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Airfreight: an attractive mode for importers.


The easiest and quickest way for goods to reach many destinations, and in particular landlocked countries and island states, is by air. If economies in packing, insurance and inventory control are considered, if the financial resources tied up in goods in transit by sea are added in and, above all, if allowance is made for the heavy losses that often arise from breakage and theft, the international physical distribution of products is frequently also much less expensive by air than by sea. Many importers and trade promotion officials in developing countries are not aware of this fact. They should therefore take a closer look at the advantages of airfreight when they select the mode of shipment for their foreign trade transactions.

Advantages of airfreight

The economies achieved through airfreight for import shipments are of several kinds: those related to the actual transport operations and those involving stocking and distribution. Transport by air also offers advantages in the financing and marketing arrangements.

Most airlines produce brochures outlining the advantages of airfreight. It is in the interest of importers to get copies of the airfreight brochures issued by all airlines serving the country.

Connections to the port or airport: Many airports are located closer to commercial centres than sea ports are, and transport at the beginning and end of an airfreight journey (from the supplier to the airport of departure, and from the airport of arrival to the consignee) is therefore often shorter and less expensive than the comparable trip for sea freight. Airports outnumber ports around the world, and in many cases they are closer to the site where goods are produced and to their destination than are ports. It has been estimated that the savings on the transport of merchandise to and from airports is about US$0.18 per kilogram compared with transport to and from ports, on an average basis worldwide.

Packing: In most cases, connections by air are direct, without transshipment. Even if the route involves transshipment at an intermediate airport, the time for air delivery does not usually exceed 48 hours from airport to airport. Because of the speed of carriage and the ease of transport to and from the airports on both ends of the journey, a light form of packaging is possible. The wooden crates with jointed planks that are essential for sea transport may be replaced to advantage by lighter and cheaper double- or triple-corrugated cardboard, or merely by a wooden or polystyrene base with a plastic cover.

Statistics show that packaging for airfreight is only 10% to 50% the cost of that for sea transport, depending on the nature of the goods. Savings are made on materials, labour, preparation time of the packaging and lower weight (tare) of the consignment.

Packing is usually charged to the exporter. Therefore the ex-works price quoted to an importer for goods transported by air should be less than a comparable sea shipment. Precisely because of these savings, an importer should obtain two different offers from the exporter for the goods in question, for both sea and air transport.

Handling and customs clearance: Handling operations are simpler and safer for the goods in air transport than in sea shipments. The rollers and the vertical lifts that enable goods to be raised to the level of the flight deck or the cargo holds of aircraft are of a more advanced technology than the usual crude handling facilities at ports. Documentation and customs clearance for air shipments are also easier, faster, more reliable and cheaper than for sea transport.

It is estimated that savings of about $0.18 per kilogram (and even more) occur in all of the activities connected with handling, loading, unloading, documentation, customs clearance on export and customs clearance on import of air shipments compared with sea freight.

Insurance: All of the factors enumerated above enable insurers to offer low premium rates for airfreight shipments. The premium rate for carriage by air is on average one-fifth that for sea transport for the same goods using the same route, for similar insurance cover.

The advantages mentioned above in packaging, handling, formalities and insurance systematically favour air transport both for single shipments and for a sustained flow of imports. The savings described below refer only to the second type of operations, i.e. imports over a period of time.

Tied-up capital: The time factor affects the cost of distribution. Capital is tied up while goods are being transported. During distribution, all goods constitute capital on which no interest is earned. The longer the delivery times, the more costly the transport operation.

The average time saved by airfreight for shipments from Europe is: 7 to 15 days for North Africa, 15 to 20 days for the Caribbean region and the Middle East, 30 to 45 days for Africa and South America, and 40 to 60 days for Asia.

For example with goods valued at $100 per kilogram, with interest rates of 20%, a voyage by sea and by land to a landlocked country lasting 60 days, and a voyage by air from the consignor to the consignee lasting 6 days, including customs clearance on import, the cost in terms of tied-up capital in sea transport will be:

20% x 60/360 x $100 = $3.33 per kg The comparable cost in air transport will be:

20% x 6/360 x $100 = $0.333 per kg

The cost of tied-up capital for air shipments is thus only one-tenth that for sea freight under these specific conditions.

Stocking: Stocking is another consideration that is affected by the time involved in the distribution process. The speed and flexibility of air transport make it possible to reduce and space out consignments at the request of the importer. The result is fewer goods held in stock and consequent savings, both on tied-up capital represented by the stock and on warehousing costs. The main elements in these savings are lower insurance on goods in stock, warehouse charges, handling costs on receipt and release, stockkeeping costs and general operating expenses.

These charges often amount to 15% to 20% of the cost of the goods on departure (stocking by the exporter) and on arrival (stocking by the importer). The important holds larger stocks than the exporter to allow for uncertainties of the market and for delays (the idea of buffer stocks). The savings resulting from air transport are therefore larger for the importer than for the exporter.

Losses: The extent of loss of stocks of imported goods stored in the importer's warehouse is dependent on the nature of the goods, whether they are susceptible to dampness (rust, mould) or injury upon impact, are breakable, are perishable and so forth. Obsolescence, wear and tear, and deterioration spoil goods in stock. Loss is lower on smaller stocks obtained by air transport than on large stocks necessitated by sea transport.

Financing: The speed of airfreighted consignments also works to the importer's benefit in the financing of the goods. The goods are obtained rapidly, and if payment is to be made within a set period, for example 60 days, the importer may sell the goods before even having paid for them.

Returning to the example above of a delivery time of 60 days for sea transport and 6 days for air transport, an importer whose payment terms are 60 days will have no credit leeway for sea-freight consignments. On the other hand he will have 54 days of credit for airfreight shipments.

With documentary credits, payment must be made upon shipment of the goods. If the importer receives the consignment rapidly by air (for instance in six days), he is obviously in a better position than if he must wait for two months.

Marketing advantages: Goods arriving more rapidly are sold more rapidly. This results in increased sales, a reduction in the quantity of unsold goods and costly returns. An importer's reputation is strengthened by air transport, which does away with goods going out of stock and with penalties for late delivery. After-sales service is also more effective when goods are shipped by air because of the possibility of building up numerous small stocks at many points.

Negative aspects of airfreight

Not all aspects of airfreight are positive.

First and foremost, the cost is high. Whether or not it is always higher depends on the particular goods and on the specific trading situation. It is roughly, on average, between 2.5 and 6 times higher than sea freight.

Another negative aspect of airfreight is that it is unsuitable for bulk transport (because of limited carrying capacity). It is prohibited for some dangerous products.

In addition, customs duties will in many cases be higher with airfreight compared with sea freight. For goods purchased on terms of "cost, insurance and freight" (CIF), customs duties are based on the CIF value. As the freight charges are considerably more for air than for sea consignments, the customs duties are higher for the same goods when they arrive by plane.

Many of the statistical comparisons published by airlines show total distribution costs to be the same or even lower for airfreight than for sea transport. This is not so in practice. In the vast majority of cases, distribution by air does require a higher financial outlay by the importer than by sea.

What can be said, however, is that an importer is going to have to pay a somewhat higher cost for air shipment, but that he will benefit by doing so.

The examples that follow show that the cost of transport by air is slightly higher than by sea. The real question that the importer has to ask himself is whether he is prepared to pay X% more to receive his goods very quickly, and to specify what that percentage is.

Choosing between air and sea transport

When planning purchases from foreign sources, an importer must consider whether the goods should be carried by sea or by air transport. The decisions will depend on a series of considerations, largely concerning the goods, on the one hand, and the route, on the other.

Value of the goods: Importers should beware of statements to the effect that only goods above a certain set value per kilogram (for instance $20.) should be carried by airfreight. This is not necessarily the case. A thorough analysis must be made in each case in relation to the goods, the freight rates, conditions affecting the flow of goods and the route, among others.

At what point does the value of the goods make carriage by air advisable? Some experienced traders consider that the airfreight costs should not exceed 25% of the value of the merchandise in question. Above this figure, they ship their goods by sea, except for special cases. This method tends to rule out airfreight for bulky goods with a low added-value and, in general, raw materials, which are usually shipped in bulk transport vessels.

Because of their value, the following exports are among the most suitable for transport by air: mechanical and electrical equipment; chemical products and their derivatives; textiles and ready-to-wear clothing; perishable goods (food-stuffs); and various manufactured articles.

Freight rates: Another system used by some shippers when deciding between air and sea freight is the ratio of the freight charges of the two modes. Those using this approach do not send goods by airfreight when that cost is more than four times the cost of sea transport.

Airfreight charges are often less than four times sea freight in any case, a fact that many exporters and importers in developing countries may not be aware of.

This calculation and the preceding one can provide valuable guidelines for selecting between air and sea modes by establishing from the outset whether airfreight can even be considered as an alternative. Again, however, other factors are also involved and should likewise be considered:

* Air cargo rates go down rapidly as the weight transported increases. For example, they drop to one-fifth of the initial figure between 30 kg and 100 kg - the cost per kg of sending 1,000 kg by air is one-fifth the cost of sending 30 kg. There is no sliding scale for marine freight rates.

* Minimum charges for low-weight shipments are far higher for sea transport that air transport. Because of the minimum charges, airfreight is in most cases less costly than sea carriage for consignments of less than 300 kg.

The rates by volume are also much more attractive for air transport than for sea transport. Volume charges are not applied below 6 cu.m. per ton for airfreight, while for sea transport the level is lower. Thus only bulky consignments are charged by volume for airfreight, which is not the case for sea cargo.

The charge for goods carried by sea to the majority of destinations is calculated on the basis of the payment unit (PU): 1 ton of 1 cu.m. is charged as 1 PU, and 1 ton of 6 cu.m. is charged as 6 PU. For example, assume that a shipment is charged at a rate of $350. per PU (ton or cu.m.) for sea transport and at $2.60. per kg for each ton in air transport. (In this example, the cost of airfreight is about 7.5 times the cost of sea freight, and the ratio referred to above is therefore greatly exceeded.) The differences in price between the two modes drops appreciably as the volume increases:
 Weight/ Sea Air Air/sea
 volume $350/PU $2.60/kg ratio
1 ton = 1 cu.m. $350 $2,600 7.4
1 ton = 2 cu.m. $700 $2,600 3.7
1 ton = 3 cu.m. $1,050 $2,600 2.5
1 ton = 4 cu.m. $1,400 $2,600 1.9
1 ton = 5 cu.m. $1,750 $2,600 1.5
1 ton = 6 cu.m. $2,100 $2,600 1.2

* By grouping their air cargo shipments, traders can get attractive rates if they stay within the limits of the lowest category of rates. Grouping also makes it possible to put packages of different sizes together so that the volume does not go above six times the weight, which allows the shipper to qualify for a highly advantageous airfreight rate.

Nature of the goods: Some categories of goods go by air irrespective of the obviously higher costs of airfreight than sea transport. The two methods described above for determining ratios are not applicable when the goods are, for example, perishable (such as fruits and vegetables), urgent (for instance new fashion garments) or already delayed because of manufacturing difficulties.

Except for bulky goods with a low added-value, aircraft are suitable for practically all goods. (Even some bulky goods are airfreighted - for instance cement has been carried by air to Nigeria and Saudi Arabia, and bricks to Lebanon.)

Distance: Airfreight is better suited to long distances than sea transport, and therefore to intercontinental routes, which is of particular interest to developing countries. With an intercontinental route the only possible transport modes are air and sea. For transport within the same continent, on the other hand, many forms of transport compete with each other - rail, road, waterway and air. For example, express road transport with guaranteed delivery times is often faster and cheaper than carriage by air within a continental region. This is obviously not applicable to intercontinental transport.

Complexity of the route: Some routes served by marine transport are quite complex, and air transport is thus advisable. For instance:

1. Infrequency: Some routes are covered by only a few sailings, for example one ship a month. If the sailing date is missed for any reason, an entire month is lost, which is unacceptable both commercially and operationally. The alternative is to shift the goods at great expense to another port at which there is an intermediate sailing date.

2. Transshipment along the shipping route: Using a shipping route that involves transshipment of the goods is risky. The transshipment may result in breakage, loss of parcels, theft and time delays. If the goods are in a container these risks are fewer, but containerization is still used only on a limited scale by some developing countries. On the other hand, transshipment from flight to flight within the same airport is far less risky.

Marine transshipment is prohibited under many forms of documentary credits. This prohibition does not apply to carriage by air, when the goods are entered on an airway bill on which the entire route and the name of the airport of destination are indicated.

3. Congestion of the port of destination: Congestion of certain ports is a frequent occurrence. The time spent waiting for unloading at the port of destination entails additional charges for arriving goods (a port congestion surcharge) and also considerably increases the overall costs related to the tied-up capital represented by the goods.

Congestion is sometimes due to insufficient infrastructures, such as quays, handling facilities or depth of the berth. Unloading the goods on barges by using the ship's own handling equipment involves an additional transshipment that is hazardous for the goods.

Airport facilities (runways, unloading facilities and so on) involve less investment and are therefore often better developed than port facilities.

4. Complex connecting transport to and from the airport or port: This problem is specific to landlocked countries. Because they have no coastline they are obliged to route their goods through a foreign port, followed by transport via rail, road, river or lake (or a combination of those modes), with many hazards to the goods arising from transshipments; from the state of road, rail and lake infrastructures; the crossing of frontiers; and, lastly, the safety of the route (such as theft or political unrest).

As mentioned above, the best way to overcome the disadvantage of being landlocked is shipment by air, which establishes a direct link between the exporting country and the airport of the importing country. Airfreight avoids all of the difficulties encountered on the ground referred to above: infrequency of services, transshipment, congestion at the port of destination or lack of facilities at it, and the many hazards of connecting transport to and from the airport or port.

Safety of the goods: Whether goods are damaged, stolen or lost, the result is basically the same. The "safety" factor in the shipment of goods should be given more consideration than the cost of the transport.

Insurance is usually compulsory for goods shipped to and from developing countries. However insurance is no more than a safeguard. It is better to look upon an insurance premium as a pure loss and to receive the goods intact, than subsequently to be reimbursed in the case of theft or damage. This is a viewpoint that is not always shared by importers in developing countries, who sometimes consider that if damage or theft occurs, the insurance company will pay. This overlooks the fact that many incidents are not covered by the insurance taken out and that, all too often, the reimbursement does not include the expected profit.

Under these conditions, a valid comparison between air and sea transport must include a "loss coefficient" ratio for the two types of transport. To determine the loss coefficient the importing organization must produce statistics for each separate import operation and for each category of goods purchased. If the loss coefficient regularly exceeds an average of 3% of the value of the foods for sea transport, whether or not the loss is reimbursed by the insurance company, an importer should consider the alternative of airfreight, for which the loss coefficient is around zero, given the safety and the speed of air transport. The loss coefficient is systematically lower for airfreight than for sea freight. The difference is even larger for imports into a landlocked or an island country than for those into others.

Insurance companies usually keep statistics that they refer to as "premium-to-loss" rates. This is the ratio between the premium paid and the losses reimbursed. If this ratio is high for a given importing company, the company can claim a reduction of the premiums that it pays for the next period. A study of these rates shows that air transport is very safe: The premium-to-loss rate is systematically and clearly lower for airfreight than for sea freight.

An importer should therefore consider the possibility of air transport if the voyage has the following characteristics: the route is long and complicated, service is infrequent, transshipments are necessary along the sea route, the port of destination is congested, connecting transport to and from the port is complicated (for a landlocked country), the loss coefficient in sea transport is high and the "premium-to-loss" rate for sea carriage is high.

Making a rational choice

As discussed above, the choice of the mode of transport for the import of goods is dependent on many factors. The four following preliminary analyses, which were presented in the proceeding sections, can be conducted to determine if a detailed comparative study of the alternative modes is required:

1st analysis: cost of air transport/value of goods [is less than] 1/4

conclusion = air transport possible

2nd analysis: cost of air transport/cost of sea transport [is less than] 4

conclusion = air transport possible

3rd analysis: losses by sea/value of goods [is greater than] 3/100

conclusion = air transport possible

4th analysis: special circumstances

conclusion = air transport vehicle

Using figures available in his enterprise, the prices quoted by his supplier and the detailed quotations of his forwarding agent (which he can check out with the shipping lines and airlines serving his country), an importer can produce a comprehensive table to compare air and sea transport costs for a given import transaction.

Importers would be advised to make such a comparison systematically whenever the first three analyses above lead to the conclusion that air transport is advantageous and in all cases of special circumstances, and to do so for all import transactions.

PHOTO : The easiest and quickest way for goods to reach many destinations is by air transport.

PHOTO : A lighter form of packaging is possible for goods shipped by air than for those sent by sea.

PHOTO : Handling operations are simpler and safer for air shipments than for sea transport.
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Title Annotation:International Physical Distribution; includes related article
Author:Chevalier, Denis
Publication:International Trade Forum
Date:Jul 1, 1990
Next Article:Advice to new silk exporters.

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