Freight forwarders’ earnings amid carrier-rate volatility

Three key charts reveal the relationship between freight forwarders’ rates and earnings.

The supply-chain crisis has driven an increase in freight rates, with implications for freight forwarders’ earnings. Understanding the relationship between rates and earnings can help freight forwarders navigate the volatile forwarding market.

Our analysis draws on recent and historical data to reveal major trends around freight forwarders’ gross margins and absolute gross profit amid carrier-rate changes.

Through three key charts, this article examines forwarders’ cost structures, the relationship between gross profit margins and freight-rate changes, implications for forwarders’ current earnings, and the potential outlook for future earnings.

Freight forwarders are asset-light intermediaries with flexible cost structures

Carrier rates are a key driver of freight forwarders' gross profit. Between 62 and 85 percent of revenues are channeled into purchasing carrier capacity (such as shipping lines or cargo airlines). Of the remainder, forwarders typically convert 20 to 30 percent to earnings before interest and taxes (EBIT), achieving EBIT margins of 1 to 11 percent—with return on invested capital (ROIC) typically above 20 percent, given the asset-light business model. Freight forwarders’ cost structures are thus generally flexible.

Forwarders' cost structure is largely flexible, with 62 to 85 percent of revenues spent on procured capacity from carriers.

Gross profit margins decrease as rates increase, but absolute profit improves

For both ocean and air freight, gross profit margins shrink as carrier rates increase, and inflate at times of low rates. Since 2005, gross profit margins went up by four percentage points over a ten-year period, while carrier rates declined. The dynamic has recently reversed, with gross profit margins at a ten-year low while carrier rates are at their highest. On the other hand, absolute gross profit (and gross profit per transported unit of cargo) can increase in times of higher rates.

Over the past 16 years, freight forwarders' gross profit margins have trended within a 4 percentage-points range.

Forwarders’ earnings are currently elevated, driven by freight-rate peaks, but are expected to trend downwards

Gross profit margins are dropping for both air and ocean forwarders as carrier yields have soared, quintupling from 2017 for ocean lines. Meanwhile, gross profit per unit has increased with the surge in demand. Coupled with largely flat operating costs, this has led to significantly higher EBIT margins compared to historic averages. Forwarders’ earnings are currently elevated as a result. However, carrier rates are expected to decrease in the coming years, and forwarders’ earnings will likely trend downwards. 1

Forwarders' earnings are currently elevated, driven by freight-rate peaks.

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