Dynamic airfreight pricing, what it means for shippers and forwarders
24 / 07 / 2017 By: Manel Galindo, chief executive of Freightos WebCargo
Posted airfreight rates with promotions change about once a month, on average. When airlines make the shift to dynamic pricing, rates change constantly, driven by excess capacity and diminishing time before departure, writes Manel Galindo* of Freightos.
Once the majority of airlines make this shift to dynamic pricing, our industry will witness the same kind of monumental transformation that reshaped passenger air travel in the 1980s or concert tickets in the 2000s.
Ever search for an airplane ticket, find the perfect flight, come back two hours later and see that the same flight price spiked? Welcome to the wonderful world of dynamic pricing.
Air cargo isn’t there... yet.
Although airfreight rates currently change about once a month, even that pace of change is still called static pricing. Given what I’ve seen since starting the business nine years ago, dynamic pricing won’t be hitting the industry in a few months...or even in a few years.
It already has. And, as it rolls out more and more, it will significantly change the way freight is bought and sold.
About a year ago, someone on the Freightos WebCargo team noticed that Air France/KLM were toying around with dynamic pricing on a small scale.
Then, earlier this year, things really started to heat up. Suddenly Air France/KLM are changing their pricing in real-time. It’s currently just in the 500 to 1,000 kg weight band across all cargo flights and it’s likely to expand soon to all weight bands and after that, it’s just a matter of time before air cargo operators will follow Air France/KLM’s lead.
Dynamic pricing is a good thing for the industry. Every plane that takes off with unused cargo has effectively sold that space, but for zero dollars (and incurred overhead).
Dynamic pricing encourages full capacity usage, reaching textbook supply and demand in perfect market conditions. As a result, carriers will no longer build in a price buffer to compensate for unused capacity.
Lower prices overall (typically the result of dynamic pricing) will drive more sales, including switching from substitute products and new stimulated demand.
This isn’t exactly a step into the unknown for the airline passenger industry. In fact, air was the first industry to use it as a pricing strategy, beginning with American Airlines the early 1980s.
They already have the expertise, systems, and processes that make it work for passenger travel.
And it’s not as if the forwarders that book air cargo will need much educating on how it works, or even how to work it to their advantage.
Most of them will already be familiar with dynamic pricing, from its use in a rapidly growing list of booking scenarios across passenger flights, rental cars, Uber rides, event tickets, concert tickets, and sports events.
While capacity usage is on the uptick, air cargo has struggled recently. A decade ago, it represented 12% of total airline revenue, but it’s languishing around the 9% mark now, with airfreight average capacity utilization currently below 45%.
Done well, dynamic pricing optimizes capacity and price. And there’s plenty of capacity to play with.
That is, the argument goes, carriers could take over consolidation, thereby optimizing their profit margins along with their per-plane cargo yields.
The rebuttal is that this underestimates both the daily operational realities faced by airlines, and the investment required to achieve this.
On a more mundane level, when dynamic pricing becomes standard, will that mean the demise of promotional pricing? Probably not.
Promotions have a special purpose – to stimulate demand. And the two pricing strategies already work together well, for instance, in the travel industry.
Haggling is a big part of the airfreight sales today. Following up on a quote request, forwarders check out the posted rates then call carriers to get a better deal.
The time taken is worth the effort, especially when it lowers customer spend or improves forwarder’s margins. Carriers build a buffer into their prices precisely because this happens.
But with dynamic pricing, it stops, as dynamic price is the better deal. Forwarders instantly get the best deal for customers, without wasting their or the carrier’s time. That frees up forwarders time too, making them more productive.
Currently, shippers struggle to get pricing visibility, lacking the ability to ensure a good deal.
In other words, forwarders and carriers invest time negotiating down inflated prices to satisfy a customer who shouldn’t be truly satisfied.
Dynamic pricing not only gives the customer the best available price (whatever the price might be then compared to today’s posted rates is irrelevant), it gives them both choice and transparency.
One criticism of dynamic pricing is that customers expect surge pricing as part of the game, but not if it descends into profiteering or price-gouging. That could happen, of course, but with many suppliers in the market, they would be rare events.
Dynamic airfreight pricing might have been all talk, despite being part and parcel of air passenger travel for decades. But Air France/KLM have moved beyond just talk. Others will soon follow their lead.
This can only be a good thing. By removing unnecessary costs, increasing capacity, and giving customers transparency and choice, dynamic pricing has the potential to benefit all players in the industry.
*Manel Galindo is the chief executive of Freightos WebCargo, the automated airfreight rating and quoting tool used by over 1,000 freight forwarders, including Panalpina, KWE, DB Schenker, Agility and others.
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