Commentary: Railroads’ Track to Profit

Logistics companies may dominate the Top 50 Global Transportation and Logistics Companies, but when considering profit margins, railroads top the list.

The six railroads on the list had an average operating margin of 28 percent in 2011. Although the capital-intensive structure of railroads warrants high margins, the segment’s average margin was more than three times better than the average of the next best segment.

Canadian Pacific had the lowest margin of the railroads, at 18.7 percent, but it was still higher than any other company in the Top 50.

In terms of profit, ocean carriers were at the bottom of the list and were the only transportation service providers to collectively post a negative margin in 2011. The 11 reporting carriers in the segment averaged a minus-5.4 percent margin during the year, and only Maersk Line and Orient Overseas (International) Ltd. generated positive operating income, although both companies had margins under 3 percent. Additionally, ocean carriers were the only group whose margins declined substantially in 2011.

Overcapacity in ocean shipping led to the drop in margins for this segment, while tightening truck capacity and increasing domestic demand helped trucking companies, representing the smallest segment on the list, increase margins.

The trucking segment collectively had the largest increase in profit margins on the Top 50 list, led by Con-way’s 2.5 percent improvement and YRC Worldwide’s margin growth of 2.4 percent.

In terms of profit growth, Con-way and YRC Worldwide were among the top three companies in the top 50. That’s especially impressive considering YRC Worldwide lost $354.5 million in 2011 and underwent significant restructuring as part of its long-term recovery effort.

Parcel carriers also collectively improved their margins in 2011. UPS had the highest margin in the segment at 12.7 percent, primarily because of strong margins for the company’s domestic and international services. UPS also had the highest operating margin of all non-railroads in the list. FedEx’s ground parcel division, with an operating margin of 17.1 percent, generated more than half of the company’s operating income and helped to offset the less-than-5 percent margins at the company’s Express and Freight segments.

Although 3PLs were the second-fastest-growing segment in the Top 50, revenue expansion for some came at the expense of operating margin growth. 3PL margins were largely flat between 2010 and 2011 as most companies were able to offset the negative impact of a slowing global economy by benefiting from excess ocean capacity. Hitachi, Norbert Detressangle, Bollore and Toll were the fastest-growing companies in the Top 50, but none of the four had a meaningful improvement in margin in 2011.

What may be surprising is that despite the U.S. for-hire trucking being a $300 billion industry, only three U.S. trucking companies made the top 50 list and all ranked near the bottom. Unlike 3PL, parcel and ocean services, the revenue potential of trucking companies is limited by geographic boundaries. And, unlike the rail industry, trucking is also highly fragmented, being composed of hundreds of thousands of small companies in the U.S. alone, most of them with fewer than 10 trucks.

FedEx owns FedEx Freight, a $5.3 billion less-than-truckload carrier, which if it were a stand-alone company would have been included in the Top 50 list.

Michael D. Scheid is an analyst at SJ Consulting Group, a transportation and logistics research and consulting firm with offices in Pittsburgh and India.

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