There’s cholesterol in our transportation arteries

Sometimes you find something interesting in a story about something else entirely. In this case, the story was about Forward Air, an air forwarder, truckload and intermodal carrier that ranks 27 on Transport Topics’ list of Top 100 For-Hire Carriers.

Seems Forward Air is merging with Omni Logistics, the 38th largest third-party logistics provider on TT’s Top 100 Logistics list. Some of Forward Air’s major customers, mostly 3PLs themselves, are upset because Forward Air, a carrier they rely on, could now be a competitor.

But that’s not what caught my eye in a FreightWaves story about the deal. No, it was this reference to Forward Air’s performance: “Forward also expects to see continued success selling directly to small and midsize shippers.”

Forward Air traditionally served that sector through 3PLs, you see.

The story continued with this: “Cutting out the middleman can double margins to roughly 30%.”

If Forward Air has convinced those smaller shippers to call them instead of a broker, there must be something in it for the shippers, as well. I have to guess that something is lower rates. If so, and if Forward Air still doubled its profit, then what were those broker rates in the first place?

It brings to mind the Owner-Operator Independent Drivers Association’s request that the Federal Motor Carrier Safety Administration amend its rule requiring brokers to make details of a shipment transaction – including the broker’s margin – available to the parties involved. Of course, that’s something brokers duck by any means necessary. Regulation or no regulation, they simply don’t do it.

OOIDA has petitioned for a different approach that would require brokers to proactively provide shipment details to all parties electronically – by email, for example.

OOIDA’s proposal would also bar brokers from making carriers waive their right to see records.

Naturally, OOIDA’s concern is for truckers, but with Forward Air’s example in mind, shippers – especially small and midsize companies – should strongly support OOIDA’s petition too. They should be included in the proposed proactive notice by brokers.

Of course, the broker community is lobbying hard to eliminate any obligation to show margins. It’s all about the free market and freedom itself, brokers say. If the shoe store doesn’t have to reveal what they paid for the boots you just bought, why should brokers have to reveal what they charge shippers?

Oh, were it only that simple. Maybe it would be if the good of the overall economy weren’t involved. But it is.

We’re talking about the financial health of a super critical transportation industry. 

Freight brokerage is necessary, no question, and good brokers provide valuable services. But the layer of brokerage between shippers and carriers weighs down on rates in general, and when capacity is tight, brokers push the other way, as well, extracting more from shippers. The truth is that the current layer of brokerage is way too thick and growing.

Let me pose an analogy. If you think of highways as similar to our bodies’ circulation systems and truckers as the blood that carries oxygen and nutrients to the body, then you should think of brokerage as cholesterol.

Yes, there is good cholesterol and bad cholesterol, but there’s a lot more of the bad stuff in a typical diet – just as there are too many freight brokers, and way too many lousy ones, in our transportation system.

Back when the Interstate Commerce Commission controlled brokers as well as carriers, getting a broker’s license was difficult to say the least. Besides having to prove to the ICC it was “fit, willing and able” to provide brokerage services, a company might have to spend more than $100,000 to obtain a license – much of it on legal fees. That would be about $342,000 in 2023 dollars. There were an estimated 200 to 300 licensed brokers in the U.S. then, many involved in exempt commodities like fresh produce. Combined, they probably billed less than $1 million a year.

But guess what? The freight got where it was supposed to go, and America prospered.

To become a broker today, you have to show knowledge of the industry – not all that hard – post a $75,000 surety bond that you pay for like an insurance policy and cough up a fee of $300. That’s it. Then you can buy and sell truck transportation in your kitchen, your car or a booth at Joe’s Tavern.

Today, the number of freight brokers is estimated to be 17,000 at the low end. John Mahle of Triple T Transportation said in a recent podcast that he believes the number is actually more than 20,000. Prowling the internet, I found estimates up to five times that.

Finding out how much business they all do was just as difficult. I found separate estimates by freight sector – truckload, LTL, refrigerated, etc. – adding up to almost $100 billion. But let’s take a more conservative number from Ibis Research of about $61 billion per year across all sectors. A few sources put typical broker margins at 15% to 35%. If true, that would mean U.S. brokers bring in $9 billion to $21 billion a year after paying their carriers and before any billing for ancillary services.

I know, I know. These are not verified figures, and in any case, a broker’s margin has to cover salaries and business expenses. Even so, we’re still talking about billions in profit and a sprawling broker landscape that seems, at least to my wondering eyes, wildly excessive.

All those brokers soak up transportation revenue, and while some of it pays for worthwhile services, much would be better invested in the people and equipment doing the actual work of moving America’s products and commodities.

Right now, FMCSA is considering the issue of broker transparency. With a little gumption, the agency could enable transparency across the board.

Good brokers would do just fine, as they should, while both carriers and shippers would be empowered to make better business decisions, maybe like those shippers who now deal with Forward Air directly.

The worst thing FMCSA could do is cave to the loudly braying brokers and take transparency off the table completely. Nothing will change, and plaque will continue to grow on our supply chain arteries. LL