In a series of articles our author Mark Grinsted, a true industry veteran, is critically assessing the state of the cargo industry. So far, he has put these five topics under his
magnifying glass: disruptions in airfreight, rate structures, surcharges, reliability and documentation.
In this piece, Mark focuses on the ritual of price adjustments. Next to come is a critical survey about developments in trucking and road feeder services.
Users are cordially invited to send their inputs and post comments or make suggestions for additional cargo themes worth evaluating to share with our worldwide readership.
“The same procedure as every year“ is the catchphrase in Germany’s favourite New Year’s Eve TV comedy sketch “Dinner for One” starring Freddie Frinton, which – the same procedure as every year -
German TV channels broadcast every year. A similar phenomenon seems to be the annual announcement of air cargo rate increases published by various airlines at this time of year. Lufthansa, for
example, has just announced a rate increase of 5% to 10% effective from 1st October, and they are of course by no means alone. Actually, these announcements tend to come twice a year;
traditionally a further round of rate increases can be expected in the springtime, in March or April. If all these rate increase announcements were really put into effect, then airfreight rates
should be at least twice as high as they were ten years ago! But they are not. So, what is going on?
Flexible price markets
At a time when, in other branches, prices are becoming increasingly flexible, it seems strange that airfreight rates should be fixed for a six-month period. Petrol stations meanwhile change their prices several times a day. Supermarkets are switching to electronic price tags so that the price of butter or potatoes can be adjusted up or down depending on the time of day and the type of customer who normally shops at certain times during the day. Internet shops are even said to vary their prices depending on what internet device is being used – iPhone users being considered able to afford higher prices. And airline fares for passengers are meanwhile very flexible.
Flexible airfreight rates
Normally one would also expect such flexible prices for a highly perishable commodity like airfreight capacity. As we all know, any excess capacity not filled becomes instantly worthless as soon as the flight departs. If at last minute there is still some unused space left over, then any price would be better than nothing at all. And, of course, in reality, airfreight rates are indeed extremely flexible. Spot rates are the essence of the business. There are promotional rates, density rates, peak and off-peak rates, rates for certain days of the week, rates for certain agents or shippers, and all these rates are subject to individual negotiation, case by case. There are not many industries in which the staff on the phone can take decisions on prices on the spot, on their own responsibility, involving such relatively large sums of money. This happens all day and every day for airlines and forwarders alike. And frequently based just on word of mouth and mutual trust. And it works. This is one of the things that make the airfreight business so fascinating for us all. Cargo rates vary not only from airline to airline, but also week by week, even hour by hour, shipment by shipment. And the variations can be huge. When capacity gets tight rates can easily increase by 100% within minutes, not just 5% or 10%, and it makes no difference whether the shipment is before or after 1st October or any other specific date. Demand and capacity drive the rates, and these fluctuate constantly. So, what does it really mean when airlines regularly announce general rate increases?
General price increases
In Germany, we see similar announcements of general price increases from state-owned, or at least, state-regulated monopolists: railways, bus services, postal services and the like. As monopolists, they can afford to have this “take it or leave it” attitude. But not in free-market competitive environments like the air cargo industry. Imagine getting a letter from your local supermarket advising a general price increase of 5% for all their products, perhaps adding as an explanation that they feel they need better margins. This would surely be a good reason to immediately start shopping elsewhere!
So, what is going on? “We have always done it that way” may be a reason, but certainly not a justification. One explanation could be that these announcements are a good way to get sales staff out on the road talking to their clients about rates. For the freight forwarder, such announcements may present a welcome opportunity for increasing their own rates to the exporters (irrespective of whether they end up paying more to the airlines or not). It is another question whether it would be in the airlines’ own interest to give the freight forwarder a helping hand in this way. But the main reason seems to be that, like with railways and postal services, this practice of bi-annual rate increases dates back to the time, decades ago, when the TACT rates were valid and binding for everyone, as a sort of state-sanctioned monopoly. As we saw in a previous article in the “Quo Vadis” series, these times are long gone, but still live on in certain rituals in our industry.
Of course, such announcements are also immediately reflected in the published rate-sheets. But, if we are honest, such rate-sheets have very little bearing on the every-day airfreight business, with the exception perhaps of very small shipments; a higher rate for a few kilos makes only an insignificant difference to the total flight revenue generated. And larger shipments seldom move at published rates. Published rates are like the official price lists of car manufacturers. What people really pay for their new car is normally far less, and, like airfreight rates, subject to supply and demand and individual negotiating skills. In the end, the only relevance of the car manufacturers’ price list is as a starting-point for price negotiations - and (in Germany at least) for the tax office when calculating the income tax for privately-used company cars.
Adjusting rate-sheets certainly causes a lot of additional work for all concerned. Published rates must be re-calculated, printed and distributed. Forwarders must enter the new rates into their own systems. Forwarders need to start comparing rates and getting counter-offers from other airlines. Airline must negotiate new pricing structures with the forwarders. And then, at the end of all this, just to see market rates fall again to their former levels within a few weeks. All this takes up time and effort which could be devoted to more useful tasks, like introducing innovative service improvements, which could produce a competitive advantage and, in themselves, lead to higher rates. Let’s look out for some new procedures next year.