Moore On Pricing: Turbulence in the Air

I was recently discussing contracting with a large less-than-truckload (LTL) carrier executive who pushed back on the fact that I encourage shippers to work out more shipper-friendly contracts with carriers of all modes.

He insists that in LTL, like in airfreight and parcel, most shippers are small and will not be given the opportunity to engage with carriers to work on collaborative contracts. As a result, he insists that the shipper must use the tariff rules and rates as published by the carrier.

I suggested that we look at the markets for LTL and airfreight and consider what’s happening to disrupt these markets as a result of the historically limited options for shippers. For example, LTL carriers have consolidated to the point that less than 25 carriers are moving the majority of tonnage.

Air would seem to be slightly more competitive, as about 20 carriers carry roughly 40% of the cargo according to the International Air Transport Association (IATA). We have seen that as markets consolidate, the shipper increasingly has to do things the way the carrier wants—think railroads, pipelines and ocean carriers.

Unlike those other modes, the time-definite service market has lower barriers to entry and is therefore subject to disruption. The disrupters in both the airfreight and LTL markets are the intermediaries or broker/forwarders and their Silicon Valley competitors who are eyeing the brokers’ margins.

Shippers don’t have to worry about negotiating shipper-friendly contracts with large carriers when new service provider entrants are providing alternate buying options, often with more flexibility and extended services. And as larger organizations focus on their larger customers, the small- to medium-sized buyer has to do some homework on what alternatives exist.

In airfreight, the first area to examine is time in transit. Putting aside the last-minute emergencies, the improvements in planning data available from point of sale and business intelligence systems are reducing the risk of allowing more lead time, and thus a chance to use ground rather than air.

Smart shippers are substituting information for inventory as they track shipments en route to their locations and count on in-transit inventory as saleable. Better inventory planning gives us a larger time window for time-definite delivery, such as shippers who have taken advantage of substituting for ground services that deliver within 500 miles in one or two days at a fraction of airfreight. We’re now seeing that Cloud-based markets are supplementing traditional carrier networks with entrepreneurs who bid on freight that can be taken in a smaller truck or even a van.

Having said all that, the current airfreight market is softening. Capacity in the form of new players, and the ground substitution services is affecting prices. Shippers could and should begin to ask about more flexibility or added services that can reduce cost and enhance customer experiences.

For the majority of small- and medium-sized shippers, the airfreight market is just slightly less mysterious than the international cargo market. I believe it’s time to change that. Better planning—and perhaps the assistance of an intermediary—can open up opportunities for shippers who need to get time-definite delivery of less-than-truckload products at a price they can afford. •