Cause for contracts
Last year, a high-volume shipper with strong exports out of the United States saw an opportunity to bring stability to his air cargo business. Instead of using the volatile spot market to secure air freight rates, he signed a two-year contract with a freight forwarder for the 70 percent of his total business that transits through the United States.
With the new business model secured, the company now only looks at the spot market for emergency or heavyweight shipments. The shipper, who did not have permission from his company to discuss the matter on the record, is now looking to contract out the remaining 30 percent of his business.
Before signing on the dotted line, the shipper talked with five other companies from the pharmaceutical arena and other industries who had been contracting air cargo for some time. There’s not a lot of contracting in the air cargo sphere, they told him, but shippers that have the volume and ability to do it, should.
Another shipper of electronics, who routes a lot of air cargo on transpacific lanes, said a company with enough volume and control of a given lane could use contracts and possibly see a 15 percent to 20 percent savings over spot rates. Contracts can benefit a shipper, he said, but they aren’t to be seen as the only solution.
“For shippers with well-defined and established lane segments with predictable volumes, I believe contracts would be the way to go,” said the electronics shipper, who agreed to speak on background. “When you have price and service volatility, I believe the spot market is beneficial.”
Even when contracting air cargo transport, the spot market is still necessary either to test the rates or keep the contracted party “honest” about costs, he said. Spot rates are also needed for short-term pricing that’s best suited for a special project or to route goods on a new lane.
Large shippers can either contract directly with either carriers or forwarders. In the former, the shipper takes the place of a forwarder, pooling together a significant amount of business to achieve a desirable rate. Smaller shippers don’t have the clout to secure a contract directly with a carrier, the electronics shipper said.
From the input of these two shippers, it seems that contracting hasn’t quite tipped into a full-blown trend; but in other industries, this ocean-container approach to air cargo was established years ago.
For the perishable industry, maintaining stability is more important than any small pricing benefit that could come from playing the spot market. Neel Shah, the new chief commercial officer at Los Angeles-based forwarder Able Freight, said contracts take the guesswork out of air cargo. Volatility is definitely something Shah avoids when exporting fruit and other perishables out of the United States.
But he allowed that shippers can maximize their margins by playing the spot market. He would rather, though, pay a few extra cents per kilo directly to a carrier and know that the freight is being handled properly, Shah said, then go onto the open market and try to get the best deal possible.
“If you’re doing general consolidation and you’re willing to take a little more of a risk on the service and things like that, the spot market is certainly an interesting way to go and is certainly a way to maximize your margin,” he said.
Air cargo booking has shifted from the spot market now because supply is outstripping demand in most corners of the world. This leaves shippers in the pilot’s seat, allowing them to extract the best prices they can far ahead of time. If the shipper has enough activity to entice an airline, they’ve just potentially removed a huge variable from the process.
“He who has the tons should be able to extract the best pricing and should be able to extract that pricing well in advance of departure,” Shah said.
Shippers who have engaged in these contracts will be sitting pretty when the market tightens up again. If shippers keep to the spot market, as airline capacity decreases and there are fewer flights available for the same amount of goods, these companies will be forced to pay up or sit out.
Large shippers in Europe have been contracting with airlines for quite some time, according to Joost Van Doesburg, air freight policy manager at the European Shippers Council. These companies see contracting as a concentrated move away from the spot market, which rewards shippers who book cargo at the very last minute.
“We need to more or less get away from the spot market and change the industry toward a contract industry where you can purchase and book your cargo more in advance,” he said. “Now this simply does not happen because it’s much easier to book as a freight forwarder or a shipper 24 hours or a week in advance.”
Forecasting is at the heart of contracting. Projecting profitability and cost is a lot easier for shippers who have contracts than those who are left to get rates from the spot market.
“The level of volatility in the air freight market has been tremendous, if you look at what the trend has been compared to 10 years ago, you had a slow season rate, and you had a peak season rate,” Norbert Dentressangle’s Akira Moss said. “Now what we’re finding is the rates fluctuate almost monthly.”
When the industry shifts, it can produce a remarkable swing in the spot price of cargo, which could wreak havoc on a company’s profitability. The flip side, as he sees it, is the spot market can offer tremendous opportunity for shippers who can take a few chances. Shippers do have to be aware, however, that a price quoted today might not be the same in two months.
“Everybody involved in the supply chain is really thinking about how to be able to better predict their profitability,” Moss said. “That’s why companies are starting to think outside the box and say, ‘You know what? We can go directly to the air carriers, the same way we do to the ocean freight carriers, and negotiate our own long-term rate.’”
This adaptability is one of the main selling points for the spot market. Forwarders are able to cull prices from a variety of different sources, providing a Plan B if a shipper’s needs change; when contracting with one carrier, shippers are locked in to the carrier’s needs and schedule.
“There are always going to be shippers that are going to play the spot market. It’s a tremendous opportunity,” Moss said. But, he added, “In any sense of long-term business, it’s a very difficult thing to depend on.”