Navigating the Challenges as Freight Brokerages Struggle Through a Long Trough

The freight brokerage industry, a vital link in the global supply chain, is currently grappling with unprecedented challenges as it navigates a prolonged downturn. How do a freight broker respond?

This period, marked by fluctuating demand, rising operational costs, and evolving regulatory landscapes, has tested the resilience and adaptability of brokerage firms across the board. As economic pressures mount and competition intensifies, freight brokerages find themselves at a crossroads, needing to reassess their strategies to maintain profitability and relevance.

The long trough has illuminated vulnerabilities within the sector, compelling companies to enhance their technological capabilities, refine their service offerings, and foster stronger relationships with carriers and shippers alike.

In this article, we will explore the multifaceted challenges faced by freight brokerages during this tumultuous period, examining the underlying factors contributing to the downturn and the strategies that industry players are employing to thrive.

Through a comprehensive analysis, we aim to provide insights into the current landscape, highlighting the importance of innovation, operational efficiency, and market responsiveness as brokerages strive to emerge from this challenging phase stronger and more resilient than before.

Freight brokerage still in post-pandemic correction

The freight downturn that led to the bankruptcy of Surge and the closure of Convoy is not yet fully resolved, even if signs suggest we may have reached the lowest point. Tender rejection rates remain around 4%, indicating that capacity is still relatively abundant and asset-based carriers are not in a position to decline contracted freight.

J.B. Hunt’s first-quarter earnings report, released after market hours on Tuesday, highlighted the challenges faced by major transportation firms and their brokerage operations. The company’s Integrated Capacity Solutions (ICS) division reported a 26% year-over-year decline in gross revenues, dropping to $285 million due to a 22% reduction in loads and a 5% decrease in revenue per load. Notably, ICS is now smaller than it was five years ago; in Q1 2019, it achieved gross revenues of $301 million.

In response to ongoing challenges, Hunt has focused on enhancing its online marketplace, J.B. Hunt Carrier 360, which facilitates the majority of ICS transactions. Efforts have been made to weed out untrustworthy carriers and to manage more loads manually, reducing the risk of fraud. Despite these measures, gross margins widened to 14.3%, compared to 13.4% in the first quarter of 2023. However, the ICS unit incurred a loss of $17.5 million, with $11 million attributed to integration costs stemming from Hunt’s acquisition of BNSF Logistics, a freight brokerage contributing approximately $70 million to ICS’s gross revenues.

The Investors' Reaction

Investors reacted negatively to the earnings announcement, with Hunt’s share price dropping over 8% since the release of the quarterly results.

In a client note dated April 17, Stifel equity analyst Bruce Chan expressed disappointment regarding the lack of detailed insight into the integration of BNSF, stating, “The acquisition remains somewhat opaque, and we would appreciate greater transparency, especially considering it currently constitutes a quarter of the segment’s revenues. The company continues to face costs associated with acquisition and integration, and it appears that the deal may not be as margin-enhancing as initially anticipated.”

Chan also pointed out ongoing pressures within Hunt’s Dedicated business, which benefits from long-term contracts and more stable pricing compared to typical freight contracts. Customer retention dipped to 91% in the first quarter, indicating potential margin pressures on new business.

“Management is optimistic about replacing lost accounts and maintaining stability in the Dedicated segment throughout 2024. However, given the competitive landscape and the risk of further bankruptcies, we are adopting a more cautious outlook,” Chan commented.

Assessment by Freight Brokerages Experts

A known freight news consulted logistics industry expert Kevin Hill from Brush Pass Research, who offered insights into the current state of the freight brokerage market. Hill reported that brokers are experiencing significant challenges, stating, “It’s a tough market. Acquiring new shippers, increasing load volumes, and pricing competitively are all proving difficult.”

Despite the presence of approximately 27,000 active brokers with motor carrier numbers in the U.S., a staggering 88% of the industry's gross revenue is concentrated among the top 1,000 brokers. The largest firms among these—approximately the top 50 brokerages that compete with major asset-based truckload carriers—have borne the brunt of the freight recession.

Effects on Small to Mid-sized Brokerages in the Freight Industry

While small to mid-sized brokerages managed to grow gross revenues in 2023 despite declining revenues per load, the largest brokerages, including J.B. Hunt’s ICS, reported significant revenue drops. Hill noted, “The top 20 brokerages experienced a 13% year-over-year decline in gross revenues in 2023,” attributing this trend to a natural correction following the unprecedented growth seen during the pandemic. According to Armstrong & Associates, a firm specializing in logistics mergers and acquisitions, the freight brokerage sector in the U.S. nearly doubled in size from 2019 to 2022, growing from $86.5 billion to $159 billion in gross revenue.

“The pandemic led to a dramatic increase in freight managed by third-party logistics providers,” Hill explained. “What we are witnessing now is the market correction reflected in the 2023 figures.”

The timeline for a recovery in the truckload market remains uncertain, as it is challenging to assess how quickly excess capacity is being absorbed. Although volumes have increased year over year, there has yet to be a distinct external catalyst prompting a market upswing, as seen in previous cycles. Knight-Swift has adopted a pessimistic outlook for the market, having preemptively announced disappointing results prior to its first-quarter earnings call and subsequently reducing earnings guidance for the first half of the year by 56%.

In Conclusion

The current challenges faced by freight brokerages during this prolonged economic trough highlight the necessity for adaptability and strategic foresight in an increasingly competitive landscape. As market fluctuations and operational hurdles persist, brokerages must leverage technology, enhance their customer relationships, and optimize their supply chain processes to navigate these turbulent times effectively.

By embracing innovation and focusing on sustainable business practices, freight brokerages can not only survive the downturn but also position themselves for future growth as the industry rebounds. The road ahead may be fraught with obstacles, but with resilience and a proactive approach, these firms can emerge stronger and more capable than ever.

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