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 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 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.
- 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."
- 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.
- 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 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.