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As businesses increasingly engage in international trade, understanding the intricacies of shipping goods across borders becomes essential. One crucial aspect of global transactions is the use of Incoterms, which play a pivotal role in ensuring a smooth and efficient shipping process.
However, not all Incoterms are multimodal, and only seven of them can be used for air freight.
This blog post will outline the Incoterms used for air freight and provide helpful tips for selecting the right ones.
Let’s start with the basics…
To fully grasp the importance of Incoterms in international trade, it's essential to explore their history and development, understand their structure, and examine the key concepts they encompass. Let’s delve deeper into these aspects to provide you with a comprehensive understanding of Incoterms and their role in global shipping.
History of Incoterms
The concept of Incoterms dates back to 1936 when the International Chamber of Commerce (ICC) first introduced them to facilitate international trade by providing a standardized set of terms and conditions. Over the years, Incoterms have been periodically updated to keep pace with the evolving global trade landscape, addressing changes in transportation methods, technology, and legal practices.
The most recent version, Incoterms 2020, builds upon the previous iterations, refining the rules and introducing new provisions that reflect current market practices and emerging trends in international trade.
Structure of Incoterms
Incoterms are organized into 11 distinct terms, each represented by a three-letter abbreviation. These terms are grouped into two main categories:
Rules for sea and inland waterway transport
These four Incoterms are specifically designed for shipments transported via sea or inland waterways.
- FAS (Free Alongside Ship)
- FOB (Free On Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance, and Freight)
Rules for any mode of transport
These seven Incoterms can be applied to shipments transported by any means, including air, sea, rail, or road.
- EXW (Ex Works)
- FCA (Free Carrier)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- DAP (Delivered At Place)
- DPU (Delivered at Place Unloaded, formerly DAT)
- DDP (Delivered Duty Paid)
Key Concepts in Incoterms
Understanding the following key concepts is crucial when working with Incoterms:
- Delivery Point: Each Incoterm specifies a delivery point at which the seller fulfills their obligation to deliver the goods to the buyer. This point varies depending on the chosen Incoterm and impacts the allocation of responsibilities, costs, and risks between the parties.
- Transfer of Risk: Incoterms define the precise moment when the risk of loss or damage to the goods transfers from the seller to the buyer. This transfer typically occurs at the delivery point, ensuring that each party is aware of their respective responsibilities for the safety and security of the shipment.
- Allocation of Costs: Incoterms clearly outline which party is responsible for various costs associated with the shipment, such as transportation, insurance, customs clearance, and other related expenses. By explicitly allocating these costs, Incoterms help prevent misunderstandings and disputes between buyers and sellers.
Incoterms for Air Freight
When it comes to air freight, selecting the appropriate Incoterm is crucial for ensuring a smooth and efficient shipping process. Here, we will explore the seven Incoterms applicable to air freight shipments and discuss their key features.
Incoterms for air freight graphic
EXW (Ex Works)
Under Ex Works (EXW), the seller makes the goods available at their premises, and the buyer is responsible for all transportation and export/import clearance costs. With 35.2% of quotes requesting EXW, it is the second most popular Incoterm. This comes as no surprise since the term places minimal obligation on the seller, making it suitable for businesses that prefer not to handle shipping logistics.
FCA (Free Carrier)
Free Carrier (FCA) requires the seller to deliver the goods to a carrier or another agreed-upon location (e.g., a warehouse or airport). The seller is responsible for export clearance, while the buyer assumes responsibility for all subsequent transportation costs, import clearance, and risks during transit.
CPT (Carriage Paid To)
Under Carriage Paid To (CPT), the seller arranges and pays for transportation to a specified destination but does not cover insurance. Once the goods are handed over to the carrier, the risk transfers to the buyer, who is also responsible for import clearance and any additional transportation costs.
CIP (Carriage and Insurance Paid To)
Carriage and Insurance Paid To (CIP) is similar to CPT but includes insurance coverage for the goods during transit. The seller is responsible for arranging and paying for transportation and insurance up to a specified destination. However, the risk transfers to the buyer once the goods are handed over to the carrier.
DAP (Delivered at Place)
Delivered at Place (DAP) requires the seller to deliver the goods to a specified destination, with all transportation costs and export clearance covered. However, the buyer is responsible for import clearance, duties, and taxes. The risk transfers to the buyer once the goods are made available at the specified location, but before unloading. This term offers flexibility in terms of the delivery point, making it suitable for various types of shipments, including air freight.
DPU (Delivered at Place Unloaded)
Delivered at Place Unloaded (DPU), formerly known as DAT, requires the seller to deliver the goods unloaded at a specified place (e.g., a warehouse or airport). The seller bears all risks, costs, and responsibilities, including export and import clearance, up to the point of unloading. Once the goods are unloaded, the risk transfers to the buyer.
DDP (Delivered Duty Paid)
Delivered Duty Paid (DDP) places the maximum obligation on the seller, who is responsible for all transportation costs, export/import clearance, and applicable duties/taxes. The risk transfers to the buyer once the goods are made available at the specified destination. This term is suitable for buyers who prefer not to handle any aspect of the shipping process.
Selecting the Right Incoterms for Air Freight
Selecting the right Incoterms for air freight is a critical aspect of international trade, as it impacts cost, risk, and efficiency throughout the shipping process.
To make an informed decision, consider the following factors:
- Level of responsibility: Evaluate how much control you want to maintain over the shipping process. If you prefer minimal involvement, opt for terms like EXW. For more control, choose terms such as DDP, where you manage the entire process from start to finish.
- Risk management: Assess your risk tolerance and identify the point at which you are comfortable transferring the risk of loss or damage to the goods. This will help determine the most suitable Incoterm. For instance, under CPT and CIP, the risk transfers to the buyer once the goods are handed over to the carrier.
- Cost allocation: Determine how you want to allocate costs between yourself and your trading partner. Some Incoterms, like FCA, require the seller to cover transportation costs up to a specific location, while others, like DDP, place the burden of all costs on the seller.
- Insurance coverage: Consider whether you want insurance included in your chosen Incoterm. While terms like CIP include insurance coverage, others like CPT do not, making it essential to weigh the benefits and potential risks.
- Customs clearance: Familiarize yourself with the export and import regulations of both the origin and destination countries. Choose an Incoterm that assigns responsibility for customs clearance to the party best equipped to handle the process.
- Relationship with your trading partner: Evaluate the nature of your relationship with your trading partner. Trust and collaboration play a significant role in determining the right Incoterm. For long-standing partnerships with established trust, you may be more willing to assume additional responsibilities or costs.
Clearing the Air on Incoterms
Knowing the ins-and-outs of each applicable Incoterm is essential for navigating global transactions with any hiccups.
If you're looking for an effective way to optimize your accountability, obligations, and costs related to air freight shipments, look no further — our guide to Incoterms provides everything you need to be successful.
Don't miss out on this invaluable resource — download our full guide to Incoterms today and take your logistics operations to new heights. With the right knowledge and tools at your disposal, the sky's the limit for your success in the global market.