Airfreight Industry – Quo Vadis? - Part 2 - Rate Structure

In this part of his series, Mark takes a critical look at the rate structure. A seemingly simple issue but in daily cargo practice a rather obscure jungle. It’s about time for tidying-up the confusing rate architecture, Mark advocates.

Mustard-colored Boeing 707 freighter of former German Cargo
Mustard-colored Boeing 707 freighter of former German Cargo

Why so complicated?
A newcomer to the airfreight industry must learn a lot about rates, things like: Minimum rates, breakpoints, add-ons, TACT rates, Class Rates, ULD-rates, Special Commodity Rates, rate constructions, volume calculation, IATA Traffic Conference Areas, agents’ commission. Not to forget the surcharges, but these are another subject. Why so complicated? Let’s look where it all came from.

TACT Rates
For the TACT rates, we need to go back in history. Originally, at least until the 70’s, airfreight rates were not determined by free markets but were government regulated. The freight forwarder received a fixed commission based on these rates. IATA organised tariff conferences in which airline representatives determined the applicable rates, and these rates were legally binding for all airlines operating within these areas. It was in effect a state sanctioned monopoly. And as such, it was a criminal offence to charge less than the TACT rates! Airlines did however, even in those days, undercut the official TACT rates, but in the form of kickbacks in cash in sealed envelopes, top secret and confidential -  and illegal! These IATA tariff conference areas still exist in theory and everyone working in the industry is still expected to know what is meant by TC1, TC2 and TC3 (IATA Traffic Conference [Area] 1, 2 or 3).

Split-Charter
Charter flights were always an exception and prices for full charters were negotiated case by case based on market forces of supply and demand. In the 70’s and 80’s as freighters became more common, some airlines started to split the capacity of a ‘charter’ flight between various shippers, offering charter contracts to each party for just a part of the freighter capacity. This was called “Split-Charter”. Who remembers the mustard-coloured B707F freighters (“Senf-Bomber”) of German Cargo, one of the pioneers of split-charter rates? These split-charter rates were still government regulated and initially only applicable to large tonnages, but the prescribed minimum weights for split-charter were progressively decreased, and soon “split-charter” rates were the standard net rates, the rates that were really charged, making the TACT rates theoretically obsolete. At the same time, the “official” agents’ commission disappeared, since the new rates were applied on a net, non-commissionable, basis.

Still Alive
The TACT rates may meanwhile be obsolete, but they still live on, like zombies. The TACT rates are still shown on the AWBs, but, in real life, are seldom applied. Class Rates, at least the Class-Rate surcharges for human remains, valuable cargo and live animals still live on (while the Class-Rate reductions for books and newspapers seem to have become obsolete).
Do we still need them, and do they still make sense? Why are there no class rates for perishables or dangerous goods, which also require special treatment? Would it not be more logical to apply standard rates for all commodities, plus a separate extra charge for additional special handling based on actual costs? The current situation can have strange effects: Banknotes are classified as “valuable cargo” and subject to the applicable class rates. But if they are not signed, then they are not legal tender, but just “printed matter”, and move at normal rates, at just a fraction of what the applicable Class Rate would have been. But still. the security arrangements, such as armed police escort, are of course the same as for “real” banknotes.

Why breakpoints?
In the early days of airfreight, shipments were small and rates were high. In an attempt to generate more cargo, a rate incentive for larger shipments was introduced. In the USA, the first weight breakpoint was set at 100 lbs, and this, or rather the equivalent 45 kgs breakpoint, was adopted in the rest of the world. More breakpoints followed, but based on round kilogrammes (100 kgs, 500 kgs, etc) and not on the equivalent pounds.
Since those early days, the airfreight industry has grown rapidly. Shipments of one ton, ten tons, or more, are nothing special. Why should large shipments still be subsidised?  Two shipments of 500 kgs have the same fuel costs and handling costs as one shipment of 1,000 kgs.  Of course, the cost of processing 2 AWBs is more than for 1 AWB, but if the +1,000 kgs rate is just EUR 0.10 lower than the +500 kgs breakpoint, then the airline is giving a reduction of EUR 100 for the 1,000 kgs, which stands in no relationship to the possible extra processing costs for one additional AWB. The only explanation seems to be that “we always did it this way.”

Consolidation
 As it is, this traditional breakpoint policy has generated a whole area of business: consolidation shipments. The freight forwarder collects various smaller shipments to a certain destination, delivers these as one large shipment to the airline and pays a lower rate. The money thus saved is split between the shipper and the consolidator: The shipper gets a lower rate than he would have paid to the airline, and the consolidator is able to cover his additional handling costs, and perhaps have some profit left over at the end. And the airline is the loser? Of course, if this were changed, the freight forwarder as consolidator, would lose an important segment of his business. But this is what disruption is all about!

Skeletons in the Cupboard
In the last decades, there has been some progress as rates have become more realistic and simple. But we still have some skeletons in the cupboard dating back to the old TACT rates. There is still some tidying-up to do in order to streamline processes and increase efficiency in our airfreight industry.

Mark Grinsted

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Comments: 1
  • #1

    Lucien Galano (Tuesday, 27 June 2017 12:40)

    Dear Mark,
    well analysed and good that you bring it to the point that some rate structures as applied by Cargo Carriers are absolete ! Tact is of no use anymore as such useless. Still the major problem on rates and market rates comes from the fact that cargo carriers and many other airlines as well, dont know their REAL costs. Navigation at sight is still up to date ....all depending on the weather turbulences the market may be confronted with.
    all the best
    Lucien