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The very old
issue of international transportation pricing has recently surfaced anew. The basic
parameters of the debate are the same — carriers say they need higher
rates; shippers say they need lower rates. But new market dynamics are
altering the rate debate. "Rational"
and "pricing" are two words rarely seen together in any sentence
describing the international transportation market. However, several
trends affecting both the supply and demand sides of the capacity equation
could change that, particularly in the air freight industry. Comparing ocean
freight and air freight pricing is difficult. For one thing, air freight
rates can be up to 10 times higher than maritime prices. Secondly, there
has always been a clear divide between the cargo side of ocean carriage
and the passenger side. Cruise ships don’t carry containers in their
bellies. The same is not
true in aviation, where air cargo is often viewed as a byproduct of
passenger travel. That view holds today at many airlines despite the fact
that planes now carry about 40 percent of world trade measured in U.S.
dollars, according to the MergeGlobal Inc. logistics consulting firm. In ocean
shipping, carriers have a long history of uneconomic and cutthroat
pricing, a trend that reasserts itself when overcapacity builds up in the
shipping industry. Changes in
pricing behavior will likely appear first in air freight, for several
reasons. The gap between
air freight capacity growth and air freight demand growth is shrinking.
Smaller all-cargo carriers operating older airplanes are being forced out
of the market by higher maintenance costs and stricter environmental
restrictions. Passenger carriers are moving to smaller aircraft on shorter
intercontinental routes that once were served by widebody planes with
bigger bellies. Reliable cargo-carrying passenger jets, such as the B777
and the A340, are coming into service. But these planes are often used on
longer routes that require additional fuel, which limits freight capacity. On the other
side, demand for fast, reliable transportation is clearly growing,
particularly in core air freight industries like high-tech and apparel.
Multinational manufacturers are facing increasing pressure from consumers
and stockholders to shorten the product cycle and to improve return on
investment. Logistics is no longer simply a cost component at these
companies. It is a key competitive tool. More often, as an executive at
the software-maker-turned-logistics-provider Vastera said in this issue
(page 42), it also is a core part of their marketing and customer service
strategies. One should not
immediately jump to a conclusion that shippers and carriers will suddenly
wake up tomorrow holding hands on the righteous path to rate
rationalization. The new
environment in the United States. where ocean carriers and shippers are
free to meet and confidentially set contract rates and terms has provided
some impetus for rational pricing, but both sides still operate largely
out of distrust. Shippers accuse carriers of underhanded rate hikes and
surcharges. Carriers accuse shippers of price gouging. The plain problem
is, neither side approaches "rational pricing" rationally.
Shippers and carriers need to redefine the rate debate. Perhaps if
carriers and their agents took more time explaining how much value and
cost-savings they can bring to a supply chain with the proper support,
they would find more shippers that are willing to pay viable rates. To
move away from commodity-type pricing and towards value-added pricing,
ocean carriers may also have to look at how they can tailor their services
better to meet individual shippers’ needs. In liner
shipping, there is no medium term risk of capacity shortages, given the
huge number of vessel orders in the pipeline. In the air freight industry,
the capacity issue is much less clear. However, because
the transportation provider ranks are thinning quickly, trade growth may
ultimately lead a shortage of capacity in international transportation. If shippers want reliable service
in the future, they had better listen.
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