As the 2024 peak season approached, cargo owners and forwarders found themselves staring at the prospect of losing out on limited capacity on air cargo routes to North America and Europe.

Projections of large volumes and tight capacity further constrained by large-scale disruption – especially a port strike along the U.S. East Coast – prompted many to secure airfreight capacity through contracts.

In its outlook for 2025, Xeneta, a global shipping and freight rate benchmarking platform, noted that “in 2024, shippers demonstrated a growing preference for longer-term air freight contracts, with durations of one year or more. These contracts accounted for 63% of all agreements valid in Q4 2024, marking a 16-percentage point increase compared to the same period in 2023.”

American Airlines saw a “big double-digit” increase in strategic contractual agreements with customers last year, reported Roger Samways, commercial vice president at American Airlines Cargo. “Customers value regular, consistent access to capacity,” he said.

Turbulent ups and downs in pricing since the early days of the pandemic suggest caution about the spot market, but contracts have not necessarily insulated customers from these swings. Many found airlines were prepared to give their contracted space to higher bidders unless they agreed to elevated rates in times of tight capacity. Conversely, airlines sometimes found that customers jettisoned contracts in pursuit of lower prices elsewhere at times of capacity gluts.

Niall van de Wouw, Xeneta’s chief airfreight officer, warned that more of these gyrations lie ahead and urged stakeholders to adopt a different strategy.

“Heightened market volatility due to rising global uncertainties will continue to impact air cargo demand, and this could force air freight rates to fluctuate significantly. Therefore, embracing more flexible freight rate negotiation methods, such as indexing or transparent pricing, could foster mutual understanding and better collaboration across the industry this year,” he stated.

Ian Arroyo, chief strategy officer of Freightos, noted that capabilities for more flexible contracts have come a long way since air and ocean carriers began shifting sales into digital channels, a move that involved a shift to a more centralized capacity and revenue management as well as dynamic pricing. The Covid era was a major catalyst for this transition.

The air cargo sector has been faster to adopt dynamic pricing than the ocean carriers, partly because the latter traditionally left pricing and capacity decisions to a greater degree to their country management level but also because the slump in container rates towards the end of 2022 slowed their momentum in that direction, Arroyo noted.

In contrast, many airlines moved to adopt dynamic pricing, with some updating their pricing in five-minute increments, he observed.

Recently, the push on the ocean carrier side to digital distribution of capacity has gained significant momentum, he pointed out. CMA CGM launched their spot rate API a couple of months ago, and others are planning to provide full API suites this year, he said.

On the side of shippers and forwarders, there has been a desire to introduce a degree of pricing flexibility into contracts with carriers, refreshing rates on a more frequent basis or if they stray beyond agreed thresholds.

Renegotiating pricing is time-consuming and costly, though, so cargo owners are looking increasingly to index-lined pricing agreements in their contracts.

When Maersk first experimented with the concept in 2012, data resolution and latency were not at adequate levels, but over the past six years, this has improved massively, which has inspired growing confidence in the concept, especially among large cargo owners, Arroyo said.

Seven Fortune 500 companies were testing index linking in one or more traffic lanes last year and some have adopted the concept for their contracts with multiple carriers, he added.

He expects to see significant gains for the concept this year and for it to become more prevalent in 2026.

This has been facilitated by a shift brought about by the rise of supply chain management in corporate hierarchies. Traditionally, chief financial officers were not inclined to accept significant fluctuations in their logistics cost, which often used to be minuscule in terms of the overall cost of their products, Arroyo remarked.

On the forwarder side, pricing transparency and index-linking have clashed with the business model of basing profits on the margins between buy and sell rates. “If you have different rates what your people can sell than what’s online, then there’s no incentive,” Arroyo said. Lufthansa dealt with the issue by leveraging an extra charge for offline bookings, he added.

Many large enterprise forwarders have concluded that it’s more productive for them to put the amount of time that’s required for price negotiations into value-added activities instead, he remarked, adding that artificial intelligence can be used to fill a tender with pricing elements and call out areas where human intervention is required.

This can be done in a matter of minutes, drastically reducing the time to respond to an RFQ, he noted. “The first to quote is the one to win the business nine out of 10 times,” he said.

“You don’t have to index-link 100% of your traffic,” he pointed out. Segments that show extreme volatility or where data is sparse can be left out of the framework.

Some shippers manage a significant percentage of their cargo through index-linked contacts and have the rest on floating terms that are renegotiated every three or six months, he said.

For many shippers, full index-linked freight pricing is not possible anyway. By and large, carriers have covered general cargo with such contracts and dynamic pricing but made little or no headway in special segments. Likewise, some industries – notably the retail sector and consumer electronics – have embraced dynamic options for their traffic management, but others have shown little interest so far.

Interest in index-linked pricing varies much by customer and market, confirmed Samways. “It’s very market-specific,” he said.

By Ian Putzger

Correspondent | Toronto