Howto: Calculate Shipping Cost Carefully – A Guide

Calculate Shipping Cost Carefully To Avoid Wasting Money

Have you wondered why you are paying a lot for your air cargo consignments? Did you calculate shipping cost for each of your consignments? If you haven’t, you would want to start now.

As with all the articles on this site, this, too. is written for the person new to air freight. Those who are experienced will have to bear with me.

Classifying the charges that arise in shipping by air is a good way to start. However, if you are not into air freight or new to it, you need to start right at the beginning. Having a clear view of the processes will help your familiarise with this mode of shipping. There is no shortcut to acquiring knowledge, however, you don’t have to go through 500 pages of information which might bring in only fatigue and also confusion.

Building Blocks

Before trying to understand the process of shipping by air, it is better to break down the structure into small building blocks. Once the structure is clear, you can understand the factors underlying the charges. When you calculate shipping cost, do not be misled by the value of the freight. Keep the points below in mind, make a list and you will be on the safer side. Of course, not all the costs can be listed before the freight leaves your facility.

calculating shipping cost

Three Main Entities

  1. Consignor (also called shipper)
  2. Freight Forwarders (air cargo agent or air freight agent)
  3. Airline
  4. Consignee

Consignor or shipper is the person or company exporting the goods and it is his/her name that appears on the air waybill.

The freight forwarder is the connecting link between the shipper and the airline that flies the freight.

The Sub-Entities

  1. Lorry companies
  2. Customs authorities
  3. Brokers

Although the lorry company picks up the freight, it is not a direct contractual partner of the shipper. This point is of importance when it comes to freight damage. We shall come to this topic later. 

Customs Formalities: Questions You Need To Ask

  • Is an export permit required?
  • Is an export declaration required?
  • Number of pieces on the commercial invoice tallies with the actual number of pieces?
  • The total gross weight of the consignment: (that includes the pallet/carton) tallies with the declaration in your invoice/packing list?

The customs authorities have a direct say in the shipment. Without their consent, a freight may not leave the borders. Each country will have its own rules about the procedures. In Germany, for example, a consignment with an invoice value of under 1000 Euros should have an accompanying invoice as customs declaration. Any consignment with an invoice value of 1000 Euros or above must have an export declaration. This rule however does not apply to consignments going to Iran. No matter what the invoice value is, an electronically issued export declaration is mandatory for all shipments going to Iran. This is a regulation issued and monitored by the Federal Office of Economic Affairs and Export Control. Restrictions imposed by the German customs authorities can be see seen on this page. The list of countries under embargo is listed on the page of the German customs. Link

Customs authorities can order inspection, which might cause charges to be raised. However, any costs raised by the customs will be documented.

The Costs

  • Packaging
  • Security
  • Customs formalities
  • Transport

Packaging

Don’t save on packaging! Strong resistant cartons or crates (If using wood, please read the guidelines) are important. Waterproofing is not necessary but is a good measure, if it is raining in the country of destination. Use light weight but strong packaging materials. Try not to increase the total weight by using heavy materials. Wooden packaging can increase the weight!! 

Security

This is one of the most important words in the freight industry and it cannot be repeated enough. Are you certified as a known shipper? In the case of the US is your company in conformity with the C-TPAT? Don’t compromise on this. It is important to all of us.

Minimum Security Requirements as per C-TPAT.

Exporters in the US please click here to access the CBP site

Customs Formalities

You may need to transport the goods to customs for inspection before export. In the case of import, customs might demand an inspection in the bonded warehouse.

  1. Inspection charges
  2. Labour charges
  3. Duties (Excise duties in case of India)
  4. Taxes (various forms dependent on country)
  5. Warehouse charges

All these charges cannot be determined in advance to calculate shipping cost. However, they need to be taken in account to avoid surprises.

Transport

The charges included here fall into various categories.

Pick up charge

This will depend on when you advise the freight. Dedicated pick up is expensive. It may be dependent on the distance the lorry has to cover. Waiting charge is one you should always keep in mind. If the lorry has to wait because the freight is not ready to be loaded, the charges cannot be raised on the consignee.

Dedicated Transport charges are unpredictable. It will depend upon the availability of the vehicle, time taken for executing the pick up and the delivery after the customs formalities.

Air Cargo Charges

The most important point here is to remember that there are two weight categories. Many companies have made the mistake of not taking this into consideration. If the difference in the two different categories is negligible, there is not reason to worry. However, if the two weights are very far apart, there is reason to worry. The nett weight is of no consequence in air cargo, except in the case of dangerous goods, where the net quantity is mandatory.

The Two Weight Categories

  1. Gross weight
  2. Volume weight

Gross weight is the total weight of the goods, including the packaging. Airlines will weigh the consignment and if there is a discrepancy, charges will be raised. Even if the terms of sale show Ex Works (EXW), the shipper has to pay for this, as it is no fault of the consignee. The transfer of risk is stipulated by the incoterm EXW. The costs that arise after the freight is picked up by the lorry company are to raised on the consignee. However, the consignee is not responsible for the weight of the goods. The shipper who has made the freight available along with the details of the same, should pay for the discrepancy. The goodwill of the company is to be thought of here.

Volume weight is the space taken up by the goods. It should be made clear, here, that the charges on air freight are raised on the space the freight occupies. The gross weight is only one of the factors involved. Before you calculate shippings cost, highlight the two weights, if there is a difference. If the volume weight is less than the gross weight, you may safely ignore the former.

How To Calculate Volume Weight

This is to be done after the freight has been packaged.

An example will clarify this. Before we start, we need to remember the weight volume ratio used in air freight. The standard ratio is 1:6. This means 1 cubic meter is 166.666 kg. It is better to calculate without rounding up.

A consignment consists of one piece with a weight of 125 Kg. The dimensions are

Length = 120 cm

Width = 120 cm

Height = 120 cm

Method 1

Keeping the measurement in cm.(Not going into details to avoid regression)

L x W x H = 120 x 120 x 120 = 1728.00

since the weight volume ratio is 1:6 we need to divide the result by 6000

Volume weight = 1728/6000= 288.00 Kg

Comparing the two weights

Gross weight = 125 Kg

Volume weight = 288 Kg

Since the volume weight is greater than the gross weight, air freight rate will be charged on the former

Assuming air freight rate is 1.00 EUR for a Kg, the difference is big.

Airline Surcharges

Fuel Surcharge and Security Surcharge (also called War Risk Surcharge or Risk Surcharge) are the two most common charges. The trend is to base these charges on volume weight.

Security Charges are raised if the freight needs to be screened (x-ray). Airlines and freight forwarders have to keep the laws that demand these measures.

Customs Duties And Taxes

This will be as per the tariff in the country of import. A shipper who exports goods sold under terms that do not include duties and taxes of the country of import, does not have to worry about these factors. However, if the shipper is exporting under the terms DDP (Delivered Duties Paid to named place of destination) he has to consider the charges involved. No invoice will be raised by the local customs office or the broker or the freight forwarder on the consignee for these amounts.

A word about HS Codes

 HS Code stands for Harmonised System of Tariffs.  Only the first six of the 11 digits are harmonised. The rest of the numbers will vary. Hence, do not waste time on finding the exact match. The consignee can give you the number, if the customs regulations in that country demands that the number be mentioned in your invoice.  The HS Code will determine the customs duty that is to be paid for the item(s) imported.  If you are not shipping under DDP terms (Delivered Duty Paid), you need not waste your time on this point. It is not a part of shipping cost.

Recapitulation Of The Costs

  1. Packaging : airworthy packaging
  2. Security : x-ray charges, sniffing charges (if the freight cannot be screened)
  3. Customs formalities: Inspection, duties and taxes, repackaging after inspection
  4. Transport : pick up (export), delivery (import), airline charges,
  5. Inspection charges
  6. Labour charges
  7. Warehouse charges : storage charges, demurrage charges

A Short Note On Storage And Demurrage Charges

Storage charges are raised on cargo that are made to wait in the warehouse. If the shipper is not at fault, then no charges are to be raised on him.

Demurrage charges are raised when the consignment is made to wait in the bonded warehouse. The cargo may not leave the premises of the bonded warehouse until and unless the customs formalities have been finished fully. Moving the freight out of such a facility is a punishable offence.

Important: Demurrage charges are noted as rate/kg/day. There will be a minimum price involved. The weight mentioned will be the higher of the two (gross and volume). Holiday and weekends are usually never exempted!

Dangerous Goods

This is a vast topic. Consult your freight forwarder for the charges. Any serious error in packaging is an offence that must be reported to the authorities. Absolute care is a must here. No dangerous goods are to be processed (packaged or labelled) by uncertified personnel. Packaging and documentation (Shipper’s Declaration /Dangerous Goods Declaration) are to be done exclusively by personell holding valid certificate. 

Keep a spreadsheet to calculate shipping cost. This will help you to discover loopholes that can be covered in the next shipment.

A Common Point of Conflict:

 Two shipping terms have proved to be a headache. My own personal experience.

FCA is NOT FOB

Always remember: FCA, named place. that is the combination. If shipper is  making the goods available (for export) at his facility, it is as good as ex works (EXW) but not the same. The shipper has to make the export declaration (if needed as per customs regulations) available.

If the shipper is making the freight available at the airport of departure, he will not only make the export declaration available but also the transport cost. All the cost, after loading from the vehicle will be on the account of the buyer.

Hence, if you are a shipper (aka consignor), mention the “name place” after the term “FCA”

FOB is NOT a term for air freight!  However, it is being widely used in that field. All the charges up to the aircraft (loaded into the aircraft) is to be paid by the seller. This is the practical side.