A change is coming to the airfreight industry. Airlines are on the brink of taking back control of their freight. How? By riding the wave of the technological revolution and dramatically changing the way they price their capacity, explains Flexport senior vice president and global head of airfreight, Neel Jones Shah
This is good news for airlines. But not so much for traditional freight forwarding which relies heavily on the arbitrage on airfreight rates to generate profitability.
As airlines gain more power over their pricing and begin to change it on a dynamic basis, traditional freight forwarders will need to adapt by refocusing their efforts on managing the complexity of the supply chain and relying less on arbitrage.
The airfreight industry has for decades been the preserve of freight forwarder middlemen who buy space from airlines and mark it up to shippers.
They improve margins by consolidating multiple customers’ cargo in a single shipment and determine prices through weight or size. By working with these third-parties, airlines may outsource risk – but they also outsource their margins.
Change is in the air. Technology has brought the option of real-time dynamic pricing for airfreight within our grasp. This means that airlines use algorithms to raise and lower prices to reach the ideal consolidation for every flight.
Airlines can take whatever freight is offered, then instantly lower the prices for freight that fits and raise them for freight that does not.
And being able to plan ahead with web-based software gives airlines visibility into cargo that is weeks away from reaching the consolidation point.
What’s more, the structured data connection made available through APIs and web interfaces will eliminate costly phone calls, emails and paperwork, meaning that airlines can massively reduce transaction costs for both the forwarders and the shippers they work with.
The air cargo market profit pool can be split across its three major players: airlines, forwarders and shippers. As the fourth industrial revolution takes hold, the size and share of the profit pool is going to change.
Airlines will reclaim much of the margin traditionally captured by forwarders. These new systems will lead to a more open and transparent marketplace where prices are clearly visible rather than discovered through hearsay, so it will be more difficult for forwarders to play competing airlines off against each other.
Shippers will also benefit. But let’s be clear: there will always be a very clear need for freight forwarders, because they are the ones positioned to manage the complexity of the supply chain from end to end.
Freight forwarders need to understand that their P&L is going to be determined on value creation as opposed to price arbitrage.
Airlines and shippers will begin to have a direct relationship and the opacity of rates will disappear over time. Shippers will have more visibility and control over inventory in transit, cutting transit times and improving working capital needs.
Significantly, as this transition takes place, we can expect a showdown between traditional freight forwarders and their 21st-century equivalents.
The latter, like Flexport, who are building the technology required to connect airlines and shippers, are able to take advantage of the growth of real time dynamic pricing.
These new forwarders structure every piece of data that comes into their business, underlying a much better understanding of customers’ freight demand and their own freight purchasing needs. They are at the forefront of the disruption that’s transforming the industry for the better.
On the other hand, in this new environment, legacy forwarders which refuse to or just simply can’t transition to the new ecosystem will face serious challenges. Just like the phone-based stock market-traders of the last century, they’ll be displaced by technology at both the low-end and high-end of the scale.
In order to adapt, incumbents will need to extricate themselves from the mentality that arbitrage is the way to make money and come round to the belief that freight forwarders should get paid for the value they provide, not just by buying low and selling high.
The revolution is coming. And for the first time in recent memory, airlines are making enormous profits and reinvesting to bring their technology into the 21st century.
There’s no escape: everyone in the supply chain will need to adapt to this new world or face the consequences.