Air Freight Costs

Part
01
of three
Part
01

Air Freight Cost Structure Factors

Economic conditions, peak season and holidays, regulations, and technology are additional 4 factors that affect air freight cost structure aside from route, load factor and operational expenses. These are discussed in detail below.

ECONOMIC CONDITIONS

  • Economic conditions drive supply and demand, which in turn affects air freight pricing.
  • In times of economic prosperity, air freight demand rises and exceeds capacity leading to higher prices.
  • Conversely, in times of economic downturn demand decreases which lead to lower prices as carriers try to fill unused cargo space.
  • International Air Transport Association (IATA) reported that North American airlines and air cargo carriers saw both demand and capacity increase over the past year thanks in part to strong domestic economic performance.
  • On the other hand, air freight revenue and cost are expected to be affected with the tightening US-China tension, which impacts both economic trade conditions and air cargo demand.
  • IATA CEO Alexandre de Juniac said that "Cost inputs are rising, trade tensions are affecting confidence, and global trade is weakening. ...Governments should respond by easing trade barriers in order to drive economic activity," which would also help air freight volume and pricing.

PEAK SEASON AND HOLIDAYS

  • Peak seasons and holidays also affect air freight cost structure as well as other freight markets.
  • As holidays such as Christmas approaches, demand increases and air cargo capacity is exceeded, leading to higher air freight/cargo rates.
  • IATA projected that peak season and holidays have affected air freight outcomes and pricing this 2019, with Chinese New Year and Easter causing volatility in air freight volumes.
  • Flexport also reported that air cargo rates are rising in proportion to air freight capacity consumption as peak season approaches.
  • In the US, air freight peak seasons revolve around Christmas and New Year, as well as Black Friday as stores replenish their stocks for the holiday.

REGULATIONS

  • Regulations affect air freight cost structures as extra expenses in research and compliance are passed on to consumers.
  • Traditional regulations such as flight patterns, time restrictions and safety affect operating expenses, which contribute to overall cost structure.
  • New regulations revolving around environmental impact particularly emissions are causing air freight carriers to adjust their infrastructure and operations, the cost of which are also passed on to consumers.
  • Air freight carrier Lufthansa reported that its security costs has increased tenfold from 2001 to 2012 to comply with safety regulations.
  • Another example is London Heathrow's airport which recently announced hiking up environmental fees to address noise pollution.
  • The International Maritime Organization's mandate to reduce all emissions from 0.5% to 3.5% under the recent Emission Control Area regulation is also expected to push carriers' pricing between 2019 and 2020.

TECHNOLOGY

  • Supply Chain Beyond identifies technology aside from regulation as a factor that could affect air freight profitability and cost-effectiveness.
  • New air freight shipping technologies include robotics, augmented reality, drones, artificial intelligence and big data.
  • If used effectively, these technologies can help air freight reduce operational and logistics costs as well as increasing efficiency which impacts overall cost structure.
  • Technology can also enable air freight forwarders to comply with environmental regulations cost-effectively.
  • A highly digitized air freight brand also leaves less room for human error, reducing losses and attracting clients.
  • On the other hand, a digital transformation of a traditional air freight player entails high costs which can significantly affect cost structure.
  • One air freight player that leverages new technology is Boeing, which is currently developing unmanned cargo aerial vehicles (CAV).
  • SCB states that such developments will open the industry to more digital breakthroughs as well as intensify competition between traditional and tech-savvy air freight players, all contributing to their cost structures.
  • Technology also affects demand as e-commerce sustains consumer demand for goods between holidays.
  • Flexport reports that "Because e-commerce draws out the amount of time consumers have to purchase goods, a break in the market is not expected between the December holidays and Chinese New Year."

ROUTE

  • Destination/route and weight determine marginal cost of air freight according to World Bank.
  • Charter services usually charge higher rates to account for incremental distances flown, empty legs of the flight, and balance between demand and capacity.
  • The World Bank states that air freight rates per kilometer are higher for shorter flights as more time is spent on the ground and aircraft ascent/descent.
  • Cargo transfers which involve several carriers also contribute to final cost.
  • For single carriers, the route from source to destination to the nearest metro city is usually taken into consideration.
  • Air freight carriers also combine routes to reduce flights and optimize fuel, which impacts cost structure.

LOAD/CARGO

  • Weight, volume, time and temperature sensitivity affect load or cargo and its contribution to air freight cost structure.
  • Weight and distance are the major factors determining the overall cost structure of an air freight delivery.
  • Volume is also computed aside from weight as a cargo might be lightweight but take up a lot of space.
  • Urgent cargo (such as needed medicine) require both time and temperature-sensitive conditions, adding to regular costs.
  • Food, chemicals, and other temperature-sensitive cargo can also require unit load devices (ULD) or other service upgrades which can hike up costs.
  • Load/cargo product classifications also determine cost structure based on weight, density and value.

OPERATIONAL EXPENSES

  • Operational expenses include fuel, wages, taxes and fees, tariff, and security among others.
  • The biggest operational expenditure for air freight is fuel, accounting for about half the annual operating cost of an aircraft according to World Bank.
  • Fuel consumption is roughly proportional to the aircraft and cargo weight plus distance flown, though this may vary for advanced aircrafts with fuel efficiency technology.
  • Flexport also points out that new environmental regulations increasing pressure for lower emissions will likely affect cost structure as air freight players upgrade to more environmentally-friendly fuel.
  • Regional differences in wages as well as tariffs and tax regulations will also affect overall air freight cost structure.
  • Depending on airports, taxing and landing fees will vary in their final contribution to cost structure.
  • Local and international regulations on implementing security will also affect operational expenses, impacting overall cost structure of air freight players.
Part
02
of three
Part
02

Air Freight Cost Structure: DHL and UPS

UPS spends more per kg in air freight services than DHL estimating $6.73 per-kg for international services and $22.52 per-kg for domestic services compared to DHL spending $1.49 per-kg for all services. Below is an analysis of each company's cost structure and comparison of the two.

UPS AIR FREIGHT OPERATIONAL COST STRUCTURE

  • In 2018, revenue for Next Day Air products and Deferred Air were up by 7.5%.
  • In 2017, UPS added nine new Boeing aircraft to their fleet as well as 18 facilities including 3 new regional hubs.
  • The company owns or leases over 4 million square feet of floor space in regional air hubs around the world.
  • Their regional air hubs in the United States are located in Dallas, Texas; Ontario, California; Philadelphia, Pennsylvania and Rockford, Illinois.
  • International air hubs are located in Cologne, Germany; Shanghai, China; Shenzhen, China; Hong Kong, China; Hamilton, Ontario; Miami, Florida (which serves Latin America and the Caribbean).
  • UPS owns 189 Boeing aircraft and 52 Airbus aircraft with 45,000 containers used to transport cargo in our aircraft.
  • Surcharges for fuel increased by 1.5% for domestic air freight and 2.7% for international air freight in 2018.
  • In order to determine the cost-per-ton and cost-per-kg for UPS, we searched the company website and press room, annual reports, media sources such as DC Velocity and American Journal of Transportation, as well as research studies published in the past 24 months relating to UPS operations. Through this search we were unable to find these metrics, however, we were able to find the following data per-package in 2018:
    • UPS shipped 1.542 million packages over air freight per day domestically.
    • UPS shipped 1.482 million packages over air freight per day internationally.
    • Yearly operating costs in 2018 were $39.95 billion domestically and $11.913 billion internationally.
    • Domestic cost-per-package is estimated at $102.40 (operating cost/operating days= cost per day; cost per day/packages per day — $39.95 billion/253 operating days= $157.91 million per day/1.542 packages=$102.40).
    • International cost-per-package is estimated at $30.54 (operating cost/operating days= cost per day; cost per day/packages per day — $11.913 billion/253 operating days= $47.087 million per day/1.542 packages=$30.54)
    • UPS estimates the average package size at 10lbs or 4.53592 kg meaning that the average cost-per-kg for domestic air freight is $22.52 and average cost-per-kg for international air freight is $6.73. (cost per package/4.53592 — $102.40/4.53592=22.52; $30.54/4.53592=6.73).
    • Average cost-per-ton for domestic air freight is $22,520 (cost-per-kg*kg-per-ton — $22.52*1000=22,520)
    • Average cost-per-ton for international air freight is $6,730 (cost-per-kg*kg-per-ton — $6.73*1000=6,730)

DHL AIR FREIGHT COST STRUCTURE

  • In 2017, DHL shipped 24 million Tonnes over air freight 5.1 million of which was shipped domestically.
  • In 2019, DHL will be contracting with Boeing to purchase 14 new 777f aircraft, each with a range of 9,070 km and 102 ton load capacity. The company noted that they believe this will prove more cost effective than smaller crafts.
  • In addition, the company converted an Airbus A330-300s from passenger to freight capacity increasing load capacity by 33%.
  • Air Freight operating expenses for domestic and international services amounted to €31.697 billion or $35.83 billion.
  • Overall cost-per-ton over air freight in 2018 amounted to $1,492.91 (operating cost/total tonnes — $35.83 billion/24 million).
  • Overall cost-per-kg over air freight in 2018 amounted to $1.49 (tons converted into kg; operating cost/total kg — 24*1000=24 billion; $35.83 billion/24 billion=1.49)
  • After searching the company website and press room, annual reports, media sources such as DC Velocity and American Journal of Transportation, as well as research studies published in the past 24 months relating to DHL operations, we were unable to find operating cost specifically relating to domestic and international air freight individually.

UPS VS DHL COMPARISON

  • UPS cost-per-kg is significantly higher than DHL at $22.52 per-kg domestically and $6.73 per-kg internationally compared to $1.49 per-kg overall.
  • Up focuses their efforts of maintain air hubs world-wide to cut costs relating to storage and distribution of products as opposed to DHL which has focused efforts on increasing load capacity and air craft quantity.
  • In the last two years UPS has increased their fleet by 9, while DHL has increased their fleet by 14 in addition to converting their passenger space to freight space.
  • UPS operating cost for air freight exceeds DHL operating cost by over $15 billion, however, the company's overall revenue exceeded DHL with $71.86 billion compared to $69.62 billion respectively.
Part
03
of three
Part
03

Air Freight Cost Structure: FedEx and USPS

Findings

FedEx and UPS have many similarities in their air freight cost structures. Where FedEx and UPS differ the most is on the number of surcharges and what surcharges they increase in their air freight cost structures. Both FedEx and UPS are adding larger aircraft with more capacity to their fleets to improve their cost efficiency.

Overview for Domestic and International Air Freight Services Offered

  • FedEx offers Same Day and Next Business Day domestic services that are further stipulated as First Overnight, Priority Overnight, and Standard Overnight.
  • UPS offers Next Day Air Saver, 2nd Day Air, 2nd Day Air A.M., Next Day Air Early, and Next Day Air domestic services.
  • FedEx offers International Next Flight, International First, International Priority, Flat Rate International, and International Economy services.
  • UPS offers Air Freight Direct, Air Freight Premium Direct, and Air Freight Consolidated international services.

Similarities in Cost Structure for Domestic and International Services

Differences in Cost Structure for Domestic Services and International Services

  • FedEx has significantly more surcharges than UPS.
  • Examples of surcharges that FedEx adds into their air freight cost structure for domestic services that UPS does not include are: a storage surcharge, Saturday pickup or delivery surcharge, live entry processing surcharge, and a change of air waybill surcharge.
  • Examples of specific surcharges that FedEx adds into their air freight cost structure for international services that UPS does not include are: international out of area delivery surcharge, international out of area pickup surcharge, and a northern Canada surcharge.
  • UPS increased the cost of their domestic second day air service more than FedEx with a UPS rate of 7.7% compared to the FedEx rate of 7.3% that had no increase in 2019.
  • UPS increased the fuel surcharge for domestic services in their cost structure more than FedEx in 2019.

FedEx Approach to Air Freight Cost Efficiency

UPS Approach to Air Freight Cost Efficiency

Research Strategy

We first researched and compared the air freight cost structures of FedEx and UPS from multiple credible sources like their company websites, Reveel group, and the LJM group. We then researched the approaches to cost efficiency that FedEx and UPS are using to complete our findings.
Sources
Sources

From Part 01
Quotes
  • "Economic Conditions Economic conditions directly impact supply and demand - factors at the heart of all pricing decisions, regardless of industry. That is certainly true for air cargo. In booming economies, demand for air freight services can exceed capacity, which leads to higher prices. "
  • "Regional Factors Regional factors affect supply and demand as well as operating costs. Circumstances like war, civil unrest, labor strikes, epidemics, and terrorism can both lower demand and make it costlier for carriers to operate in a given region. "
  • "Operating Expenses Operating expenditure can vary widely and change rapidly. The price of fuel is a prime example. Fuel prices are currently low and expected to remain low for a while, thereby reducing one of the biggest operating costs (although many hedge buyers have yet to see the benefits). "
  • "Time and Temperature-Sensitive Cargo Sea freight has long been the only option for shipping products that require a temperature-controlled environment, while air cargo has been the method of choice for shippers with short lead times. However, the increasing availability of temperature-controlled ULDs is changing that dynamic, opening up a new customer segment for air freight carriers: customers whose products are both time-sensitive and temperature-sensitive. "
  • "Premium and Value Add Services One of the primary competitive advantages of air freight over sea freight is the ability to offer premium services at a higher price. Unlike sea freight, where all shipments are treated the same, air freight carriers have the ability to set tiered pricing based on things services like packing, door-2-door service, express delivery, shipment tracking, and shipments that require special handling, like food with a short shelf life, hazardous materials, or human remains. In addition, while cargo-only carriers have the advantage of knowing exactly what their capacity is, combined carriers don’t. "
  • "Weight and Volume Weight and volume of shipments determine the potential pay-off for any given flight. Traditionally, weight has been the determining factor when quoting a price. However, volume must be considered as well. "
Quotes
  • "The International Air Transport Association (IATA) released data for global air freight markets showing that demand, measured in freight tonne kilometers (FTKs), fell 4.7% in April 2019, compared to the same period the year before. This continued the negative trend in year-on-year demand that began in January."
  • "Freight capacity, measured in available freight tonne kilometers (AFTKs), grew by 2.6% year-on-year in April 2019. Capacity growth has now outpaced that of demand for the last 12 months. "
  • "“April saw a sharp decline in air cargo growth and the trend is clearly negative this year. Cost inputs are rising, trade tensions are affecting confidence, and global trade is weakening. "
  • "North American airlines saw demand increase by 0.1% in April 2019, compared to the same period a year earlier. International FTKs, however, fell 0.8%. Despite solid domestic economic performance, global headwinds are likely to impact air freight outcomes in the coming months, especially with the recent escalation in US-China trade tensions. Capacity increased by 2.5% over the past year."
Quotes
  • "Costs As a result of the recent spike in oil price, fuel now accounts for about half the annual cost of operating an aircraft, whether for cargo and passengers. Because fuel consumption is roughly proportional to the aircraft weight and the distance flown, the marginal cost for carrying cargo is computed based on weight and destination. "
  • "Because the rate is usually set based on marginal cost and then adjusted for the level of service. For charter services the rates are usually higher, reflecting the incremental distance flown, including the empty legs, and the balance between demand and available capacity."
Quotes
  • "Tight Market Continues in Peak Air freight capacity is continuing to tighten and rates are continuing to rise as we push further into peak season. Because e-commerce draws out the amount of time consumers have to purchase goods, a break in the market is not expected between the December holidays and Chinese New Year."
  • "Impact of New IMO ECA Regulations The International Maritime Organization has mandated under new Emission Control Area regulations that by 2020, all merchant vessels must reduce their sulfur emissions to 0.5% from 3.5%."
  • "Whether they upgrade their vessels or their fuel, carriers will need to undertake significant changes to comply with the new regulations, and those changes will come at a cost to shippers. Rates may climb between now and 2020 as a result."
Quotes
  • "However, there are two areas of change which could impact the industry and its potential profitability. These are regulation and technology. "
  • "Technology is transforming freight forwarding in multiple ways; from robotics and automated systems to augmented reality, drones, and the use of big data and artificial intelligence. All of these, if used correctly and cohesively, have the potential to make air freight forwarding cheaper, safer, and easier."
  • "A digital approach also makes freight forwarders more attractive to clients. It provides a cost effective, efficient, and environmentally friendlier way to ship, as well as giving customers the peace of mind that there is much less room for human error."
  • "A consequence of increased safety regulation is increased costs for forwarders. In 2012, Lufthansa reported that mounting regulation reduced their ability to “operate efficiently”, stating that “security is a double-edged sword” and that security costs had increased tenfold since 2001."
Quotes
  • "There are about 18 different freight classes based on package weight, density, and value. The freight class number lies between 50 and 500. "
  • "Below are some of the factors that affect shipping rates when it comes to freight shipping. Weight of the shipment Density of the shipment Distance between source and destination"
  • "Freight Classification Shipping Mode Fuel Cost Tariff rates and Negotiated Rates"
  • "hipping carriers have no way to compensate the increase or even decrease in the fuel charges. Hence, the only feasible option is to pass the difference in the fuel charges over to the consumers."
Quotes
  • " Although aggregate data is not yet available for November, early reports suggest that relentless demand − combined with insufficient capacity on many trade lanes − boosted rates much higher through November and into early-December."
  • "While current prices have stabilized this week, Galindo warned that “this frenzy may happen again in the run-up to Christmas.” Typically, post-Christmas rates have fallen slightly before rising again for the Chinese New Year, which will occur in mid-February in 2018, but e-commerce is set to change that. "
  • "Singles Day, which falls on 11 November, and the flurry of replenishment activity ahead of Black Friday in the United States (which this year fell on 24 November), absorbed much of the available capacity along major trade lanes. "
From Part 03
Quotes
  • "Drawbacks: Wide Array Of Surcharges Working with FedEx means keeping a close eye on surcharges. They can cause your shipping budget to grow uncontrollably if you don’t know how to properly navigate them."
Quotes
  • "With Amazon Prime’s 2-day fulfillment model becoming an industry standard, it comes as no surprise that 2-day services are receiving some of the steepest increases domestically across the board. Cost reduction looks to be the focus when viewed from the weight perspective, falling into the established pattern over recent years as both FedEx and UPS continue their war on larger and heavier packages."
  • "2018 also saw the resumption of an old price war between the carriers, with both FedEx and UPS competing to see who could charge the most for fuel rates. For FedEx, lower fuel rates, often 14-18% less than UPS, were often presented by sales reps as an additional incentive for UPS shippers to switch carriers. Starting in September however, FedEx increased their fuel surcharges to essentially match UPS in all areas including International Import, where FedEx was significantly cheaper. In 2018 UPS responded by upping their fuel rates for all Domestic services by 25 basis points effective December 31st. "
Quotes
  • "FedEx Freight margins are steadily increasing due to a better balance of volume, pricing, and capacity. "
Quotes
  • "FedEx Express has announced that it will buy 50 new Cessna SkyCourier 408 cargo planes with an option to order 50 more from Textron Aviation. One plane will be delivered per month to FedEx’s Memphis-based air express division beginning in 2020. "
  • "Shifting to the SkyCourier—with twice the volumetric capacity of the older Cessna Caravans—will effectively put more capacity into FedEx’s shorthaul air freight business. In general, the faster, higher-capacity SkyCouriers will have the effect of speeding up the supply chain and enabling more freight to be shipped same-day and next-day to smaller markets. “This continues our very successful fleet modernization strategy, which improves our fuel efficiency, reliability and operating costs,” FedEx Express President David Cunningham said."
Quotes
  • "United Parcel Service Inc. is increasing the size of its air fleet. These are the largest planes the Atlanta-based shipping company has ever flown, offering about 16 percent more cargo capacity. All 32 of the jets — the new ones, plus the ones ordered in 2016 — will be delivered by the end of 2022, according to a news release. "
  • ""To support this strong customer demand, we continue to invest in additional air capacity, providing the critical link our customers need to markets around the world." David Abney, UPS chairman and CEO, said in the release. "