K+N sees underlying forwarding profits grow but not as fast as volumes

The increase in sea and air freight volumes across the freight forwarding businesses of Kuehne + Nagel over the past quarter ought to be a sign of a healthy market. Yet even allowing for a rising Swiss Franc, profits were not quite as strong as they might be. (Kuehne and Nagel (K+N) reports its results in Swiss Francs however does most of its business in Euros and US Dollars.)

For the second quarter the sea freight forwarding business saw an 6.9% increase in container volume year-on-year, yet even after stripping-out the effects of currency fluctuations turnover increased by just 3.9% and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) by 1%. In Swiss Franc terms results deteriorated with EBITDA falling by 3.8%.

It was a slightly different story at the air freight business where a 1.4% increase in tonnage year-on-year resulted in an underlying 11.8% leap in profits. In Swiss Franc terms sales fell by 1.2% but EBITDA rose by 5.6%.

In sea freight the continuing problem of lower returns on business does not appear to be going away even as K+N keeps its margins steady. Things are obviously better in air freight where it is not just cost-control that is delivering higher profits, rather it appears that K+N has achieved traction in terms of pricing without losing business

Both the air and sea freight markets are growing with volumes up 3.9% and 8.2% respectively, for the year-to-date. The combination of increased demand and loose supply ought to be driving profits in sea freight, yet it is air freight, where capacity is tighter, that is seeing the rise in income. So what is going wrong in sea forwarding? In such circumstances in the past the leading forwarder would be expected to exploit market conditions to drive-down the price it pays for containers whilst holding prices firm for customers. Apparently this strategy will work no longer. K+N blames “volatility” for its problems here, however it does appear to be something more profound.