Experts Say Outlook for Brokers Is Positive Despite Tightening Margins, Cost Pressures

This story appears in the April 18 print edition of Transport Topics.

ORLANDO, Fla. — The outlook for brokerage firms is mostly positive, despite compressed margins and inflationary cost pressures, industry officials and analysts said.

“We know that things are actually pretty challenging for the broker side, with tight capacity, inflationary spikes, the driver shortage and CSA 2010,” said Ben Gordon, CEO of the public equity firm BG Strategic Advisors, “but in my view, the overall theme is positive.”

“CEO confidence levels are much higher today than they have been at any point in the last four years,” Gordon told executives attending a Transportation Intermediaries Association conference here on April 7. “That means that companies are starting to make more aggressive investments, whether that’s in capital, in rolling stock, acquisitions, or other initiatives. You’re starting to see a loosening of the purse strings.”

Evan Armstrong, president of Armstrong & Associates Inc., a supply chain consultant firm, said that in 2010 brokerage firms overall recorded “very significant growth.” Net revenue grew at an average of 12.7% annually from 1995 to 2010, he said.

However, brokers not only are having to overcome increases in rates and fuel costs but also are juggling more freight with fewer available trucks, according to freight information provider TransCore’s 2011 broker benchmark survey report.

The company’s survey of 270 brokers and broker-carriers said truck tonnage increased by 6% last year, compared with 2009, while spot market load volume more than doubled.

Brokers are paying 10% more per mile on the spot market and 1% on average more for van contract rates. In addition, average gross broker margin per truckload last year was 14.9%, down from 15.6% in 2009, TransCore said.

In 2010, one in four brokers added staff to their payroll, while 16% reduced their payroll and 8% cut costs, the survey said.

“Regulatory changes, including new emissions standards in California, also exerted pressure on costs for many carriers, driving up rates,” TransCore said.

Also in 2010, the average length of haul per brokered freight move declined by 10%.

“The overall trend in the trucking industry is toward shorter hauls, as shippers direct a larger portion of their longhaul freight to intermodal and rail,” the survey said.

Mark Christos, vice president of highway services for Matson Integrated Logistics and a member of TIA’s executive committee, said there have been dramatic changes in the third-party logistics industry over the past two years.

“As we all recognize, our industry is rapidly changing, and the ability and generation of change is accelerating,” Christos said at a TIA session on April 9.

Some of those changes have included increasing regulatory requirements, such as the new federal Compliance, Safety, Accountability program, evolving technology, recent mergers and acquisitions, and rising customer expectations and requirements.

“Pick a subject,” Christos said. “All of these things are causing significant changes in our business.”

In addition, he said, the use of intermodal is increasing with brokers seeing rail service become “more truck-like.”

“When you look at the rail networks in the U.S., the railroads themselves are becoming highly efficient in what many would traditionally call truck lanes — 600- or 700-mile length of haul in certain corridors,” Christos said.

All these changes are expanding opportunities for brokers, “although in the heat of the battle, you may not feel like you’re making progress,” Christos said.

Because the freight business rebounded last year, Gordon said, stock-market performance for public transportation companies rose by 22%.

Inventory levels have dipped to 5% below their historical norm, he said.

“That’s good news,” Gordon said. “It means it’s more likely that shippers will need to accelerate their transportation spend  to catch up.”

In the near term, he said, brokers can expect to see rate increases continue, partly because of the worsening driver shortage magnified by the CSA program. They also can expect to see increases in insurance rates because of the natural disasters in Japan.

“There’s no doubt in my mind that we’re going to see lots of inflationary pressures that will cause carriers to jack up rates,” Gordon said. “The question will be how much of that gets passed on.”

He also said mergers and acquisitions in the logistics industry are certain to pick up as corporate executives decide to put the excess cash on their balance sheets to work.

“For buyers and sellers, 2008, 2009 and 2010 was a tough period of time.” Gordon said. “Now we’ll be seeing more use of mergers and acquisitions as a strategic tool.”