Restoring ocean freight profitability is ‘top priority’ for Panalpina

4/30/2017

Restoring profitability in its loss-making ocean freight unit is currently Panalpina’s top priority, senior executives of the global freight forwarding and logistics group told analysts last week.

The Swiss group recently reported 7% growth in its ocean freight volumes in the first quarter (Q1) of this year − compared to estimated market growth of about 4% − mainly driven by strong Transatlantic and Far East trades, with buoyant demand from the consumer goods, fashion and automotive industry verticals, CFO Robert Erni explained. But this had little impact on its ocean freight unit’s bottom line.

Panalpina’s ocean freight unit posting an EBIT operating loss of CHF 3 million for the quarter following a loss of just over CHF 5 million in Q4 2016.

“While the strong volume growth is good news, it is clear that further measures such as the centralisation of operations and offshoring operations to low labour (cost) countries need to be accelerated in order to turn the product back to black numbers,” Erni said. “Ocean freight is certainly the (company’s) most important ‘construction site’ left and, rest assured, its profitability is our highest priority.”

As with air freight, Erni took some comfort in the recovery of ocean freight gross profit (GP) per unit in the last quarter on Q4 2016, providing grounds for optimism that more “normalised” margins of around CHF300 per TEU could be attained later in the year. “If market conditions further improve and we have a situation where demand is getting stronger and stronger and it’s more about capacity, this number (CHF300/TEU) can certainly go higher,” he noted.

“It can also go up through us extending the service level to customers from port-to-port services to more door-to-door; but the margin will also come under pressure when we go into the bigger customer verticals. So, all in all, CHF 300 is a good assumption going forward, and also for our internal planning.”

Analaysts asked CEO Stefan Kerlen why the company’s ocean freight business was growing in volume so much if it is losing money. They questioned whether Panalpina was doing enough to ‘rationalise its book of business’ − taking on freight that pays and getting rid of loss-making business. Kerlen replied: “We are very selective in the business we are going after. Today, we have detailed transparency and analysis in terms of profitability per individual customer.”

He continued: “The focus is on improving the margin on the port-to-port or beyond the port-to-port with value-added services. What we need to get better at is getting the gross profit down to the bottom line, improving how we operate, how efficient and effective we are, how we can transfer some of our operating costs into a low-cost environment where we can drive profitability through productivity improvements.”