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CHAPTER 7

Freight rates

7.1 Theory of freight rates


Freight is the reward payable to the carrier for the carriage of goods in a
mercantile or recognized condition ready to be delivered to the merchant.
The pricing of air or sea transport services, usually in combination with
land transport services, is dependent on the forces of supply and demand,
but the factors affecting both supply and demand are perhaps mjore
complicated than is the case of most other industries and services. The
demand for a particular international transport service mode(s) is
basically derived from the demand for the commodities carried and is,
therefore, affected by the elasticity of demand for these commodities.
The price eventually fixed for a chartered vessel or aircraft depends
largely on the relationship between buyers and sellers. Where both groups
are numerous and have equal bargaining power, and where demand is
fairly elastic, conditions of relative perfect competition prevail. Under
these conditions for chartered tonnage, prices are fixed by the haggling
of the market and are known as contract prices. The market for tramp
charters operates under such conditions and the contract is drawn up as a
agreement known as a charterparty.
Under these conditions, the rate structure for tramps is a very simple
product and emerges from the competitive interplay of supply and
demand.
Chartering can also extend to Ro-Ro vehicles in the trades and markets
beyond. The shipper/freight forwarder can charter a portion of the vehicle
from the road operator either on a regular or spasmodic basis.
Air freight rates operative on regular scheduled international services are
decided collectively by the airlines through the IATA mechanism which
adopts policy of parity on the level of rates on individual services/routes.
The rates reflect market conditions and service cost. A major share of the
air freight market is now conveyed under agent sponsorship involving
consolidation arrangements and integrators.
Overall, a properly compiled tariff should encourage the movement of all
classes of cargo to ensure the best balance between revenue production
and the full utilization of the transport unit.

7.2 The constituents of the freight rate


Rate making has changed significantly in recent years as a result of the
development of multi-modalism. No longer is the rate based on one
carrier on a port-to-port or airport-to-airport basis; it also involves two or
three carriers providing a dedicated door-to-door service featuring one
overall composite rate and the sea/land-bridge from the Far East to North

America using the gateway ports of Vancouver, Los Angeles, Seattle and
double-stack container trains. overall, the rate would feature the
following:
1. Consignor premises and collection to Ipoh, based on zonal road rate
charge.
2. Processing of cargo/handling/packaging/documentation at Ipoh.
3. Agents charges including customs formalities.
4. Rail journey Ipoh to Port Klang.
5. Handling charges to Port Klang raised by the port authority to cover
transhipment costs.
6. Shipowners freight costs Port Klang to Port Dubai.
7. Handling and transhipment charges at Port Dubai to convey goods
from port to airport; these are raised by the port authority and agent.
8. Handling charges at Dubai Airport, including documentation and the
agent; these are raised by the airport authority and agent.
9. Air freight charges from Dubai to Frankfurt raised by the airline.
10.Handling/documentation/customs import duty at Frankfurt Airport.
These are raised by the airport authority and the agent.
11.Delivery by rail or road to consignees warehouse; rail charges raised
by the German railways; and road charges raised by road hauliers.
Basically, the tariff raised for a consignment can embrace a number of
elements other than the sea, air, plus inland transport tariff and these are
listed below.
1. Tariff cargo rate.
2. The customs clearance charge.
3. Freight forwarders commission.
4. Customs duty.
5. Disbursements.
6. Cargo insurance premium.
7. Delivery/collection charge.
8. Transhipment charge .
9. Documentation charge .
10.Demurrage.
11.Handling cost.
12.Wharfage charge .
13.Cargo dues.
14.Rebate.
15.Bunker or fuel surcharge.
16.Currency surcharge .
17.Surcharges are usually raised for heavy lifts such as indivisible
consignments and on excessive height or length of Ro-Ro rated traffic,
together with any other traffic where special facilities are required.

7.3 Factors influencing the formulation of freight rates


We will now examine the salient factors which influence the formulation
of freight rates.
1. Competition. Keen competition on rates exists among various modes
of transport. For example, in the UD-Europe trade, competition exists
amongst air freight agents offering consolidated services, Le Shuttle
(Euro Tunnel), ISO containerization in the Asia/Europe, Asia/North
America and Europe/North America trades and international road
haulage.
2. The nature of the commodity, its quantity, period of shipment(s) and
overall cubic measurements/dimensions/value.
3. The origin and destination of the cargo.
4. The overall transit cost .
5. The nature of packaging and convenience of handling.
6. The susceptibility of the cargo to damage and pilferage.
7. The general loadability of the transport unit.
8. Provision of additional facilities to accommodate the cargo, namely
heavy lifts, strong room, livestock facilities, etc.
9. The mode(s) of transport .
10.Actual routing of cargo consignment. Alternative routes tend to exist,
particularly in air freight, with differing rate structures and overall
transport costs.
11.Logistics-the supply chain value added benefit.

7.4 Air freight rates


The formulation of air freight rates is controlled by the International Air
Transport Association(IATA) insofar as major world airlines are affiliated
to it, representing approximately 98 percent of international air freight
services.
International air cargo is charged by weight, calculated either as actual
gross weight or in equivalent volumetric units, whichever is the greater.
Thus air cargo is charged by weight except where the volume is more
than 366 in3/kg. In such cases, volumetric charges apply and each unit of
366 in3 is charged as 1 kg. To calculate this, the maximun dimensions of
the piece should be multiplied together to give a volume in cubic inches.
This volume must be divided by 366 and the result will be the vulumetric
weight. If this is more than the actual weight, then the volumetric weight
will be the chargeable weight. Where the consignment consists of pieces
varying indensity, the volumetric calculation will be based on the whole
consignment. For metric measurements, 6000 cm3 = 1 kg .
A brief examination of each air freight rate classification now follows:
1. Specific commodity rates.

2.
3.
4.
5.
6.
7.

Classification rates (surcharges and rebates).


Valuation charge.
General cargo rates.
Unit load device (ULD) rates.
Cabotage.
Express handling units.

7.4.1 Charges
1.
2.
3.
4.
5.
6.
7.

Payment of charges.
Charges forward.
Cash on delivery.
Disbursements.
Perishable cargo.
Mixed cargo.
Packaging of the consignment will be charged on the basis of the
highest rated article in the consignment.
8. Cargo subject to regulations relating to the carriage of dangerous
goods must be offered separately, and clearly indicated in the
Shippers Declaration.

7.4.2 Air freight consolidation

7.5 Canal and inland waterways freight rates


The portion of the international transit conveyed by canal will have a
tariff based on distance, commodity type, transhipment cost, handling
charges and any other miscellaneous charges.
Distribution of international trade by inland waterway based on the major
European ports is very extensive on the Continent for a variety of
reasons. Rates are based on weight or cubic measurement and vary by
commodity and trade. It is a highly competitive method of distribution for
certain commodities and/or trades and one which is likely to continue to
expand as the system is modernized and further developed.

7.6 International road haulage freight rates


The rates charged to the international road freight forwarder to convey
the vehicle and/or trailer on the vehicular ferry are based on the
trailer/vehicle length, and whether it is empty or loaded, accompanied or
unaccompanied.
To the shipper using the international road freight forwarders service
much of which is group age traffic-the actual rate is based on the cubic
measurement or weight of the cargo, whichever produces the greater

revenue.

7.7 International rail services rates


Details of the international rail service rates are given below:
1. Cargo wagons.
2. Groupage services offering collection and delivery between UK
fretght villages and key industrial and commercial centres.
3. Purpose-built car transporter wagons in complete train load formation.
Rate are negotiated direct with suppliers to move the cars between
factories and distribution points.
4. Maritime ISO container trains. Rates are negotiated with the container
operators to convey TEUs between seaport and container terminals
usually in complete train load formation.
5. Intermodal services, the UK and the Continent. This involves 1200
intermodal wagons operating between UK-based rail Euro terminals
and 15 Continental industrial centres. The wagons are 2.77 m high and
2.5 m wide and refrigerated units are 2.75 m high and 2.6 m wide.
They can accommodate swap-bodies and containers in the form of
tilts, tanks, reefers, flats, dry boxes, etc. rates are based on a range of
options to meet shippers needs including the chartering of wagon
space on a regular or irregular basis, to the chartering of a complete
train.
6. The Le Shuttle rate for the road haulage vehicle travelling between the
portals will be based on the vehicle unit. Hauliers who can guarantee a
certain volume of business annually will be given a discounted rate.

7.8 Maritime container rates


The mega container operator with a fleet in excess of 250000 TEUs tends
to formulate their rate structure on three factors:
1. the cost of the services;
2. the value added benefit the service provides to the shipper;
3. the opportunities in the market place for containerized goods.
An illustration of consolidator rates strategy under NVOCC is given
below:
Shipowner rate
1. 50 individual shipments of 2 tonne at LCL rate of US60 per
tonne

charged

US6000.
Consolidator rate

by

the

shipping

line(US 60*100

tonne)

2. 50 individual shipments of 2 tonne at consolidator rate of US30


per tonne(US30*100 tonne)

US3000

Total Rate Difference

US3000

3. Rate per tonne charged by consolidator to individual


Shippers(50 shipments at 2 tonne = US5000)
4.

US50

Saving per tonne to shippers(i.e. US 60- US 50)

US10
5. Margin of profit per tonne to consolidator
(i.e. US50- US30)

US20

6. Saving to shippers (50 shipments at 2 tonne US6000


Shipowners rate-50 shipment at 2 tonne US5000
Consolidator rate)
7. Profit to consolidator

US1000
US2000

The above demonstrates a situation where the shipowners LCL rate per
tonne is US 60, whereas the NVOCC consolidator rate to shippers is
US50, yielding a profit to the consolidator of US20 per tonne on the
basis that the wholesale rate is US 30 per tonne quoted by the
shipowner.

7.9 Sea freight rates


In more recent years there has been a tendency in an increasing number
of liner cargo trades to impose a surcharge on the basic rate. This includes
bunkering or fuel surcharge, currency surcharge and finally surcharges
raised on heavy lifts such as indivisible consignments or on excessive
height or length of Ro-Ro traffic.

7.10 Calculation of freight rates


To illustrate the calculation of the freight rate applicable to all transport

modes, an example is given below.


Consider the despatch of the following luxurt food items from
Birmingham to Milan; all items are packed in tri-wall cartons:
6 cartons 120*80*80 cm; weight of each carton 50 kg
Freight rates are:
Air 2.50 per chargeable kg
Sea US150 per tonne W/M (assume 1.8 = 1)
Road 200 per 1000 chargeable kg
Chargeable weight/volume ratios for each mode should be assumed to be:
Air 6 CBM = 1000kg
Sea 1 CBM = 1000 kg (CBM = cubic metre)
Road 3 CBM = 1000 kg
Air-Volumetric12*80*80
One carton = kg
6000
12*80*80
Six cartons = 6 * kg = 768 kg
6000
Air freight rate2.50 per kilogram
Total air freight volumetric 768 kg * 2.50 = 1920
Weight
1 carton 50 kg
6 cartons, 6*50 kg = 300 kg
Air freight rate 2.50 per kilogram
Total air freight weight = 300 kg * 2.50 = 750
Sea rate US150 per tonne (1000 kg)
Rate sterling US150 / 1.8 = 83.33 per tonne

Rate sterling per kilogram 83.33 / 1000 = 00.08


Volummetric
12*80*80
1 carton = kg
6000
6*12*80*80
6 carton = kg = 4608 kg
6000
Sea freight rate 00.08 per kilogram
Total sea fright rate volumetric 4608 kg * 00.08 = 368.64
Weight
One carton = 50 kg
Six cartons, 6*50 kg = 300 kg
Sea fright rate 00.08 per kilogram
Total sea freight rate = 300 kg *00.08 = 24.00
In some trades the rate would be based on the nearest tonne, in which
case the volumetric rate would rise from 4608 kg to 5000 kg and yield
416.65, and the weight from 300 kg to 1000 kg to product 83.33.
Road
Rate 200 per chargeable 1000 kg
Road rate per kilogram 200 / 1000 = 00.20
Volumetric
12*80*80
1 carton = kg
3000
6*12*80*80

6 carton = kg = 1536 kg
3000
Road freight rate 00.20 per kilogram
Total road freight 1536 kg * 00.20 = 307.20
weight
1 carton 50 kg
6 carton, 6*50 kg = 300 kg
Road freight rate 00.20 per kilogram
Total road freight rate 300 kg * 00.20 = 60.
Most carriers would calculate the road freight when mention is made of
per 1000 kg chargeable on the basis of rounding up to the nearest 1000
kg .hence the volumetric would rise from 1536 kg to 2000 kg yielding
400, and the weight from 300 kg to 1000 kg producing 200.
The carrier would charge the volumetric or weight rate which will yield
the highest income. Accordingly, in the example the answer would be as
follows:
Air (volumetric)

1920

Sea (volumetric)

364.64

Road (volumetric)

307.20

(416.65, nearest tonne)


(400, nearest 1000 kg).

An alphabetical list of salient freight rates is given below:


Ad valorem. This is based on the declared value of the cargo whereby
merchandise declared at 1000 with 2.5 percent ad valorem rate would
be charged 25.
Antiques. Antiques including art treasures require special packaging by
an accredited company and special freight rates apply. Freight forwarders
tend to specialize in this business.
Bloodstock. This involves the movement of racehorses. Special
arrangements and rates apply by air and Ro-Ro ferry. All must be

accompanied by a groom.
Box. A container rate.
Commodity.
Commodity box. A container rate.
Consolidated. The rate is for consolidated consignments usually based on
W/M option. Also termed the groupage rate.
Dangerous cargo. Conveyed under ADR, RID, IMO and IATA
regulations, involving a rate about 50 percent above the general cargo
rate.
Dead freight. This usually arises when a charterer fails to provide a full
cargo for a ship.
Express Air Freight Service. For packages, documents, usually involving
couriers.
FAK(freight all kinds). This rate applies to all types of cargo irrespective
of commodity type.
Fixture. chartering a vessel
Groupage. See consolidated entry.
Household effects. Removal of household furniture. Special packaging
and rates apply. Some agents specialize in this business.
Indivisible loads. Such consignments are of excessive weight or
dimensions and require special handling equipment and arrangements.
Livestock. Special rates and arrangements apply.
Lump sum freight. This is an amount payable for the use of the whole or
portion of a ship.
Pallets. Rates applicable to palletized cargo.
Postal. There is a wide variety of postal services ideal for documents,
small packages and samples.
Project forwarding. This involves the coordination through a freight
forwarder of all the international transportation arrangements of all
products relative to a major capital project such as a new airport terminal,
power station, etc.
Rebate. A discount on a published rate attained through negotiation on a
guaranteed volume over specified period, etc.
Ro-Ro rates. Applicable to road haulage movement.
Trade vehicles. Rates involving the movement of trade cars, lorries,
buses, etc.
W/M. Option weight/measurement ship option based on weight or
measurement evaluation.

7.11 Royal Mail International


Royal Mail International (RMI) operates a strategic business witin Royao
Mail. Overall, it is the foremost UK based international carrier and has
effective links with the worlds postal administrations and offers a

guaranteed delivery to 225 countries.