A Shippers Guide to Using Air Freight Indexes
Explore the ins and outs of air freight indexes
Before you purchase anything, it’s normal to check the price against alternatives in the market. You need to know if the quote you’ve received is competitive. An index-based methodology to air freight purchasing can help you determine whether the quote is aligned with the average market price – it tells you what the market in general has paid for air freight services. But beware! Not all air freight indexes are equal, as this article by our Freight Forwarding Experts explains.
What is an Air Freight Index?
You know size and weight of cargo you want to send by air. You know the departure and the arrival points. You probably have a shipment date in mind. The next step is to ask a freight forwarder to give you a quote.
Before you receive this price, what is your expectation? Have you got a rough idea of an acceptable price? Benchmarking a rate is tricky, particularly in a volatile market when prices are changing frequently yet many shippers decide to benchmark the quoted rate to see if it is on a par with the current market rate.
Shipping companies do this by using one or more price indexes that track current air freight rates in specified areas of the market, combining this information with historical data.
But how do shippers choose the right indexes? It is very important to understand the methodology behind any index available in the market, and this always concerns the nature of the business, especially where the rate is subject to the services chosen, the volumes moved, and the current capacity situation.
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The 7 Essentials of an Air Freight Index You Should Consider
Sample Size & Source
Air freight indexes include available transaction data. While every index owner takes steps to ensure this data is accurate and independent, no index can include 100% of all air freight transactions. So, what’s required to reflect the market trend is a decent sample size of around 80% of all volumes moved globally.
While some index owners use customs data as their source, others have as their main source forwarders, airlines, or their own booking platforms. The source always determines the key metrics available with any index. The methodologies are also different in the way the data is shown. Every index owner’s perspective on market air freight rates is therefore always skewed, and you need to find the right match for your specific business
Update Frequency
Time is of essence in the air freight market. Especially a fluctuating market has rates which are redundant in a few weeks, so the update frequency is very important to determine whether you have the latest information. Some air freight indexes are updated every week. Others provide new data every month. On top of data frequency though, it is essential to check whether the index gives you the right market trend.
Data Lag
Another feature to watch out for is the data lag of your selected air freight index. Rates are often changing but each index has a specific data lag. It is highly unlikely that the index will have real-time data, but you can choose a methodology which gives you data within the range of the current month. Some indexes may include forecast calculations, and it is critical to understand the methodology behind that prediction model.
Bear these issues in mind, as benchmarking accuracy reduces when there’s more than a month’s data lag, especially if there is a high incidence of forecasting in an index.
Data Volatility
Indexes deal with multiple data points. While it is important to consider sample size, it is also important that the global market is fairly represented especially if your trade lanes are spread around the globe. Some index owners have a stronger sample size in specific regions (for example, the Americas) but, if your business is in a different region (for example Asia Pacific), the issue of data volatility becomes critical. In such a scenario, the more granular the index data (global to region, to country, to city), the more volatile it becomes.
Data Privacy
For obvious reasons, choose an index partner with strong cybersecurity credentials. And be wary of requests to share your own air freight transaction data. This might seem acceptable as a quid pro quo for the lane-specific index information you receive but, if you are paying to access this index, full disclosure of third-party transactions is certainly not industry-standard practice.
Relevant Reputation
Some indexes have a great name, widely known and respected around the world. Sometimes though this reputation is for tracking and reporting mainly on ocean freight rates rather than air freight rates. Monitor and analyze the progress of the index because the key metrics of sample size, source, data granularity, and more might not be as stable for air as for ocean. Choose the index owner based on your preferred transportation mode.
Dashboard Draw
More and more index owners are setting up shop, but don’t be distracted by new, bright, and shiny dashboards! Rather make sure you’ve taken all the above into consideration.
Sample Size & Source
Air freight indexes include available transaction data. While every index owner takes steps to ensure this data is accurate and independent, no index can include 100% of all air freight transactions. So, what’s required to reflect the market trend is a decent sample size of around 80% of all volumes moved globally.
While some index owners use customs data as their source, others have as their main source forwarders, airlines, or their own booking platforms. The source always determines the key metrics available with any index. The methodologies are also different in the way the data is shown. Every index owner’s perspective on market air freight rates is therefore always skewed, and you need to find the right match for your specific business
Update Frequency
Time is of essence in the air freight market. Especially a fluctuating market has rates which are redundant in a few weeks, so the update frequency is very important to determine whether you have the latest information. Some air freight indexes are updated every week. Others provide new data every month. On top of data frequency though, it is essential to check whether the index gives you the right market trend.
Data Lag
Another feature to watch out for is the data lag of your selected air freight index. Rates are often changing but each index has a specific data lag. It is highly unlikely that the index will have real-time data, but you can choose a methodology which gives you data within the range of the current month. Some indexes may include forecast calculations, and it is critical to understand the methodology behind that prediction model.
Bear these issues in mind, as benchmarking accuracy reduces when there’s more than a month’s data lag, especially if there is a high incidence of forecasting in an index.
Data Volatility
Indexes deal with multiple data points. While it is important to consider sample size, it is also important that the global market is fairly represented especially if your trade lanes are spread around the globe. Some index owners have a stronger sample size in specific regions (for example, the Americas) but, if your business is in a different region (for example Asia Pacific), the issue of data volatility becomes critical. In such a scenario, the more granular the index data (global to region, to country, to city), the more volatile it becomes.
Data Privacy
For obvious reasons, choose an index partner with strong cybersecurity credentials. And be wary of requests to share your own air freight transaction data. This might seem acceptable as a quid pro quo for the lane-specific index information you receive but, if you are paying to access this index, full disclosure of third-party transactions is certainly not industry-standard practice.
Relevant Reputation
Some indexes have a great name, widely known and respected around the world. Sometimes though this reputation is for tracking and reporting mainly on ocean freight rates rather than air freight rates. Monitor and analyze the progress of the index because the key metrics of sample size, source, data granularity, and more might not be as stable for air as for ocean. Choose the index owner based on your preferred transportation mode.
Dashboard Draw
More and more index owners are setting up shop, but don’t be distracted by new, bright, and shiny dashboards! Rather make sure you’ve taken all the above into consideration.
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