Arrangement of Transportation of Freight and Cargo

SIC 4731

Companies in this industry

Industry report:

This category includes establishments primarily engaged in furnishing shipping information and acting as agents in arranging transportation for freight and cargo. Also included in this industry are freight forwarders, which undertake the transportation of goods from the shippers to receivers for a charge covering the entire transportation, and, in turn, make use of the services of other transportation establishments as instrumentalities in effecting delivery.

Industry Snapshot

Companies engaged in the freight transportation arrangement business offer numerous services, ranging from import advice to shrink-wrapping freight crates. These firms are transportation middlemen that support the movement of cargo through the services they offer. Although relationships between forwarders and carriers may develop, the companies involved in arranging freight transportation are not affiliated with any particular carrier.

Automation, consolidation of information, and a strong customer orientation were the hallmarks of the industry in the 2000s. Freight transportation arrangements were rendered by two major types of establishments: freight forwarders and customs brokers. Although many large companies offered both types of services, the businesses were distinct.

The overall freight transportation arrangement industry was worth $69 billion in 2010, according to Dun & Bradstreet's Industry Reports. About 25,940 establishments--almost 60 percent of which had only one to four workers--employed a total of 253,914 people in the industry. States with the highest annual earnings in the industry included Minnesota ($11.9 billion), New York ($9.6 billion), California ($6.7 billion), Washington ($5.5 billion), and Texas ($4.6 billion). California and Texas had the most employees in the industry, each accounting for 14 percent of the nation's total, followed by Florida (8 percent), New York (7 percent), and Illinois (6 percent).

Organization and Structure

Freight Forwarders.
Freight forwarders operate under many names and licensing requirements. All freight forwarders, however, are transportation intermediaries that arrange the movement of cargo according to customers' needs. Supplementary services such as shipment tracing, warehousing and storage, and the preparation of letters of credit also are offered by forwarders. Freight forwarders often are referred to as "transportation architects."

Through working with numerous air, road, rail, and water transportation companies, these establishments endeavor to find the least expensive and most efficient freight routings possible. Their services are popular with shippers because freight forwarders are not affiliated with one carrier and therefore are not biased or restricted. Also, forwarders are known for their expertise in the ever-changing regulations that affect cargo movements, such as hazardous goods handling, documentation, and insurance. The carriers, in turn, welcome the business from forwarders. In fact, smaller carriers, who cannot afford to maintain sales staffs, depend on the business tendered by forwarders.

All forwarders that are involved in ocean, truck, or rail forwarding must be licensed by either the Federal Maritime Commission (FMC) or the Interstate Commerce Commission (ICC). However, the majority of freight forwarders are licensed by the FMC as ocean freight forwarders. Some ocean freight forwarders, known as nonvessel operating common carriers, operate as third-party carriers and issue their own bill of lading. Since deregulation of the U.S. air transportation industry, air freight forwarders have not been subject to formal licensing requirements; however, most air cargo agents that are involved in international forwarding are endorsed by the International Air Transportation Authority (IATA).

Customs Brokers.
Customs brokers provide services to importers and exporters and facilitate the clearance of shipments through customs. One particularly important service offered by a licensed customs broker is advice on regulations and laws pertaining to customs clearance and the power to argue on behalf of a client during the clearing process. In this regard, a customs broker is similar to a lawyer. Brokers may also provide advice and information on quotas for controlled commodities, trademark restrictions, and dumping duties, among other topics.

The customs brokerage industry is highly regulated by the U.S. Department of the Treasury. According to Section 641 of the Tariff Act, customs brokers must be individually and personally licensed by the Treasury, and brokerage firms must obtain a separate license. In order to be licensed, an individual must pass a comprehensive test, which often is passed by fewer than 40 percent of the test-takers.

Financial Structure.
The rate structure for both freight forwarders and customs brokers is extremely competitive. These establishments operate on very thin profit margins. Freight forwarders generate revenue through transportation charges, fees for additional services such as warehousing or shrink-wrapping freight, and commissions from carriers. Customs brokers' revenue sources include document preparation fees, charges for customs clearance, and charges for post clearance services.

Background and Development

Pack horses were the primary means of transporting freight over land through the seventeenth century. In the mid- to late eighteenth century, the first freight transportation establishments sprang into existence as services via pack horses. Ironically, supplying pack horse freight transportation frequently cost more than current airline freight rates. Even though traveling over land entailed a much shorter distance east to west than using water routes, the latter was much more practical and cost effective, so the majority of freight was moved over the Mississippi River, the Gulf of Mexico, and the Atlantic Ocean.

In the first half of the twentieth century, the United States mainly relied on truckers, oil pipelines, and inland waterway carriers for freight and cargo transport. In the 40-year period from 1915 to 1955, railroad freight traffic decreased by 29 percent (as measured in ton-miles). Airlines accounted for less than 1 percent of freight transportation. Yet, the total freight traffic increased approximately 350 percent as a result of the boom in commerce and manufacturing.

Transportation middlemen, performing services similar to modern freight forwarders, operated in Europe in the 1600s. In the United States, these intermediaries arranged transportation by means of stagecoach, riverboat, horse, and rail in the eighteenth and nineteenth centuries. However, the birth of the modern freight forwarding industry in the United States did not occur until after World War II, when the IATA allowed air freight forwarders and air cargo agents to solicit freight independently of the air carriers.

The deregulation of the trucking industry in 1980 contributed to a tremendous proliferation of forwarders. Deregulation resulted in a staggering increase in the number of registered truckers, causing confusion in the shipping community. Freight forwarders were needed to help shippers choose from the many newly established trucking companies. As a result, the number of forwarders swelled from 70 in 1980 to 6,000 in 1991. Many of these forwarders were small and barely solvent.

The growth of intermodal traffic during the 1980s and early 1990s also contributed to a rise in the number of forwarders. Intermodal transportation, or the movement of freight via two or more modes of transportation, grew faster than the economy in 1992. Freight forwarders were particularly well received in the intermodal industry because of their willingness to take responsibility for the cargo as it moved over different modes of transportation. In this way, one bill of lading was issued for the shipment. In 1992, between 400 and 500 forwarders handled approximately 35 percent of all rail intermodal traffic.

Although customs brokers operated as far back as Phoenician times, they have only operated since the early 1900s in the United States. The existence of customs brokers in the modern world can be attributed to myriad tariff laws that the United States and other countries enforce. In 1989, every shipment imported into the United States was subject to 500 pages of customs regulations and 14,000 tariff items. Moreover, importers must comply with regulations put forth by approximately 40 U.S. regulatory agencies, such as the Food and Drug Administration and the Federal Communications Commission.

The demand for freight forwarders has remained stable. However, forwarders and customs brokers have found it difficult to maintain their profit margins, which are estimated to range between 5 and 10 percent. Lower freight rates reduced the commissions forwarders earned from the carriers. Additionally, the costs of automation and improved customer service eroded profit margins. Overall, forwarders and customs brokers significantly improved their service level without a corresponding increase in their rates.

The safeness of cargo and the adequacy of inspections was an issue in the late twentieth century. Freight is subject to inspection only when the shipper is unknown to the freight forwarder; about 80 percent of shippers are familiar to freight forwarders. However, most cargo shipments are not X-rayed or inspected as a matter of routine, and hazardous materials inspectors lack proper training.

In 1989 the Presidential Commission on Aviation Security issued the recommendation that airlines, rather than freight forwarders, be responsible for screening cargo. Until that time, the Federal Aviation Administration (FAA) stipulated that freight forwarders comply with a security program. However, that stipulation went largely unenforced because the Civil Aeronautics Board became defunct in 1984, and it was their responsibility to monitor freight forwarding firms. In 1992, the FAA suggested ways to make freight forwarders accountable for security. Then, in 1994, the FAA began requiring that airlines only conduct business with air forwarders who submit safety plans that adhere to a set of established federal guidelines.

The globalization of the market created challenges for forwarders and brokers. Logistics appeared to be the smallest hurdle, while increased competition from large integrated carriers--who took full responsibility for cargo and promised shippers door-to-door service over great distances--was more difficult for forwarders and brokers to overcome. To mitigate this threat, forwarders and brokers continued to emphasize their ability to provide the customized service not offered by mega-carriers. Freight transportation arrangers, however, established more overseas networks in response to this globalization.

International shipments--13 million per day in 1999--grew at 18 percent annually in the late twentieth century. However, to avoid potential delays in the end-to-end transport of goods, companies were turning more and more to overnight air shipments. In 1999, 80 percent of overnight shipments took place in the United States, but the market for overseas shipments was growing twice as fast. By shipping overnight through companies such as DHL and FedEx, manufacturers could eliminate or reduce their contracts with intermediaries such as freight forwarders and have the shipments go straight through to their destinations.

In early 1999, the National Customs Brokers & Forwarders Association of America (NCBFAA) petitioned the FMC to declare forwarders as shippers, thereby making them eligible to joins shippers' associations. Memberships in such associations would help to streamline the end-to-end transportation package, as well as to enhance their bargaining powers in securing competitive rates. In 2004, NCBFAA had more than 600 members.

Unlike airline passenger industries, airline freight transportation did not decline due to the September 11, 2001 terrorist attacks, but in 2003 air cargo still accounted for only 4 percent of international traffic and 2 percent of domestic traffic. Yet, The Journal of Commerce reported that forwarders were responsible for the origination of 90 percent of international freight and 60 percent of domestic freight. With half of all international air cargo shipped on passenger planes, the industry was often at the mercy of global political conditions. In 2003, for example, passenger air travel--and cargo shipments by extension--to and from Asia were compromised by the outbreak of Severe Acute Respiratory Syndrome (SARS).

Nonetheless, freight forwarders with global skills and connections continued to be in the greatest demand. Worldwide e-commerce sales were expected to grow exponentially throughout the 2000s, according to Forrester Research Inc., and international transportation logistics experts who were knowledgeable in import duties, shipping charges, taxes, and returns processing were expected to remain in high demand. The size of a company was not considered a factor in resiliency, because smaller companies were often able to meet custom, individual needs more effectively than larger companies.

Intermodal shipments by rail, on the other hand, had increased dramatically by 2003, surpassing coal to become the number one source of revenue for the rail transportation sector. Growth was boosted by financial incentives offered to investors in the infrastructure and the elimination of the fuel tax on railroads.

Current Conditions

In the early twenty-first century, customs brokers and freight forwarders continued to deal with numerous rules and regulations--as well as ongoing revisions to these--that had to be met in order for them to conduct business. Compliance was a major issue in the industry, and, according to Christopher Gillis of the National Customs Brokers & Forwarders Association of America (NCBFAA), "Exporters have become more selective in choosing their forwarders, placing more emphasis on export compliance capabilities of these service providers." Gillis noted the example of shipper DHL, which was fined $9.5 million for not complying with record-keeping regulations when exporting goods to Syria, Iran, and Sudan in 2009. The same year, NCBFAA applauded a move by U.S. Customs and Border Protection when it selected four custom brokerage firms to participate in a Broker Self-Assessment (BSA) pilot program. According to American Shipper, the program was designed "to test whether a trusted compliance program should be instituted on a voluntary basis for customs brokers." One of the benefits of the BSA program, if adopted, would be that participating brokers would be subject to fewer time-consuming audits.

The freight transportation arrangement industry in the United States as well as the rest of the world suffered from the economic recession of the late 2000s, with U.S. airfreight volume dropping 36 percent in 2009 alone. Research firm Transport Intelligence noted that industry leader Expeditors International partly compensated for declines in volume with "higher margins as well as increased market share" whereas other forwarders "suffered savage falls in both revenue and profits," as reported in Air Cargo World. Transport Intelligence also predicted recovery in the industry would be slow, with the global market growing just less than 2 percent annually through 2012.

Industry Leaders

Industry leaders in 2010 included Landstar System Inc. of Jacksonville, Florida, which had $2.0 billion in 2009 revenues on the strength of just 1,374 employees, and CSX Intermodal Inc., also of Jacksonville, which had $9.0 billion in revenues and 30,088 employees. Other leaders included C.H. Robinson Worldwide Inc., of Eden Prairie, Minnesota, with $7.5 billion in annual sales and 7,347 employees, and Seattle-based Expeditors International of Washington Inc., with $4.0 billion in sales and 12,010 employees.

America and the World

The arrangement of freight transportation continued to develop into a global industry. Shippers found the international market to be particularly demanding because of high costs and complicated tariff schedules, rendering the services of freight forwarders and customs brokers especially valuable. Although international forwarding problems did occur, most international forwarding was negotiated without incident. Shippers in the Far East were unusually receptive to the use of transportation intermediaries.

The freight forwarding community itself attained an international perspective. An excellent example of its global character is United Shipping Associates, a band of 30 small companies from around the world that joined together in an effort to compete with the larger forwarding companies. Although the group was headquartered in Boulder, Colorado, approximately one-third of its members were non-U.S. companies. Through the association, the members developed an international network comparable to that of a large international firm. By the late 2000s the organization had 110 partner companies.

Smaller carriers were forced to develop innovative marketing schemes to compete with large firms, while the large firms focused on improving global networks and customer service. Although globalization, together with automation, appeared to favor the larger firms, smaller firms continued to court shippers with their strong service orientation.

Research and Technology

The U.S. Customs Department's automation initiative forced forwarders and brokers to embrace technology. All customs brokers licensed after September 1988 were required to be proficient in the Automated Broker Interface (ABI), a component of the Automated Commercial System (ACS), the department's system for reducing paperwork. Although this system increased the efficiency and speed of customs transactions, some firms objected to its use on the grounds that it was costly and difficult to implement. Smaller firms claimed the costs were prohibitive. Nevertheless, the Customs Department continued to promote ABI and other automated systems designed to revolutionize the customs clearing process.

In addition to the Customs Department's officially sanctioned automation directive, customers themselves demanded up-to-the-minute information that could only be provided by computer. As more businesses adopted time-based inventory management systems, the demand for flexible and responsive distribution services, as well as accurate and timely information on shipments, increased. Forwarders were forced to install and update computers to meet these demands.

In an effort to provide this information, many companies replaced their own computer programs with Electronic Data Interchange (EDI), a mainframe system that provided customers with online access to information on shipments. EDI allowed the freight transportation industry to meet many of the demands of shippers. One of EDI's more popular features is electronic document transmission, including electronic invoicing and remittance. Moreover, the system is well equipped to meet the demands of just-in-time delivery by minimizing errors and reducing order cycles.

In addition, customs brokers benefited from the new computer system known as the Automated Commercial Environment (ACE). ACE was designed to replace the ACS by consolidating all data for the trade. With the old ACS system, if customs brokers needed import figures, the figures had to be requested from other agencies. In addition, preliminary cargo information was incorporated as part of the ACE system. The new ACE system was a long-awaited technological advancement for the industry. According to Country ViewsWire, ACE was the "most profound change in business practice that the industry has been anticipating since the Customs Modernization Act passed in 1993."

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