-aware of the rate pressure, and said that it expects rates to eventually stabilize.

Regarding yields, CEO Jeffrey Musser said, “As expected and previously noted, we continued to experience the rate pressure that we have seen in recent quarters. Over the long term, we expect this rate volatility to subside and that we will return to more historical pricing patterns. Bradly Powell, SVP, and CFO added, “Operating income as a percentage of net revenue was 28%, which is below our 30% operating benchmark, largely due to volume increases being offset by lower average net rates.

With rapid growth in demand for air freight capacity, we question, has pricing power shifted back to the carriers?