Panalpina expects higher ocean freight margins this year
Global freight forwarding and logistics group Panalpina will put an increasing focus on end-to-end, value-added solutions in a bid to restore margins in its ocean freight product, which were impacted by the prolonged downturn in the high-yield oil and gas vertical last year, and the collapse of Hanjin Shipping driving up rates
But greater ocean freight rate stability in the market – something not yet understood by some shippers – would also help the forwarding group deliver better ocean freight returns, although the environment in air and ocean freight would remain challenging with growth limited to about 2% in each, according to CEO Stefan Karlen.
“We expect to outperform the market in both air and ocean freight,” he told analysts after the forwarding and logistics group published its 2016 results last week. “For the first two quarters, we expect gross profit (GP) margins to be still under pressure but fully expect freight rates and margins to normalise – and we’re talking here end of Q2, beginning of Q3.”
Asked if there was a risk Panalpina’s GP margins in ocean freight would stay pressured beyond the first half of 2017 if shipping lines continued to be successful in pushing through modest rate increases, Karlen replied that while prices were on an upward curve, overall there was greater stability, which provided a better climate for margins to recover.
“What we are not seeing is the volatility (in the rates) of the past; rates are much more stable. There’s been a steady increase and carriers are staying firm on it as they have never done previously.”
He said this reflected a change in the market dynamic with carriers much more disciplined in working on yield management, a key element being a tighter rein on capacity – and which was likely to be further reinforced as a result of consolidation (among shipping lines) taking effect with new schedules at the end of March.
“It takes time for customers to understand that this is the dynamic now,” he said. “There is still the belief among some of them that one or two weeks after an announced GRI rates are going to drop again and return to the previous level. But at the moment, that’s not going to happen.
“There are a lot of big shippers, BCOs, who are frustrated with certain developments because they don't have the leverage of finding alternative capacity. But this approach to yield management by lines is set to continue.”
Karlen underlined that Panalpina was currently reviewing its operating model in ocean freight and there would be an increasing focus on end-to-end, value-added solutions in a bid to restore and normalise margins in its ocean freight product.
“There are a variety of measures we are anticipating. It’s not just port-to-port but ‘pre- and post-’ where we need to further optimise,” he noted. “In developing a solutions offering to customers, with value creation, we’ll see a positive impact on the margins.”
As to what constituted normalised GP margins for Panalpina in ocean freight, CFO Robert Erni replied: “Somewhere around CHF300 per box.”
The company had started the year at the “healthy” level of around CHF340 per box, which subsequently came down to CHF250 as a result of “a perfect double whammy” of lower oil and gas volumes and tighter capacity due to Hanjin’s collapse, he explained.