Freight Rates, Tariffs & Pricing in Air Cargo: Types, INCOTERMS & Cost Structures

TAKEAWAYS:

• Air cargo pricing uses five core rate types (general, special, all-kinds, dimensional weight, and volumetric weight), each calculated differently and tied to cargo characteristics.
• INCOTERMS (e.g., EXW, DAP, DDP) define who bears costs/risks at each stage of air cargo transport—critical for contracts and insurance claims.
• Airlines determine rates via IATA’s Uniform Freight Classification (UFC) and Worldwide Air Freight Tariff (WAFT), adjusted for fuel surcharges, peak seasons, and cargo density.
• Dimensional weight (volumetric weight) often exceeds actual weight for low-density cargo (e.g., textiles), forcing shippers to pay more for space than mass.
• Tariff structures (e.g., piece rates, weight-based, or combination rates) vary by airline, route, and cargo type—always check the Air Waybill (AWB) for final charges.
• Real-world impact: A Kathmandu-to-Dubai shipment of pharmaceuticals under DAP terms means the airline (e.g., Nepal Airlines) handles customs clearance, while under EXW, the exporter (e.g., Himalayan Drug) bears all risks until handover.

1. Types of Freight Rates in Air Cargo

Freight rates determine how much a shipper pays to transport cargo by air. Airlines use five primary rate types, each calculated based on cargo attributes like weight, volume, or value. Below is a comparison table and worked examples.

1.1 Comparison of Freight Rate Types

1.2 Worked Example: Calculating Chargeable Weight for a Daraz Shipment

Scenario: Daraz (Nepali e-commerce) ships 20 boxes of winter jackets from Kathmandu (KTM) to New York (JFK) via Qatar Airways. Each box measures 50 cm × 40 cm × 30 cm and weighs 8 kg.

• Actual Weight: 20 boxes × 8 kg = 160 kg
• Volumetric Weight per Box: (50 × 40 × 30) ÷ 6000 = 100 kg (since 1 m³ = 6,000 cm³ ÷ 366 cm³/kg ≈ 167 kg, but IATA uses 6,000 for simplicity).
• Chargeable Weight: Max(160 kg, 200 kg) = 200 kg (because volumetric weight dominates for low-density cargo).
• Freight Cost: If Qatar Airways’ all-kinds rate is $4.50/kg, total cost = 200 kg × $4.50 = $900.

Why This Matters:

• Daraz would lose money if they only charged by actual weight (160 kg × $4.50 = $720), as airlines prioritize cargo density (space efficiency).
• Real-world tie-in: Airlines like Nepal Airlines or Biman Bangladesh use similar calculations for cargo from Kathmandu to Dhaka or Delhi.

2. How Airlines Determine Freight Rates

Airlines don’t set rates arbitrarily—they follow global standards and adjust for market conditions. The key sources are:

2.1 IATA’s Uniform Freight Classification (UFC)

• Categorizes cargo into 45 classes (1–45) based on density, handling risk, and liability.
• Example: Live animals (Class 1) cost more to insure than books (Class 45).
• How it works:
  • Density Factor: Cargo with low density (e.g., cotton) gets a higher classification (worse rate).
  • Liability: Hazardous goods (e.g., lithium batteries) incur surcharges.

2.2 Worldwide Air Freight Tariff (WAFT)

• Published by IATA, this is the global price list for air cargo.
• Includes:
  • Base rates per kg for routes (e.g., KTM–LHR vs. KTM–DOH).
  • Surcharges (fuel, security, peak season).
  • Minimum charges (e.g., $50 for shipments < 50 kg).

Example from WAFT:

2.3 Factors Affecting Freight Rates

3. INCOTERMS® 2020: Cost and Risk Allocation in Air Cargo

INCOTERMS (International Commercial Terms) define who pays for and bears risks at each stage of transport. For air cargo, the most relevant terms are:

3.1 Key INCOTERMS for Air Cargo

3.2 Worked Example: INCOTERMS in a Kathmandu-to-London Shipment

Scenario: A Nepali company exports handmade carpets to a UK retailer via British Airways (BA).

• Contract Terms: CIP London Heathrow
• Breakdown:
  1. Seller (Nepal):
     • Pays for packaging, loading at Kathmandu, air freight (BA), and insurance.
     • Bears risk until cargo lands in London.
  2. Buyer (UK):
     • Pays for UK customs duties, unloading, and local transport.
     • Bears risk after unloading at Heathrow.

Why This Matters:

• If the cargo is damaged in transit, the insurance (paid by seller) covers it.
• If customs delays the shipment in London, the buyer handles it (since risk transfers at destination).

4. Tariff Structures and Pricing Models

Airlines use three primary tariff structures to price cargo:

4.1 Piece Rate Tariff

• Definition: Charges per individual piece/unit (e.g., cartons, pallets).
• When Used: Bulky but lightweight cargo (e.g., auto parts, furniture).
• Example:
  • Nepal Airlines charges $15 per carton for shipments from KTM to Delhi.
  • A shipment of 100 cartons = $1,500 (regardless of weight).

4.2 Weight-Based Tariff

• Definition: Charges based on actual or chargeable weight.
• When Used: Dense cargo (e.g., metals, machinery).
• Example:
  • Qatar Airways charges $5.50/kg for a 500 kg shipment of steel → $2,750.

4.3 Combination Tariff

• Definition: Combines piece rate + weight (common for mixed cargo).
• When Used: Shipments with both heavy and bulky items.
• Example:
  • Singapore Airlines charges:
    • $10 per carton (minimum 5 cartons).
    • + $4/kg for weight over 100 kg.
  • A shipment of 8 cartons weighing 120 kg → (8 × $10) + (120 × $4) = $80 + $480 = $560.

5. Real-World Applications: How Companies Use These Concepts

5.1 Case Study: Daraz’s Air Cargo Strategy in Nepal

Problem: Daraz (Alibaba-owned) needs to ship electronics from China to Nepal via air cargo but faces:

• High dimensional weight costs (e.g., smartphones have low actual weight but take up space).
• Peak season surcharges during Dashain/Tihar.

Solution:

1. Negotiated All-Kinds Rates (AKR) with Qatar Airways for bulk shipments.
2. Optimized packaging to reduce volumetric weight (e.g., using smaller cartons).
3. Used CPT terms to shift freight costs to buyers (customers pay extra for air freight).

Outcome:

• Reduced costs by 15% by minimizing dimensional weight charges.
• Faster deliveries during peak seasons (critical for e-commerce).

5.2 Case Study: Nepal Airlines’ Pharmaceutical Shipments

Scenario: Nepal Airlines transports vaccines from India to remote Nepali hospitals.

• Cargo Type: Perishable (Class 1 in UFC) → high insurance and handling costs.
• INCOTERMS Used: CIP Kathmandu (seller pays freight + insurance).
• Pricing Model:
  • Special rate: $12/kg (higher than general rate due to temperature control).
  • Fuel surcharge: +25% during monsoon (high fuel prices).
• Handling:
  • IATA Live Animals/Perishables Regulations applied (temperature-controlled ULDs).

Why It Works:

• Government contracts ensure stable demand.
• High-value cargo justifies premium rates.

6. Common Mistakes and How to Avoid Them

flowchart TD
  A["Common Mistakes in Air Cargo Pricing"] --> B["Miscalculating Dimensional Weight"]
  A --> C["Ignoring INCOTERMS in Contracts"]
  A --> D["Not Checking Fuel Surcharges"]
  A --> E["Using Wrong UFC Class"]
  A --> F["Poor Packaging Increasing Damage Risks"]

  B --> B1["Example: Charging by actual weight for low-density cargo (e.g., clothes)"]
  C --> C1["Example: Assuming DDP when contract says EXW → buyer pays unexpected costs"]
  D --> D1["Example: Not adding 20% fuel surcharge to a KTM-LAX shipment"]
  E --> E1["Example: Classifying lithium batteries as Class 45 instead of Class 1"]
  F --> F1["Example: Using weak packaging → damage claims rejected by insurance"]

## In the Real World

1. eSewa & Khalti Payments for Air Cargo

   • When you book air cargo via eSewa (e.g., for a Daraz order), the system automatically calculates dimensional weight and applies the correct freight rate from the airline’s tariff.
   • Example: A user shipping a 5 kg but bulky drone from Kathmandu to Pokhara pays based on volumetric weight (e.g., 15 kg), not actual weight.

2. Nepal Airlines’ Pharmaceutical Shipments

   • Nepal Airlines uses special rates and CIP terms for COVID-19 vaccines shipped from India.
   • Why? The government (seller) pays for freight + insurance, while hospitals (buyers) handle local distribution.

3. Pathao’s Last-Mile Air Cargo for E-Commerce

   • Pathao partners with airlines to ship small, urgent packages (e.g., medicines) via piece rates.
   • Example: A $20 charge for a single parcel from Kathmandu to Bharatpur, regardless of weight (since it’s lightweight but urgent).

## Exam Tip

How to Score Full Marks on This Unit:

1. Define and Differentiate:

   • Always start with clear definitions (e.g., "Dimensional weight is the chargeable weight based on volume, calculated as...").
   • Use tables (like the one above) to compare rate types or INCOTERMS.

2. Worked Examples Are Mandatory:

   • Every question on rates or INCOTERMS expects a calculation or scenario.
   • Example: If asked about all-kinds rates, show:
     • Actual weight vs. volumetric weight.
     • Final chargeable weight.
     • Total cost with surcharges.

3. INCOTERMS Tricks:

   • Memorize the 3 key terms: EXW (buyer pays all), CIP (seller pays freight + insurance), DDP (seller pays everything).
   • Draw a simple flowchart in exams showing risk/cost transfer points.

4. Real-World Links:

   • Always tie answers to Nepali examples (e.g., Nepal Airlines, Daraz, pharmaceuticals).
   • Example Answer Starter:

     "In the case of Nepal Airlines transporting live animals from Kathmandu to Delhi under CIP terms, the airline (as the carrier) would charge a special rate based on IATA’s Live Animals Regulations (Class 1 UFC) and include a fuel surcharge of +20% during peak season."

5. Avoid Common Pitfalls:

   • ❌ Forgetting surcharges (fuel, security, peak season).
   • ❌ Mixing up actual vs. chargeable weight.
   • ❌ Ignoring INCOTERMS in contract questions (always state who pays what).

Final Visual Summary:

classDiagram
  class FreightRate {
    +calculateChargeableWeight()
    +applySurcharges()
    +determineINCOTERMS()
  }
  class INCOTERMS {
    +EXW
    +CIP
    +DDP
    +transferRisk()
  }
  class AirlineTariff {
    +baseRate
    +pieceRate
    +weightBasedRate
    +combinationRate
  }
  FreightRate --> INCOTERMS : "Uses for cost allocation"
  FreightRate --> AirlineTariff : "Applies rates from"
  AirlineTariff --> "IATA WAFT" : "Source"