Straighten Up and Fly Right

Straighten Up and Fly Right

A logistics maxim holds that "air freight is an ocean shipment gone bad," says Neel Jones Shah, senior vice president and head of global air freight for Flexport Inc., an air and ocean freight forwarder.

Many shippers likely can relate: They planned to move their goods using a less expensive but slower transportation mode. Then, a disruption—a supplier running late, a port strike—upends their plans, and they shift to air to meet their deadlines.

Those decisions can play havoc with transportation budgets. "Air freight is used when time outweighs cost," notes Jim Hendrickson, professor of marketing and logistics at The Ohio State University.

While air freight typically costs more than other transportation modes, shippers can contain this expense. Among the key steps: holding reasonable safety stocks, checking that air freight is truly needed, evaluating which type of air freight makes the most sense, and forecasting supply chain needs as accurately as possible.

Buoyant Airfreight Rates

Shippers have little sway over some forces currently driving airfreight costs. One is the economy. As most countries have recovered from the recession, demand for air freight has grown. Global cargo freight grew by almost one-third between 2007 and 2017—from 45.4 to 59.9 tons, reports The International Air Transport Association (IATA).

E-commerce is another catalyst. "Speed has always been a factor when using air freight, but now it’s even more so because of e-commerce," says Cathy Roberson, founder and head analyst with consulting company Logistics Trends & Insights. Both consumers and business customers now expect their packages to show up almost as soon as they click "send" on their orders. Air often is the quickest delivery mode.

Moreover, e-commerce shipments tend to consume more capacity than the traditional air cargo they’re replacing, such as pallets and containers holding multiples of the same items. That’s due to inefficiencies in packaging the one or two items that make up most e-commerce orders, Neel Jones Shah says. As capacity tightens, prices tend to increase.

Oil prices also impact airfreight rates, says Keshav Tanna, chair of the Air Freight Institute, a division of the International Federation of Freight Forwarders Associations. While prices have dropped significantly from 2011 and 2012, when they topped $100 per barrel, they’ve been inching back up. The per-barrel price of Brent crude oil jumped from $45 to $54 between 2016 and 2017, while Jet kerosene jumped from $52 to $66 over the same period, according to IATA.

The truck driver shortage also is impacting airfreight rates, says Steve DeNunzio, senior lecturer, marketing and logistics, with The Ohio State University. As truck capacity tightens, shippers must look for alternatives, including air, to keep their freight moving.

Clipping Airfreight Expense

Given its cost, when organizations determine air freight is their best option for some shipments, how can they use it as economically as possible?

Billy Duty, head of the North American supply chain with BYK USA Inc., a division of specialty chemicals company Altana, says he uses three levers. The first is administrative.

"I approve all air freight," he says. The goal is to confirm a legitimate reason for using it. For instance, he’ll check that the customer’s delivery timeline is fair and that air is the only way to meet it. If the customer is partly responsible for the need to rush delivery, he’ll try to split the cost.

The second lever is solid safety stock, with enough buffer to withstand supply chain fluctuations, especially for materials coming from outside the country.

For instance, if a customer asks that its orders be filled within five days, and some goods come from overseas, Altana will hold stock in the United States. Without air freight, it wouldn’t be able to ship materials from outside North America in time to meet the five-day limit, Duty says.

What about a just-in-time inventory approach? "Just-in-time is great," Duty says. "But somebody somewhere has to cover the variability."

The third lever is oversight. When Altana does use air freight, Duty and his colleagues try to watch the cost, while still meeting delivery deadlines. That means considering the time cargo spends not just in the air, but also moving from origination point to final destination, and providing clear instructions to the freight forwarder.

"You’ve got to manage it end-to-end," Duty says. If not, a freight forwarder may try to save a few hundred dollars by holding the goods at the airport to wait for a consolidated truckload, not realizing the shipment bill itself was tens of thousands of dollars.

Duty also checks how the airfreight is routed. If obtaining a lower fare requires connecting through several cities, extending the overall trip by one week or more, it likely will defeat the reason for using air.

Other strategies for cutting airfreight costs include:

Work with freight forwarders. By establishing a solid relationship with a freight forwarder, companies also can rein in airfreight costs, particularly in Europe where the freight forwarding industry is strong.

"Freight forwarders book in large volume and thus have more negotiating power," says Alain Decors, managing director with consulting firm Airfreight Development Worldwide. By buying space ahead of time, they typically can secure better rates than a shipper purchasing space on the spot market.

In addition, most freight forwarders have access to more than one means of transportation. If one airplane is fully booked, most forwarders can quickly find another option. "A freight forwarder is like insurance," Decors adds.

Evaluate the type of air freight. Shippers also can save money by identifying the type of air freight likely to be most economical for their shipments, Hendrickson says. For instance, "belly freight," or cargo loaded on passenger flights, tends to be less expensive when a shipment isn’t large enough to fill an entire plane. If a shipper can fill an entire plane, however, securing a dedicated plane can be more economical.

Consider multiple transportation modes. In some cases, it’s possible to combine air and ocean transport in a way that meets the delivery deadline, but at less cost than sending shipments entirely by air. Companies often use this strategy for shipments traveling between Asia and Europe, Roberson says.

Ascena Retail, a national specialty retail group, sometimes takes this approach, says Debbie Ryan, vice president of global transportation and logistics.

"You have to understand what you need," Ryan says. "If a product is flying off the shelves, prime air typically is a must."

But, if you can mix ocean and air transport and still meet the delivery deadline, you’ll likely save money. "It takes a little longer in transit," Ryan says, "but the cost isn’t as high" as using air only.

Another option is "ocean express," Ryan says. While these ships travel at about the same rate as other ships, the time savings come port-side, where the goods are made available within about 24 hours of the time they berth. In some cases, this mode shaves about one week from overall transit time.

In addition, Ascena will change shipment plans when, for instance, the goods are available earlier than expected. Rather than use air, the company will check whether it’s possible to use another, more economical mode without missing the delivery deadline.

Do You Need Air?

Indeed, not all shipments—even those under a tight deadline—require air freight. Consider a shipment of 10 skids that needs to move from Minneapolis to Dallas within 24 hours. Drive time between the two cities is about 14-15 hours. While such a trip would require more than one driver, "it’s a lot cheaper to put 10 skids on a truck versus a plane," says Michael Pettrey, vice president with C&M Transport, an expedite carrier, and president of The Expedite Association of North America.

To be sure, the calculation changes for smaller shipments. Air can be less expensive for shipments of a few pallets, Pettrey says.

Use technology. Ascena is implementing optimization software that searches for the least-expensive air shipment that will still meet its deadline, Ryan says. It works similarly to the rate shopping software that companies often use for parcel shipments.

Incorporate air freight into ongoing planning. At times, air freight becomes a compensating mechanism when organizations fail to manage their global supply chains, Hendrickson says.

Organizations that forecast their supply chain needs as accurately as possible are better positioned to both limit their use of air freight and obtain reasonable rates. Because they’re better able to secure capacity for a longer term, they reduce the likelihood they’ll have to pay premium rates for rush orders.

"Providing accurate and predictable volume forecasting becomes increasingly important in an environment of increasing capacity constraints," says Shawn Stewart, executive vice president with CEVA Logistics, a supply chain management company.

Some companies allocate an ongoing portion of their shipping budget to air freight, just to "keep a regular cadence going," Neel Jones Shah says.

Yes, this comes at a cost. However, by maintaining a relationship with an airfreight company, a shipper has a better chance of securing reasonable rates if a supply chain hiccup forces a quick shift of greater quantities of goods to air.

"Excellent planning can help companies contain airfreight costs," Neel Jones Shah says. "It sounds simple, but it’s the Holy Grail."

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