Since 2018, FIS has been working with leading air freight industry players, to help develop the next generation of price risk management tools for the air freight market.
Air freight pricing is volatile, with trade-lane annualised volatility fluctuating between 20 to 108%. The industry is large, valued at $100bn in 2019, and is growing, with forward looking market users such as e-commerce providers leading the charge. The high value of air freight capacity exacerbates the impacts of price volatility, impacting the balance sheets of airlines and freight forwarders, and transport costs for shippers.
Currently, market participants manage their risk through a myriad of physically delivered contracts such as long-term contracts, that may be liable to be inefficient or compromising, and in worst case scenarios they break entirely. The use of cash-settled tools, such as the FIS Air Freight Forward Agreement (AFFA), and physically settled contracts such as Index-linked block-space agreements, gives participants the opportunity to flexibly manage their risk, helping to minimize the requirement for compromise and encourage contract security at all levels of the air cargo value chain.
FIS traded the first AFFA contracts in August 2019, settled against transaction-based and representative pricing data provided by TAC Index. Using geographically focused index routes, these risk management tools can be used to hedge against risk in the Global market and help the air cargo industry.