The latest version of the Transport Market Monitor came along like a bombshell. For the second time since the beginning of the quarterly measurement (over 7 years ago), both the price index and the capacity index decreased. Meanwhile, the diesel index continued to recover. The drop of the capacity index was therefore particularly unusual, as capacity in autumn tends to increase. With 3.4% less available capacity, one would expect to see prices rising, transport prices in Q3 2016 nevertheless dropped by 1.3%.
This unusual observation is, in my opinion, driven by two main reasons. Firstly, if you compare the year-on-year available capacity, you could notice that Q3 2016 saw 9.5% more available capacity than Q3 2015. This available capacity puts pressure on transport prices. Secondly, the European Trade Flow Index (ETFI), which is derived from Capgemini Consulting’s Global Trade Flow Index, dropped by 1.2% in Q3 2016. As transports are highly dependent on the trade volume, such a significant drop is expected to considerably increase competition among carriers and freight forwarders.
The ability of forwarders to continue to decrease prices is further supporting the argument I’ve made throughout the last couple of entries of this blog. As freight forwarding companies are able to reduce prices to defend or gain market share, profitability in the previous periods must have been higher. September 2016 and May 2016 both saw a similar capacity index, while the price index in September was nearly 2% lower. For a low-margin industry, such as freight forwarding, a 2% price difference can be the difference between turning a healthy profit or making a loss.
With increasing competition, shrinking margins and additional pressure through increasing diesel costs, the outlook of this industry continuous to be rather worrying. Coming from a probably profitable period, freight forwarding companies might yet again face tougher times. Innovative digital solutions, which reduce internal process costs, will be the enabler to overcome this downturn and prepare for the future. In addition, more intelligent freight allocation together with an increase of volume through bundling are promising opportunities for tackling decreasing profit. This will only work by using analytics based and connecting software tools in order to allocate freight to capacity more effectively. I am looking forward to hearing your opinion on these interesting topics. Feel free to contact me!