Moore on Pricing: Air cargo going up or coming down?
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The air cargo experts at Boeing provide a bi-annual report on the Air Cargo industry entitled World Air Cargo Forecast, and I recommend it to shippers preparing for discussions with their carriers and forwarders. Logistics Management also provides monthly trend data that is worth checking regularly.
Both sources suggest air freight pricing will continue to track at or below inflation despite high fuel costs and continued upward pressure on equipment, labor, and operational costs. This sounds like good news for shippers approaching the market, but it will take some detailed market analysis and planning to get the most productivity out of your air cargo dollars. Armed with knowledge, shippers can have a meaningful dialog with providers about cost and service. And in these candid discussions shippers may learn of a provider’s expectations for the future—and they may surprise you.
The first trend Boeing looked at in its most recent report was the long-term decline of margins in the air cargo business. According to their findings, freight yield has declined 4.2 percent per year when averaged over the past two decades. The last 10 years saw a slight yield increase of 0.9 percent per year, compared to the 9.0 percent average annual decline recorded in the preceding decade. The carriers have flattened the trend by controlling labor, increasing productivity, and combining fuel hedging with fuel efficiency. But slowing margin reductions is not the same as margin improvement.
Service providers are making strong business decisions in an effort to improve their business conditions. Boeing points to improvements in margin recently, but notes that there’s more capacity coming on in new, larger, more fuel-efficient aircraft. Boeing estimates that the airfreight fleet will increase 80 percent over the next 20 years, while freight traffic is estimated to double in this time—but that growth is not uniform across the business.
The second trend that will affect the business according to Boeing is the growth of regional markets. Not surprisingly Asia continues to grow relatively fast, perhaps 6 percent to 8 percent. Latin America is expected to grow at modest rates and North America and Europe will be flat, according to Boeing’s report. Shippers should look at their freight lanes and the providers—carriers and forwarders—in those lanes. The carriers will continue to be under pressure, as will the forwarders that bring them freight.
With this information, shippers need to pay attention to the business health of their providers. For shippers who use forwarders with multiple carrier contracts, it’s important to understand their mix and how trends will impact their contractors. Make sure your discussions also cover trends in the ground portion of their business—as noted in previous columns, changes are coming to that aspect of the business as well.
Your discussions need to be candid and two-way, and it’s important to understand how trends are impacting on their business. You will need to understand their plans over the next few years including how your freight fits into their service lane strategy. What does that mean for pricing in your business lanes? Also be open to sharing your future market trends. Can your provider support your plans for your business?
Air Cargo is typically just one piece of our supply chain operations. And as we re-evaluate our businesses in light of insourcing and outsourcing and the ways we will serve our customers in the future, we need to give special attention to how changes to the provider’s business can make an impact on our ability to compete in a global market.
About the AuthorPeter Moore Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]
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