The shipping surge that benefited many truckers in the second quarter also boosted third-party logistics companies and freight brokers, raising the total dollars they billed 13 percent over the same quarter a year ago, according to the Transportation Intermediaries Association.
|But tightening truck capacity led to equipment shortages in some areas and rocketing spot market rates, tamping down the profit margins of 3PLs and brokers large and small, the TIA says in its latest quarterly 3PL Market Report.
Those profit margins — ranging from 11.5 percent to 16.8 percent, depending on the size of the company — would still be the envy of many asset-based trucking companies, where net margins often fall below 10 or even 5 percent.
On average, 3PL and broker profit margins declined 1 percentage point from this year’s first quarter, with the largest companies, those with more than $10 million in revenue, reporting profit margins of about 14.5 percent.
“Over six quarters, 3PL profit margins are down collectively 2 percent, which I think is phenomenal,” said Robert Voltmann, the TIA’s president and CEO. “It shows how close these guys are to their businesses and what tight control they exert.”
That bodes well for third-party transportation intermediaries in an uneasy economic recovery. Concern about the direction of the economy may actually be helping 3PLs and freight brokers, as businesses turn to them for help securing capacity and mitigating much-feared spikes in transportation costs.
Logistics providers surveyed by the TIA were “fairly optimistic” about the third quarter, with 90 percent of all participants expecting consistent or better business. Most of the companies surveyed expected to grow at a 10 to 15 percent pace.
The second quarter surge in billings came as over-the-road shipments jumped 8 percent, indicating there were still plenty of trucks available to 3PLs and brokers despite tighter capacity. They simply had to pay more to get them.
Some trucking companies may have held back equipment or diverted trucks to shippers as freight orders surged, but 3PLs and brokers were able to support an increase in volume comparable to those reported by the asset operators.
“Brokers are expert at finding owner-operators and the one-to-five-truck operators around the country,” Voltmann said. “An owner-operator can’t idle capacity.”
They also shifted more freight to intermodal rail, increasing intermodal bookings by about $60 million from the first quarter to almost $500 million, the TIA said.
The association’s quarterly market report supports comments from 3PLs and brokers and financial reports from companies such as C.H. Robinson Worldwide, which had $4.5 billion in revenue in the first half of 2010.
C.H. Robinson’s second quarter truckload volume increased about 18 percent year-over-year, although its net truck revenue fell 2.4 percent because of higher transportation and fuel costs. Compared to the first quarter, the 3PL’s truck revenue jumped 7.6 percent, while intermodal, ocean and air freight sales rose 10.8, 15.6 and 27.6 percent. Its less-than-truckload net revenue increased about 20 percent, the company said, driven by a 25 percent increase in total shipments.
The Minnesota-based company’s cost of purchased transportation, however, rose 22.1 percent from the first quarter and 40 percent from the second quarter of 2009, as transportation rates shot up. C.H. Robinson’s truckload costs surged 11 percent, excluding fuel, but it only raised the truckload rates it charged customers 5 percent.
“Our total cost of purchased transportation generally increases faster than our pricing to our customers when demand is increasing and the overall market relationship is becoming much tighter,” Chairman and CEO John P. Wiehoff said.
At Echo Global Logistics, a $260 million 3PL in Chicago, tightening capacity in the truckload market led to “net revenue margin compression,” CEO Doug Waggoner said, despite a 23.3 percent increase in total revenue from the first quarter. Echo’s net revenue margin dropped from 19.1 percent in the first quarter to 18.2 percent.
|“However, our operating margins expanded from 10 percent to 15.6 percent, as our continued growth improved our overall operating leverage,” Waggoner said.
That helped Echo find the trucks it needed in the second quarter. “We’ve got enough scale that we can see into the market,” he said late in the quarter.
Although trucking demand and capacity issues appear to have “settled a bit” since June, “people are still feeling pressure in some markets,” Voltmann said.
He expects a gradual increase in freight will continue to tighten capacity, an expectation the 3PLs and brokers surveyed by TIA share. More than 80 percent said they expect trucking capacity to tighten, starting with dry van, refrigerated and flatbed tractor-trailers and extending to container drayage and intermodal equipment. “Clearly, this is beginning to be a concern among industry insiders,” the TIA said in its report.
Intermediaries also are concerned about whether they can recover more of their trucking costs from end-customers. “Until there’s universal pressure from tight capacity, shippers aren’t going to pay more,” Voltmann said. “Eventually, that pressure is going to build up. I don’t know when it’s going to be, but we’ve taken so much capacity out that if there’s any kind of uptick in freight, it’s got to put upward pressure on rates.”
Contact William B. Cassidy at firstname.lastname@example.org.