Air freight – today’s rate won’t be tomorrow’s

FreightWaves is providing a forum – Market Voices – for a number of market experts.

Scott Case grew up in and around the air cargo business – literally. His father opened a customs brokerage and freight forwarding firm in 1977 and as a boy Scott would accompany him to Chicago’s O’Hare International Airport late on Saturday nights to clear automobiles arriving from Japan on Flying Tigers’ Flight 0078. He would drink hot chocolate, watch weights and balances calculated on desk calendar-sized tablets and stand inside empty 747s that seemed as big as Soldier Field.

Fast forward to today. Case has been a practicing customs broker and freight forwarder for more than 20 years, while concurrently spending seven years on the national and global stage as the National Customs Brokers & Forwarders Association of America, Inc.’s air freight committee chair. He founded Position: Global, a marketing and branding company focused on the unique needs, vocabulary and issues facing logistics companies. Case remains a licensed customs broker and serves as the elected President of the International Air Cargo Association of Chicago.

Dynamic pricing is coming to an airline near you, but the only question is whether or not shippers will embrace the fluctuating levels that appear on their invoices. In the 1990s and 2000s when I was calling in bookings and typing air waybills, I had a three-ring binder filled with airline rate sheets whose validity ranged in duration from a month to a year. Of course, there was always the chance to call my friend on the desk and ask for a spot rate, which more often than not was offered.

Shippers are somewhat accustomed to stability in rates. It’s how they budget and how they calculate landed costs. Sure, there is an expectation that surcharges for fuel, tied to indices and the price of oil, will move as the commodity moves. But movement in the basic rate? This concept was virtually unheard of until Freightos announced that Air France-KLM-Martinair are piloting dynamic pricing with their platform.

Shippers’ willingness to expect a different rate with each shipment requires crossing the boundary between what is expected in the business (stability) and what is expected as a private consumer. Anyone who owns an automobile never expects to pay the same price for gasoline two days in a row. The same can be said for purchasing an airline ticket or booking a hotel room.

Increasingly, pricing decisions are based on complex algorithms that incorporate frequency of searches, booking windows (how far in advance), high demand times or events (spring break or South by Southwest), competitor pricing and previous purchase data to arrive at an offered rate.

Zvi Schreiber, CEO of Freightos, announced that Air France-KLM-Martinair will begin offering dynamic rates to freight forwarders in real time using WebCargo’s air freight booking platform. When I asked Zvi whether or not this is something forwarders were ready to accept, his observation was that most cargo was already moving on a spot basis.

“You do have certain categories of goods like high-priced electronics [iPhones], jewelry, perishables and ‘fast fashion’ that go by air regularly and these tend to be on fixed price tenders and will not immediately be affected by dynamic pricing, although they will in the long-term,” Schreiber says.

“But most air is unplanned and spot (covering unexpected inventory shortages, replacing malfunctioning machinery, etc.). I think shippers understand that if they are not making a long-term commitment they will face a dynamic price.”

One North American airline that doesn’t use dynamic pricing today but is upgrading its  technology and processes with a plan to deploy dynamic pricing in the next two years echoes Zvi’s thoughts. The carrier indicates that moving to this new environment requires time, effort, expense and changing the manual process and mindset to trust the machines to offer the correct rate at the time of booking.

“Most capacity is already offered on a first-come, first-served basis, but can’t always meet the needs of last-minute shippers. Managing the rule sets for regular bookings and allocations while respecting the amount of cargo booked ad hoc and at the last minute will take work. The goal is to ensure that pricing and demand are better matched than they are today.”

The airline representative, who requested anonymity to discuss future plans and product offerings, indicated that today the airline has close to 100 systems working together running their cargo business and they are all linked together like a spider’s web. Add as well the inherent complexity of making a positive change or feature enhancement to one without degrading or breaking another – all in systems written in older programming languages on increasingly dated hardware that have increasing costs to maintain.

Brandon Fried, Executive Director of The Airforwarders Association, reaches back to the days post-airline deregulation and the Civil Aeronautics Board with a reminder of just how long airforwarders have operated in a fluid pricing environment.

“Dynamic pricing is no stranger to the freight forwarding industry as flexible costing has been around since deregulation in providing variable cost options to meet the changing specific needs of shippers,” offered Fried.

Jason Berry, Managing Director of Alaska Air Cargo, is bullish on the future of dynamic pricing. Alaska Air Cargo was the fastest growing business unit for the airline in the first quarter of 2019 because of better utilization of its three 737-700BDSFs and the added capacity of its Virgin America acquisition, which includes 70 aircraft and 200 million pounds of additional belly capacity.

“I believe real-time dynamic pricing is the future of air cargo. While it exists to some extent today, I don’t believe as much science or rigor has been built into this segment of the business compared to our peers in the passenger industry.”

Berry continues, “The seasonal changes and day of week air freight demand variability lends well to a model that reacts in real-time to local demands. It’s certainly something that’s on our road map.”

And for airlines, dynamic pricing gives them much better flexibility to maximize revenue when space is tight and to maximize yield when there is extra capacity.