Strategic focus on higher-margin business pays off for forwarders

Greater focus on higher-yielding air and ocean cargo in a sustained weak rate environment and anemic demand from major markets is paying dividends for global forwarders DSV and Kuehne + Nagel.

Both companies this week reported significant year-on-year declines in first-half revenue and earnings on the back of falling rate levels and volumes on the east-west trades. But the margin-focusing approach at the expense of volume has allowed the forwarders to maintain their profitability despite the soft market.

"If you protect the yields, you see sometimes a little negative development on the volumes," DSV CEO Jens Bjørn Andersen told analysts on an earnings call Tuesday. "What we have deliberately chosen is to not participate in tenders where rates reach a level where it will be breakeven or even loss-making for DSV. It is profit over growth."

Kuehne + Nagel CEO Stefan Paul told analysts on his company's first-half earnings call that monthly yields in the second quarter were "roughly stable" for ocean freight and showed "modest variation" in air cargo.

"We have a clear expectation on the yield, and this is unchanged, and we fully focus on the execution of our roadmap and on higher yields versus the pre-pandemic," Paul said.

One of the key goals of Kuehne + Nagel's "Roadmap 2026" is to continue a long-term shift to higher-yielding volume.

Q2 ocean freight volume of 1.1 million TEUs at Kuehne + Nagel was flat compared with the second quarter of 2022 and down 3% in the first half at just over 2 million TEUs. Air freight in the second quarter of 482,000 tonnes was a drop of 15%, while first-half volume of 957,000 tonnes was a decline of 16% year over year.

In a falling volume market with rates at pre-pandemic levels, keeping the focus on cargo that generates higher margins can come at the expense of market share, as DSV found out in the first half.

Volume declines were seen across the company's air and ocean segments. In air freight, volume fell 21% in the second quarter to 316,000 tonnes and also 21% in the first half when 644,000 tonnes were handled. In ocean, second-quarter volume fell 7% year over year to 642,000 TEUs, with the first-half volumes down 9% at 1.23 million TEUs.

"We are underperforming the market, particularly in air freight," Andersen said. "We have more or less the same development in volume as we had in Q1 ... whereas the yields are more or less the same."

Selective industry vertical focus

Paul noted that Kuehne + Nagel volume in the second quarter improved to flat year over year compared with a market decline of 4 to 5%.

"Our market share gains were strongest in the trans-Pacific trade lane, but a critical point I would like to emphasize is that our market share gains were not won on the expense of yield or cargo mix development," he said.

"We do not focus on any vertical," Paul added. "We experienced low double-digit growth in perishables and more than doubling of volume of small base in the semiconductor segment, a strategic focus of our 'Roadmap 2026.'"

DSV also avoided some of the industry verticals even if they were performing strongly, such as perishables, because the margins were not attractive enough to make it worthwhile, Andersen said.

"If we talk about a loss-making business, you go in and you simply pay more to your supplier than your customer pays you," he said. "This is not why we go to work in DSV. We simply refuse to do that."

The CEOs also highlighted the market trend of shippers booking greater numbers of shipments at smaller sizes, with the resulting consolidation generating higher profit margins than full container loads.

"Shipment order numbers are declining less than volume ... the shipment size has also gone down," Paul told analysts, while Andersen noted that shipment numbers were a better measure of market developments than volume and were derived from the number of invoices issued to customers.

"We've calculated that both for air and sea [shipment numbers] are approximately 7 to 8 percentage points better than what we see in terms of the overall volume," he said. "We would rather move 500 kg twice for our customers than 1,000 kg once. The profitability is twice as high, even though it is still only one tonne."

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.