A tale of two forwarders

The head offices of two of the world’s largest forwarders are less than 100 km apart in the small European country of Switzerland. But despite their geographical proximity (and exposure to the same foreign exchange effects), third-quarter financial and operating results were strikingly different for Kuehne + Nagel and Panalpina.

We’ll get to the details below, but the real point of interest is that while K+N’s strong results were driven by the exceptional performance of its air freight forwarding division, Panalpina’s overall results were dragged into negative territory by the poor performance of its air freight forwarding division.

Also of interest was the way in which K+N’s decision to dump low-margin business in its ocean freight division has paid off. Yes, ocean volume dropped, but profitability increased dramatically. The comparison we point out here is not to Panalpina, but rather to Air France-KLM, which made a similar decision several years ago when faced with losses in its cargo operation. AF-KLM did lose cargo volume, as expected, but profitability fell even more than volume. Shedding unprofitable business may sound like an obvious decision, but it is also a notoriously tricky one to manage.

Now, on to the details…

A good quarter for K+N: Switzerland-based forwarder and logistics services provider Kuehne+Nagel reported third-quarter net income up 11.4% y-o-y to US$194 million, as its gross profit (what some forwarders call net income) was flat at $1.66 billion. Operating income (EBIT) for the quarter was up 9.0% to $240 million.

As shown in the chart at right, K+N’s Airfreight segment performed well in both the quarter and through the first nine months of 2015. Gains in volume (up 3.7%) and gross profit (up 3.2%) were not spectacular, but segment operating income was up 10% in the third quarter, and Airfreight operating margin was a very strong 28.8%.

In the Seafreight division, K+N’s decision to forego market share and let low-margin business go paid off very well. Volume shrank 2.8% y-o-y, but gross profit rose 4.3% and segment operating income jumped 17%. Seafreight operating margin was 36.2%.

Regarding this year’s peak season, CEO Detlef Trefzger said on a conference call following the company’s results announcement that K+N had not seen any spike in sea freight, and “it’s definitely too early to say for air freight. We’ll know by mid-November.”

A not-so-good quarter for Panalpina: Switzerland’s other big forwarder, Panalapina, fared less well than its compatriot, reporting third-quarter net income down 4.7% y-o-y to US$25 million, as gross profit (what some forwarders call net revenue) fell 7.4% to $381 million. Operating income (EBIT) for the quarter was down 4.6% to $33 million.

As shown in the chart at right, despite a 3.2% decline in volume, profitability of Panalpina’s ocean freight forwarding activity increased fairly strongly, with EBIT up 12.4% to 10 million. Panalpina’s air freight forwarding business, on the other hand, took a big hit. Volume was down 2.5%, but EBIT plummeted 23.3% to $22 million.

Discussing the results, Panalpina said that a major problem was its historical dependence on verticals like automotive and oil & gas that were cyclical in nature. To counter this, the company is trying to expand its share of forwarding market in the perishables and pharmaceuticals sectors.

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