Flexible carrier–forwarder contracts for air cargo business

Passenger airlines (carriers), who carry nearly two–thirds of the worldwide airfreight, sell a significant portion of their cargo space through intermediaries called freight forwarders. Carriers also sell directly to shippers. In a typical carrier–forwarder contract, which can remain in effect anywhere from a few months to a year, a certain amount of capacity on specific recurring flights is preallocated (guaranteed) to the forwarder at a negotiated price per unit of capacity. Carriers often find it difficult to obtain full payment from the forwarders who typically pay freight charges only for the space actually used. Guaranteed allocations provide an incentive to forwarders to exert a greater effort on attracting demand. They, however, limit a carrier's ability to realise the highest possible revenue from cargo capacity. In this paper, we propose two flexible schemes that fall within the general contracting framework prevalent in the air cargo business. In the first scheme, the carrier determines an upfront fixed fee for reserving capacity but the freight rate is exogenous, whereas in the second scheme, there is no reservation fee, but the carrier chooses the freight rate.