How to Make Money in Air Freight: Profit Maximization Strategies

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How to Make Money in Air Freight: Profit Maximization Strategies

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In freight forwarding, the air freight division can quite easily either be the most profitable or least profitable part of the company.

The difference is whether a business has a deep understanding of the fundamentals of air freight pricing and the secrets to making money in air freight forwarding.

The Common Approach:

As a freight forwarder, air freight is likely a small division of your company, certainly not the focus. If you’re based in the US, it’s probably Ocean Imports.

Many companies offer air freight simply because they feel that their customers expect them to be a full-service logistics company or occasionally have an ocean freight shipment that has been delayed a few times by the steamship line and became urgent. Other companies will build a quoting desk, working on shipments as they are requested.

In both scenarios, shipments are quoted and booked one-by-one and profits are limited to the markup placed onto each line item of the quote or if you’re lucky enough your customer purchased insurance. There are opportunities to increase profit through operational improvements such as pre-building cargo or doing pick-and-drops but these opportunities are limited and have risks associated with them.

The Structure of Air Freight Pricing:

The standard way air freight is priced leaves an incredible opportunity for profit generation.

To understand the mechanisms it’s important to start with some definitions.

Air Freight Pricing is based on Chargeable Weight.

Chargeable Weight (kg) = the maximum of the Gross Weight or Volumetric Weight.
Volumetric Weight (kg) = Pieces x ( L x W x H ) / 6000 (dims in centimeters)

Air Freight Pricing is based on Weight Breaks.

A typical price tariff looks like this where Cost equals the Chargeable Weight x Per Kilo Rate:

The Secrets to Making Money in Air Freight:

Upon careful consideration of the structure of air freight pricing, two key insights are obtained:

Consolidation is essential because there are volume discounts
Volume/density mix is incredibly important, as the volumetric weight equation is fixed

The first insight on consolidation is perhaps obvious but the impact of the volume/density mix is routinely underestimated and is the fundamental secret to making money in air freight.

It’s easiest to see the impact in a few simple examples:

Example 1 - Consolidation Only

Example 2 - Consolidation + Volume Mixing

In this scenario, because we smartly consolidated the dense shipment 1 with the volumetric shipment 2, the total savings was $1,250 or 30%!

This is because the dense shipment 1 turned this consolidated shipment into one that is driven by the gross weight instead of the volume weight, thereby negating the high volume weight of shipment 2.

If you carefully look at the numbers, you can see we moved shipment 2 for only 100kg extra even though the chargeable weight should be 590kg alone, this feels almost free!

How to transform your air freight division into a profit driver

In these examples, we illustrated that by intelligently consolidating cargo with different densities you can unlock enormous profits! And based on the structure of air freight pricing, there is no sector of logistics that has anywhere close to the profit potential of air exports.

It’s of course easier said than done but there are numerous examples of companies growing their forwarding businesses tremendously by implementing this knowledge.

4 tips to get started or expand your existing operations:

Sell to diverse shippers and agents. Be careful of too much vertical specialization.
Look for opportunities to consolidate and invest in technology to support the added effort
Find export and import partners to support your consolidations.
Look and quote aggressively for “starter” shipments. If you secure a dense or volume shipment, sell aggressively to obtain additional cargo that fits your consolidation.