Air cargo rates threaten to head for unfriendly skies

By By Brian Milligan -- Purchasing, 10/19/2000

Some key air cargo carriers are planning rate increases for imports from Europe. And the increases are once again causing ripples as shippers brace for what is becoming an annual jump in air cargo shipping prices during the busiest shipping season of the year.

Here's a rundown of what shippers can expect:

• Lufthansa Cargo is raising prices by 7% to 9%,

• United Airlines plans to increase rates 5% to 10%, and

• Air France plans to raise its rates 10%.

All of these increases were expected to be in place by Oct. 1. Other key carriers-Swisscargo, British Airways and KLM Cargo-are considering rate reviews as they watch how these prices are accepted or rejected by shippers.

The rate increases are coming at a time when analysts say the industry is trying hard to offer beefed-up supply chain management capabilities. And they come at a time when the industry, like all other sectors of the transportation industry, continue to deal with the challenge of escalating fuel prices.

Customers are paying them, but they don't like it. The trend has some purchasing managers trying to carefully protect themselves by nailing down longstanding contractual agreements with the freight forwarders who pick their carriers.

"We deal with the freight forwarders, and I locked them into pricing a little while ago," says Robert Fitzsimmons, purchasing manager for the New York-based Koehler Instrument Co. Inc. Koehler Instrument buys and sells instrumentation in the international market and constantly depends on air freight to handle its cargo.

"I'm not a guru, but based on 23 years of purchasing experience, I thought this approach with air freight would be in our best interest," continues Fitzsimmons. "I just don't agree with [rate hikes]. You won't get rich off of me."

Bucking the trend

And some logistics firms are doing what they can to buck the trend. They say they are reasoning with air cargo carriers and trying to keep them from raising prices too high.

"We work with the carriers and try to convince them that it's not a good time to raise rates," says Rich Zablocki, managing director for the California-based Emery Worldwide Inc. Emery Worldwide is a freight forwarder for international business.

"The customers are shell-shocked with fuel increases that came out earlier this year," Zablocki continues. "They are not willing to accept a rate increase at this time. And we can't afford to absorb it ourselves."

But that probably won't stop United Airlines, Lufthansa Cargo and Air France, all of which are putting pressure on the industry with announcements that they will raise their rates between 7% and 10%. They can do this because of the depressed air cargo market from the United States to Europe and the strong market from Europe into the United States.

John Birds, vice president of international operations for the Washington-based Airborne Express, says when a few players like United and Air France make a decision to raise rates, the impact can be felt throughout the industry.

And Airborne Express should know. Bruce Grout, vice president and general manager international for Airborne, says the company is now planning to adjust its own rates. "Yes, our rates will be increasing about the same margin, between 5% and 10%," says Grout.

"Yes, we are pretty much forced to do it," agrees Robert Mintz, a spokesman for Airborne.

And if they haven't decided to raise them yet, other carriers are certainly standing up and paying attention to what is happening in Europe.

"We are reviewing the situation," admits Chris Kelly, a spokesman for the St. Louis-based Trans World Airlines. "But right now, we haven't made any decisions."

Feeling pressure

But Birds says all modes of transportation are feeling pressure to raise rates these days. With fuel prices reaching more than $30 a barrel, carriers are pressured to raise money somewhere. And the situation doesn't look like it will improve in the near future.

"Absolutely," says Birds. "You've got the fuel surcharge issues, and fuel prices are escalating. Obviously, the biggest part of our cost is based on any transaction cost for point-to-point carriage."

In many cases, the carriers seem to be able to get away with increases. Some carriers report their service is growing in leaps and bounds, this despite impressive rate increases that just keep on coming. The Georgia-based United Parcel Express announced a rate increase on Feb. 7, pushing rates for UPS Next Day Air, 2 ^nd Day Air and 3 Day Select Commercial services up by 3.5%. The UPS Ground Commercial increase, meanwhile, was limited to 3.1% across all weights and zones.

UPS international export rates from the U.S. increased 2.9%. There were no increases for import rates, which were simplified with a single-currency, globally zoned rate chart introduced in 1999.

UPS representatives say their rate increases were accepted by shippers who are turning to the service for something more than just point-to-point service.

"We've put everything together with one carrier, not only from a rate standpoint, but a management standpoint," says Steve Holmes, a spokesman for UPS. "We can intelligently manage your supply chain."

Supply chain management

Joe Pyne, UPS senior vice president

of marketing, says UPS is eagerly making the crossover to supply chain management activities. It is a crossover that Pyne believes other carriers aspire to. And Pyne says manufacturers and other

customers are willing to pay more for

the service.

The service brings overnight carriers like UPS to a different standing, one in which they are not seen as emergency overnight shipment producers.

"We have been first to market in recent years with a variety of global supply chain solutions that add value across a broad array of services," says Pyne. "We will continue our leadership in offering innovations to support ease of use and customer connectivity with and through UPS."

Like some other leading carriers, UPS is likewise trying to offer more when it comes to the Internet. UPS now offers a "fenced" Internet service directly to its Web sites, which the company makes available through a free Web browser called UPS World Link.

But supercharged supply chain capabilities and more powerful Web sites clearly aren't the only factor fueling rate increases. Birds says two things will always push prices higher. One is the fuel surcharge, which air cargo carriers all over the world are implementing. And Birds says shippers are coming to terms with these surcharges, even if they don't like them. The surcharges have gone from 5¢a kilo to 15¢a kilo.

"And that's being accepted," Birds says. "And you'll see it go higher."

Secondly, the industry still remains susceptible to old laws of supply and demand. And since imports coming to the United States from Europe are now at their peak, shippers have to pay the price.

Corey Mahjoubian, director of global gateways for the Washington-based Expeditors International, says this industry has reached a point where it can easily get away with rate increases. Mahjoubian says gone are the days when shippers could expect air cargo carriers to make rate changes at the beginning of the year, like in February. Now, if they sense a rise in shipping demand, they will make the changes at other times, like during the peak-shipping season.

"There hasn't been much traditional about this market for the past two years," says Mahjoubian.

And the temptation to raise these rates is particularly high this year. Rates on U.S. exports are likely to remain stable. But shipping demand out of Europe reached a strong peak in 1999. Carriers are eager to cash in on an expected high peak this year, too.

Fluctuating rates

Richard Whitaker, vice president of US Gateways for the California-based BAX Global, says this trend probably isn't going to change. Whitaker says air freight shippers are becoming accustomed to the fact that rates can fluctuate when demand increases.

"In a general way, air cargo is a commodity and the law of economics applies," says Whitaker. "When the supply is in demand, your prices will go up. And demand for cargo capacity from Europe to the United States has been strong.

"If carriers wish to make rate increases, this is the time to make it stick," he adds.

Whitaker says carriers are pretty much fearless when they make the rate-increase decisions. They know that manufacturers need electrical components and other supplies from Europe. They know they are willing to pay to get them.

"I think the carriers generally believe they won't be losing business," says Whitaker. "Their business won't erode as a result of making this increase, and the shippers will be inclined to take it."

Still, Whitaker says multimodal freight forwarders like BAX Global can resist rate increases and choose carriers that are not raising their rates. Whitaker says BAX will generally hold off on any decision-making when it sees one or two carriers raising their rates. And so far it's holding off. "We have no plans to raise our rates until such time that we have a better understanding of what is taking place on the import side from Europe," he says.

"When we are faced with one airline, or a couple of airlines who want to raise their rates, the market conditions may not be right," Whitaker continues. "And we can't defend them to our customers."

And Whitaker maintains that customers are not without choices. "Customers have a number of modes of transportation available to them," he says.

Unfair situation

But that's an argument that just doesn't wash with a lot of purchasing managers. They call the situation unfair and say manufacturers can consider themselves a captive audience. And they say that when one carrier sends their rates up, the others too often follow.

"They all blame high demand [for the rate hikes]," says Fitzsimmons of Koehler Instrument Co. "That kind of bothers me. The supply and demand theory might be socially acceptable, but when this happens, others will jump on the bandwagon."

"When you look at what is happening on the pricing side from the United States to Europe, prices are somewhat depressed," says Birds. "And there is plenty of space from the United States to Europe or to Asia. But you've just got a tight inbound market."

Rate increases put carriers like Airborne Express in a precarious situation. Overnight packages account for $3.2 billion of the company's revenue. The carrier uses its own planes for domestic flights, but purchases space from commercial carriers like United Airlines or Lufthansa when it wants to carry cargo to or from overseas.

Still, Birds says Airborne Express doesn't plan to just sit back and accept every foreign rate increase that is thrown its way.

"We are looking at the impact on our costs, number one," says Birds. "We just don't arbitrarily accept rate increases. If the carrier says they are raising their rates 10%, I don't just go and do it."

That's when the negotiations begin. Birds says it is possible to get the carrier to postpone its rate increases. And it's also possible to find someone else for the job.

"Maybe I can get them to postpone their rate increase by negotiating other business with the carrier. But the other way is to look for alternate carriers," Birds says. "There are other carriers out there."

Birds says Airborne Express has no choice but to take these tactics. Again, sooner or later Airborne has to break the news to manufacturers and other customers. The news generally does not go over well.

"Obviously, the customers are not going to be happy," Birds says. "They are not going to accept it. We have to sit down with our customers and look at what their alternatives are.

"We say, 'This is what Lufthansa is doing. We can look at an alternative. Rather than move the freight out of Germany, we can truck it down to Brussels and buy it for what you are paying now,'" Birds continues. "Maybe it will add 12 hours onto the service. But we let the customers decide."

Peak season

This is a game that carriers and customers alike have been living with in the fall season. Peak shipping demand hits right about now, with most carriers making their decisions on rate increases by Oct. 1.

"It usually seems that that is the time when you see rate increases, they go into effect by Oct. 1," says Birds. "There are more increases then, than at any other time during the year, because of the issue of supply and demand.

"In the peak period, space is at a premium, and that is when carriers are adjusting their rates," he continues.

Zablocki says it is true that freight forwarders are placed in a difficult situation here. In the end, the pressure to go with rate increases is going to be strong.

"It is definitely tied to the fact that we are going into the peak season," says Zablocki. "They view this as an opportunity to come out with rate increases. There is no doubt about that."

And Zablocki says Emery Worldwide does find itself in an awkward situation when it comes to passing on rates. And it may be a permanent situation. If carriers can get away with such an increase one year, the rate increases have a good chance of becoming a permanent fixture from year to year. Such increases have become a matter of fact in the less-than-truckload [LTL] industry, for example. And Zablocki says this appears to be happening in the air freight industry.

"It stands a good chance for them to become successful and make this stick," says Zablocki. "Because the capacity is so tight."

"Still, we will try to work with carriers and mitigate the increase because it is hard to pass them on to our customers these days," Zablocki continues.

And customers have experienced a lot. But Zablocki says Emery can and often does reach a point where it has no choice but to go along with a planned rate increase.

"If every carrier jumps on the bandwagon, it will put our back against the wall and push us to the point where we have to pass it on to shippers," Zablocki says. "Our primary goal is to protect our clients and keep rates from going up. But we find we may have to do that."

Proposed rate increases