Air cargo feels the heat as US trucking rates soar after controversial ELD rule
The mandate for US truckers to use electronic logging devices (ELDs) continues to feed controversy ...
Steven Levitt and Stephen Dubner, authors of the best-selling book, Freakonomics, would have smiled at the recent Trends publication letter of WorldACD, an air cargo data provider.
Why? Because part of its analysis is right up their alley.
In the book, they use a case study to highlight the complexity of hiring an expert and paying her a commission of the sales she generates. They found that when real-estate agents sell their own homes, the house is on the market on average for 10 days longer and is sold for a price 3% higher than houses they sell on behalf of people like you and me.
“When she sells her own house, an agent holds out for the best offer; when she sells yours she pushes you to take the first decent offer that comes along. And why not. Her share of the better offer (eg 1.5% of the additional $10,000; – $150) is too puny an incentive to encourage her to do otherwise.”
Let’s translate the above logic to our industry in terms of a general sales agent (GSA) selling the air cargo capacity of its principal airline.
If a forwarder contacts the carrier with the request to book a 500kg shipment at the rate of €1 per kg (excluding surcharges), why would they spend much time trying to get a better rate, if the upside to them is minute?
The maths speaks for itself. At a commission of 5%, the GSA would pocket €25. So why spend the extra effort of trying to get, perhaps, a 10% higher rate and run the risk of losing the shipment altogether if the upside is just an additional €2.50?
During airline workshops I facilitated over the years, I discussed this real-estate analogy and its applicability to the air cargo market with numerous GSAs. And whether the discussion took place in the Americas, Europe or Asia, the response was the same: yes, there are a lot of similarities in how they sell the air cargo capacity of their principal and how the estate agent sells our homes.
But these confirmations remained anecdotal evidence, as there was little data to support the theory – until now.
WorldACD states, in its recent Trend publication, that for the “top-100 country pairs in 2017, GSAs produced yields for their principals on average 12% below the yields generated by airlines doing their own sales”.
By no means am I advocating that an airline is better off having its own sales team than outsourcing it to a GSA. Such an assessment has far more dimensions to it than just the average yield that could be achieved.
More relevant, though, is a discussion on how airlines could incentivise GSAs in such a way that it is financially worthwhile for them to get a slightly higher price.
Or, as one industry expert said: “The behaviour of GSAs is less likely a product of what principles say, but more of how they pay.”
I think Steven Levitt and Stephen Dubner would wholeheartedly agree.