Managing air cargo costs
June 01, 2011
The global economic downturn that hit markets hard in 2009 has had an enormous impact on the international freight business. But perhaps nowhere has it been felt as much as in the air cargo segment. Here, as most logistics managers are well aware, losses were huge.
However, the uptick in the global economy, led by South America and Asia, and a slow but steady rebound across North America and Europe in 2010 has helped the sector recover some of those losses. Lower and stable fuel costs throughout last year also enabled carriers to post solid gains against 2009.
“But the carriers and airfreight forwarders, quite honestly, took a beating as shippers had no freight to move and demanded lower rates to move what they had,” says Greg Andrews, EMIL managing director, Georgia Institute of Technology Supply Chain and Logistics Institute.
While shippers took advantage of the market dynamics in 2009 and 2010 and jumped on some of the cheapest rates they had seen in decades, carriers and forwarders learned who their good customers were.
“Most important, carriers and forwarders learned the value of capacity management,” says Andrews. Even as freight demand began to grow again, carriers managed capacity by being slow to return parked planes into service. “And now, instead of capacity chasing rates and freight, freight and rates are chasing capacity,” Andrews adds.
Brandon Fried, executive director of the Airforwarders Association (AFA), points out that while freight companies are now seeing increased volume, low margins continue to be a significant obstacle to their growth and expansion. “Consequently, rates have doubled and, in some lanes, tripled over the last year—quickly returning them to pre-recession levels,” he says.
Add to this skyrocketing fuel costs that are passed along to the shipper as fuel surcharges. “The most significant driver of rate pressure today is certainly the rising cost of fuel,” remarks Fried. “Airlines and forwarders face a continuing uphill battle in covering constantly changing fuel costs. Incorrect planning or erroneous assumptions could spell economic disaster for carriers trying to solve this issue.”
Consequently, shippers find themselves facing an influx of changeable rates and hidden surcharges, inefficient shipping routes, missed delivery-to-transit commitments, lengthy timelines, capacity constraints along with size and weight factors, and safety and security issues.
“It’s enough to keep transportation and logistics managers awake at night trying to find ways to hold off air freight increases,” says Andrews.
Rounding up rates
A recent survey conducted by Logistics Management on behalf of Management Dynamics revealed that nearly one out of four companies spends in excess of 15 percent of their overall revenues on international and domestic freight services. Most notably, the survey found, one out of four organizations spent upwards of $50 million on shipping in 2010. For 2011, all indications lean towards an increase in spending on international freight.
While the survey discovered that shippers acknowledge that they need enhanced methods for securing better rates and routes, few reported that they are now running highly developed solutions to achieve those objectives. Some 66 percent of the shippers surveyed also indicated that over the next 12 months to 18 months, rate negotiations would be the predominant action they will undertake to control their global freight costs.
Although the fluctuation of jet fuel surcharges and the supply/demand balance of air cargo capacity are elements that they can’t control, shippers can take a few steps when negotiating rates.
The first, says Dr. Paul Dittman, director of the Office of Corporate Partnership at the University of Tennessee, is to come to the table with your carriers armed specifically with your air freight needs. Shippers can do this by closely examining their company’s business supply chain model and understanding why they use air freight. He suggests implementing a forecasting tool or matrix to understand supply chain trends and when air freight demand changes might occur.
“This way companies can understand when air cargo offers the optimal use so they don’t have to suddenly react,” Ditmann says.
Another step forward, says Andrews, is to focus on your company’s market strategy: Is it to be the first on the shelf or is it seasonal? Is your product high value, build-to-order, with short lead times? “Once you answer these questions, then you need to work with your carrier or forwarder to flatline your rate impact,” he says. “This may be a two-tiered rate program, one where rates are lower out of season and higher in peak demand; but known for the duration of the year, budgeted, planned, and passed along in the price of your product.”
Also, according to Fried, air shippers need to discuss specific needs with a freight forwarder. “For example, the forwarder may be interested in shipments destined for specific geographic areas and, therefore, may offer lower prices for those consignments,” he says.
According to Brian Clancy, managing director of Logistics Capital & Strategy, LLC, an advisory firm serving management, private equity, and key stakeholders in the global transportation and logistics industries, such seasonal capacity purchasing, or forward purchasing of block space, can save up to 10 percent to 15 percent on airport-to-airport shipment costs. Moreover, agreeing to specific costs beforehand such as document preparation, freight rates, and fuel surcharges also helps avoid costly surprises in the long run.
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