Air cargo becomes a sellers' market

09 / 03 / 2018

The boot is on the other foot now. For years, airlines were craving fixed contracts, while forwarders, egged on by their clients, kept shopping around for the bargain of the day.

Today it is the forwarders who are desperate to secure lift, as the ad hoc market augurs painfully high prices.

“The market is more and more changing from a buyer’s to a seller’s market. Supply is the bottleneck right now, which will not change short term,” remarks Ingo-Alexander Rahn, global head of airfreight at DHL Global Forwarding. “The new normal is to cater for sufficient access to capacity.”

The airlines are taking advantage of the situation. Comments Rahn: “We observe carriers applying more and more dynamic pricing, especially on constrained routes.

“They actively manage their yields by exploiting the ad hoc market, in some situations even in a less desirable way, by cancelling scheduled flights.”

Airlines can afford to sit back and wait for forwarders to come up with offers that are more tempting than the prospect of juicy gains in the spot market.

Contracts that are up for renewal are in for a drastic price hike, and some carriers try to cancel existing deals rather than extend them, reports Walter Hoffelner, managing director of Cargomind.

If anything, many carriers are reluctant to commit precious capacity that may generate higher rates down the road.

“They hide behind the statement that they want to make the market accessible to all,” remarks Timo Stroh, head of airfreight at Dachser.

One carrier executive admits privately that, in tight markets like Shanghai or Hong Kong, it will be “a yield game”.

Nippon Cargo Airlines is setting aside a greater portion of its capacity for the ad hoc market than last year.

“We had regular customers who asked for extra capacity during the peak and we couldn’t give them any,” explains Shawn McWhorter, president for the Americas.

Some carriers may be bent on making as much hay as possible while the sun is shining, but for most it is a balancing act.

“Our  block-space agreement (BSA) traffic is our most consistent business. Our operations teams finds it easier to handle. They can plan better,” says Roger Samways, vice-president of cargo sales at American Airlines.

It depends on the market how much capacity American holds back. “We want to make sure we have enough capacity for ad hoc and last minute needs of our customers,” Samways says.

As straightforward BSA agreements – even at higher rates – fail to sway carriers, forwarders are upping the ante by offering more complex deals.

“Airlines are not willing to offer us more capacity just because our logo is a beautiful colour,” remarks Stroh.

He sees the conversation move increasingly towards strategic agreements that cover both directions of a route or link capacity allocations in different markets.

Tim Strauss, vice-president, cargo at Air Canada, reports: “With capacity constrained globally, forwarders are a lot more open to things that we tried to push in the past, like two-way deals.

“Some customers tell us, ‘if you give us space out of Shanghai, we give you cargo to other destinations’. Those opportunities are definitely on the table. We will see more of that.”

Such commitments play into NCA’s space allocations on congested sectors. “With lift out of Asia, there is definitely some recognition of who supports us out of the US,” says McWhorter.

Increasingly, some carriers are leveraging their network in capacity agreements.

“I give you something more in a strong point; what can you give me in a weak point? That’s not something we’ve done in the past,” says Strauss.

Samways notes that capacity deals have to create win-win situations. “The agreement needs to work for both of us,” he says.

Capacity negotiations that involve multiple sectors are obviously something worked out at the corporate level, but this does not mean that local and regional offices are becoming less relevant, according to Samways.

“Broad agreements tend to be structured centrally, but the execution is done locally,” he says.

Nor does he subscribe to the notion that the more elaborate capacity negotiations lead to a new level of co-operation between carrier and forwarder.

“I don’t think it’s necessarily a sign of a change in the relationship,” he comments.

One airline head of cargo, on the other hand, reckons that his outfit’s dealings with some clients is about to change.

“We are looking to embed people at some large forwarders,” he reveals, adding that such implants would act in a consultative role for the agents. Forwarder reaction to the concept has been positive, he reports.