What the future may hold for dynamic pricing

There was a time when air cargo pricing for both airlines and forwarders in the United States was tightly regulated by a now-defunct federal agency called the Civil Aeronautics Board, or CAB. All rates, charges and rules offered by a freight forwarder required publishing in tariffs or public documents, which were filed with and approved by the CAB under strict standards. Any member of the public, including a competitor, was given free and open access to these tariffs, either at the CAB’s headquarters or any of the forwarder or airline offices.

Making a change to these tariffs, however, was difficult. This action was allowed only after filing a notice with the CAB 30 days in advance. Unique customer pricing was explicitly forbidden. Woe unto the forwarder or airline that charged something other than what was in their published tariffs.

This strict oversight stemmed from the early days of railroad regulation, when enforcing a fair playing field to large and small shippers forced carriers to charge the same rate to all customers who moved the same commodity, in the same quantity, thus avoiding pricing discrimination.

The game changed in the early 1980s, when Congress deregulated the airline and air cargo industries and abolished the CAB. Deregulation allowed for today’s pricing environment for passenger and freight, unfettered by government oversight.

Following deregulation, U.S. commercial aviation joined together with the recently deregulated trucking and rail industries to alleviate government pricing oversight, eventually enabling the more flexible rating environment that we see today. Maritime transport differs in the U.S. ocean shipping arena, as anyone operating seaborne and associated services is required to file a tariff with the Federal Maritime Commission.

Trucking is one of the largest businesses in the U.S., transporting seven out of 10 American products to their final destinations. Thanks to advances in automation, the US$726 billion U.S. trucking industry is seeing the early signs of dynamic pricing. Essentially, this means that trucking organizations are beginning to vary the price for service, based on changing market conditions, similar to the way Uber charges higher rates during high demand times. On a given day, there is a finite number of trucks and a limited number of loads on the market, so carriers base their rates on current market conditions and capacity competition.

Recently, a futures contract market opened in the U.S., which allows truckers, shippers and forwarders to hedge their exposure to rate volatility in three of the most significant U.S. freight corridors. A futures contract is a legal agreement to buy or sell an asset, commodity or service at a predetermined price, at a specified time in the future. In the trucking industry, the futures market will allow shippers to buy contracts from carriers at a guaranteed rate per mile, in a specific corridor, in one particular time frame.

Trucking freight futures are similar to pricing insurance, in that carriers, shippers and intermediaries get to lock in pricing and proactively protect themselves from a future price increase. This assurance helps shippers avoid cash-flow management issues created by unstable pricing. Carriers also benefit, with better operational planning, through knowing where rates are heading in the near and long term. An automated trucking load board provider plans to submit an index that will be the futures settlement price on a given day.

Air cargo is also beginning to see a dynamic exchange through a web-based air cargo platform, which promises to provide forwarders with live rates and capacity availability updates. With this model, a participating airline offers access to its dynamic pricing model and makes it viewable to the more than 1,400 forwarders using the program. Forwarders will be able to see available capacity, book cargo and lock in real-time rates quickly, while allowing the airline to improve its capacity utilization. This system and increased transparency promise to boost efficiency across the board, and allow a quicker price and space commitment for the shipper.

Forwarders are beginning to wonder if the introduction of futures and dynamic exchanges could eventually streamline some segments of the freight transportation market by removing the middleman. In other words, will shippers take a more active role in the booking of carrier space and rates? Of course, only time will tell, but if these platforms are successful, the possibility of rail and ocean futures market participation may not be out of the question.

It is impossible to predict where the transportation futures concept is heading, or if the industry is ready for what some may see as a complex dynamic marketplace.

However, as in the adoption of automation in general, forwarders who ignore these changes may do so at their peril. The certainty lies in the fact that the forwarding industry consists of professionals who thrive on innovation, change and are always up for any new challenge that might be coming down the road.