Daniil, could you please explain the meaning of the term “demurrage”?
Before explaining it in detail, I would like to point out that we’ll be talking here about demurrage payments in urgent air cargo charters as we specialize in this type of transportation. In cargo air charters we understand demurrage as a form of liquidated damages for breaching the laytime as it is stated in the contract. Demurrage refers to the charges that a charterer pays to an operator for the loss of availability (operation hours per month).
What do you mean by “operation hours per month”?
I’m happy to have an opportunity to explain it here as I can see a number ofclients get lost in all the details. Profit in aviation is calculated based on expected hours of the aircraft operating the orders. In a regular program it is easy to account the profit as we know the minimum guaranteed hours per month. In an urgent one, we do not have any guarantee as this type of charters isnot scheduled in advance. This makes the specifics of time-critical transportation business. Maximum hours per month are limited by different factors, so if an operator is wasting precious hours on ground because of the customer’s fault, it is logical that he demandscompensation.
What causes demurrage?
From our practice, mostly these are situations when a truck didn’t arrive or a truck was late. They can also involve traffic jams, problems with collecting a cargo at the factory, problems with customs and documents, slow handling, as well as different misunderstandings with handlers.
Unfortunately, quite often disputable situations come up, which results in long negotiations between the operator/carrier and the charterer.
How can demurrage fees be avoided or reduced?
The answer is short - to follow the standard that cargo should be ready for loading one hour before the departure.
Here comes one common misunderstanding which causes lots of problems. Clients understand that cargo should arrive at the airport by the loading time. But even if the cargo arrived, it doesn’t mean it is ready for loading.
Here is what really happens:
The truck comes to some place at the airport. After that it should proceed to registration, x-ray and other formalities. All this takes time. Airplane is landing according to the schedule and quite often cargo comes to the airport at the same time. And it takes a certain time for the cargo to get to the airplane. So, we depart late, the flight plan changes, and this causes extra-time for the flight to be finished, which means extra-charges.
We operate with small aircrafts of 3-ton loading volume. So we know perfectly well that a 3-toncargo can’t be ready for loading in less than an hour/an hour and a half.
I would recommend that the clients plantheir logistic schedule with one additional hour at the airport. This would definitely avoid misunderstandings of any kind.
You were the one who proposed not charging demurrage in AVEM AERO. Please explain your idea.
Frankly speaking, it's simple accounting. We have analyzed that negotiations on demurrage take lots of time and energy. It diverts our attention from new orders. In our small team all processes are optimized and we try to use each minute for doing business actually. Negotiations on extra-charges involve 4 team members with their salaries and potential profit they can make to the company.
So we realized that we can invest our time in constructive things, working out new requests, making new orders, rather than sorting out who owes who money. Finally, since we cooperate mainly with brokers, demurrage causes additional problems as they have to negotiate it with their clients as well.
We don’t want to cause headaches for our clients and ourselves.
Do you cover all cases of demurrage or there are some restrictions?
Actually, the crew working time is the only limitation. We reserve the right to revise the charter cost if demurrage causes the forced crew rest. The reason is obvious - the schedule of all our next flights changes, our availability schedule changes completely and makes it unpredictable to plan the next orders. We are doing business here and we can’t ruin all our plans. Plus additional costs for hotel, crew transportation etc. This leads to unjustified expenses.
There are a few more reasons - some airports simply have no parking places, so we have to relocate the aircraft. And finally - the COVID19 restrictions sometimes make it impossible for us to stay at the airport. This becomes an objective reason to change the price in case of a late cargo arrival.
What do you experience after a few months of all-in pricing policy?
We’ve saved lots of nerves and emotions!
By the way, our clients couldn’t believe when we announced “all-in” prices. A few months have passed and they keep asking us if everything's the same. People were not ready for good news!
As I said before, our team is small and we pay a lot of attention to optimizing operational processes. Extra-charges cancellation gave us additional free time and we use it to make new contracts.