Air Freight Incoterms Explained: FCA, CPT & CIP (When Risk Transfers in Air Shipments)

Air Freight Incoterms Explained: FCA, CPT & CIP (When Risk Transfers in Air Shipments)

 Air Freight is the backbone of time-sensitive international trade, especially for high-value goods such as electronics, pharmaceuticals, garments, and perishables. Unlike maritime Incoterms (FOB, CIF, etc.), which are tied to port operations, air freight relies almost exclusively on multimodal-friendly Incoterms. The International Chamber of Commerce (ICC) confirms that the three most frequently applied rules for air cargo are FCA, CPT, and CIP.

Understanding them in detail is not just about logistics—it has implications for risk allocation, cost visibility, trade finance eligibility, and dispute prevention.

Free Carrier (FCA) is indeed a cornerstone of international trade due to its flexibility and the clear division of responsibilities it offers. Its functionality is particularly enhanced by a key update in the Incoterms 2020 rules, which directly addresses the needs of letter of credit transactions.

Aspect	Seller's Responsibility	Buyer's Responsibility	Operational / Strategic Notes
Delivery & Risk	Deliver goods to the carrier at the named place; risk transfers upon delivery.	Assume all risks and costs from the point of delivery.	Specify exact delivery points (address/GPS) to avoid confusion.
Export Formalities	Clear goods for export; obtain licenses and handle all export requirements.	—	Use pre-shipment checklists and customs brokers to prevent errors.
Import Formalities	—	Handle import formalities, including customs clearance, duties, and taxes.	Buyer must ensure compliance with destination regulations.
Main Carriage & Insurance	—	Arrange and pay for main transport and any desired insurance.	FCA does not obligate the seller to insure; buyer should arrange cargo insurance for transit.
Loading/Unloading	Load goods if delivery occurs at seller’s premises.	Unload goods at the named place if it is not seller’s premises.	Align shipment timing with buyer’s carrier availability to avoid delays.
FCA & Letters of Credit	Ensure goods are delivered to the agreed carrier; cooperate to obtain on-board Bill of Lading if required.	Instruct carrier to issue on-board Bill of Lading to seller for LC payments.	Incoterms 2020 allows LC usage with inland terminals; ensures payment security for seller.
Operational Control & Cost Efficiency	—	Manage main carriage using own logistics contracts to optimize rates and service.	Buyers can leverage global freight networks to reduce costs and increase control.
Mitigating Pitfalls	Ensure precise delivery instructions, accurate export documentation.	Prepare to receive goods promptly; arrange insurance and transport.	Both parties should explicitly define obligations in the sales contract to avoid disputes.

Deep Dive into FCA in Practice:

The following points expand on critical operational and strategic considerations for using FCA effectively.

FCA and Letters of Credit:

A major advancement in Incoterms 2020 makes FCA much more viable for transactions using letters of credit. Previously, banks often required an "on-board" Bill of Lading, which was difficult for sellers to obtain under FCA if the named place was an inland terminal. The new rules now allow the buyer to instruct their carrier to issue an on-board Bill of Lading to the seller after the goods are loaded onto the vessel, even if the seller's responsibility ended at an inland location. This provides the document the seller needs for payment under the letter of credit while maintaining the risk and cost benefits of FCA for containerized or air freight.

Operational Control and Cost Efficiency:

FCA gives buyers significant control over their supply chain. By managing the main carriage, buyers can leverage their own global freight contracts with large integrators (like DHL, FedEx, UPS) or forwarders, potentially securing better rates and ensuring consistent service quality. This is especially valuable for companies with established logistics departments.

Clarifying the Insurance Obligation:

It is a critical and often misunderstood point that FCA does not require the seller to obtain insurance for the main journey. The seller bears the risk until the named place, and the buyer assumes it thereafter. Therefore, it is the buyer's responsibility to arrange and pay for cargo insurance to cover the transit from the named place to the final destination. The sales contract should explicitly state this to avoid uninsured losses.

Mitigating Pitfalls with Precision:

To avoid the common pitfalls:

• Vague Delivery Points: Specify the exact address, and if helpful, GPS coordinates. Instead of "airport," state "Airline XYZ Cargo Terminal, Unit 123, Specific Airport Name".

• Buyer Collection Delays: Align shipment dates with the buyer's freight booking lead times and share forecasts to ensure the buyer's carrier is ready to receive the goods without delay.

• Export Clearance Errors: The seller must manage this risk by using pre-shipment checklists and engaging a customs broker early to ensure all licenses and data are correct.

FCA provides a balanced and efficient framework for modern international trade. Success hinges on a precise sales contract and both parties having a clear understanding of their obligations.

Multimodal Transport Explained

Multimodal transport (or combined transport) is the movement of goods under a single contract but performed using at least two different modes of transport (e.g., truck, rail, air, sea).

Classic Example:

Factory (by truck) → Seaport/Airport (by air/sea) → Destination Airport (by truck) → Final Warehouse

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How FCA Perfectly Fits Multimodal Transport

FCA is specifically designed for modern, multimodal logistics chains. Unlike older terms like FOB (which is only for sea/waterway transport and has a critical point at the ship's rail), FCA can be used for any mode or combination of modes.

Here’s what happens under FCA in a multimodal scenario:

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1. The "Named Place" is the Key

In an FCA agreement, the critical element is the "named place." This place can be anywhere along the multimodal journey, making it highly adaptable. Examples:

• The seller's factory dock

• A domestic freight forwarder's warehouse

• The cargo terminal at the departure airport

• The seaport container yard

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2. The Clear Handover Point

The seller fulfills their obligation and transfers risk to the buyer the moment the goods are delivered to the carrier nominated by the buyer at that agreed "named place."

Scenarios:

Scenario A: FCA [Seller's Factory Warehouse]

• What happens: The buyer's nominated trucking company (the "carrier") arrives at the seller's warehouse. The seller loads the goods onto the truck.

• The Moment: The truck's doors close and it drives away.

• Result: Risk transfers to the buyer. The seller's responsibility and cost end. The buyer is now responsible for:

  • Truck ride to the port

  • Main air or sea freight

  • Final trucking to the destination

  • All associated costs and risks

Scenario B: FCA [Main Departure Airport Cargo Terminal]

• What happens: The seller arranges and pays for the first leg of transport (truck from factory to airport). The seller clears the goods for export. At the airport cargo terminal, the goods are handed over to the buyer's nominated air carrier (e.g., DHL Cargo).

• The Moment: The air carrier accepts the goods and issues a cargo receipt or air waybill.

• Result: Risk transfers to the buyer. The seller's responsibility ends. The buyer now manages:

• Main air freight

• Final delivery

• All subsequent risks

Feature	Why FCA is Ideal
Flexibility	Can be used whether the main transport is by air, sea, rail, or a combination. The "named place" defines the handover.
Clear Risk Transfer	Risk transfers at a single, clearly defined point on land, unlike FOB’s “ship’s rail,” eliminating disputes.
Control for the Buyer	Buyers with global freight contracts can integrate shipments seamlessly into their multimodal network.
Trade Finance Compatibility	Incoterms 2020 allow the seller to obtain an on-board Bill of Lading (for sea freight) or other transport document needed for a Letter of Credit, even after risk has transferred inland.

In Summary:

In multimodal transport, FCA acts as a precise "handover button." It clearly separates:

• Seller's domestic responsibilities → getting goods to the agreed point and handling export clearance

• Buyer's international & final domestic responsibilities → main carriage, insurance, and import clearance

For complex supply chains beyond simple port-to-port moves, FCA is the authoritative and recommended Incoterm.

2. CPT – Carriage Paid To (Cost vs. Risk Mismatch)

How It Works

CPT requires the seller to arrange and pay for carriage to the named destination (e.g., CPT Dhaka Airport).
However, risk still transfers much earlier—once goods are handed to the first carrier at origin.

As a trade finance expert, expanding on the Carriage Paid To (CPT) Incoterm is crucial, as its inherent “risk vs. cost” mismatch is a frequent source of disputes in letters of credit and insurance claims. A clear understanding of this division is essential for structuring secure international transactions.

CPT vs. FCA: The Core Strategic Difference

The following table breaks down the fundamental differences between CPT and the FCA term discussed previously. Understanding this distinction is the first step in making an informed choice.

Aspect	CPT (Carriage Paid To)	FCA (Free Carrier)
Seller's Cost Responsibility	To the named place of destination (e.g., CPT JFK Airport)	Only to the point of delivery at origin (e.g., the seller's warehouse or a local terminal)
Transfer of Risk	When goods are handed over to the first carrier at the place of shipment	When goods are delivered to the carrier at the named place
Who Arranges/Pays for Main Carriage?	Seller arranges and pays	Buyer arranges and pays
Control Over Main Carriage	Seller retains control over carrier selection and routing for the main transit	Buyer has full control over the main carriage, including carrier selection and negotiation
Best For	Buyers who want sellers to handle main transport costs; sellers with strong carrier contracts to offer competitive terms	Buyers who want early control over logistics, routing, and cost management; preferred for trade finance under LCs

The CPT Mismatch: A Trade Finance Perspective
The central challenge with CPT is that the point of cost responsibility is different from the point of risk transfer. From a trade finance and risk management viewpoint, this creates several critical considerations:

• Insurance Gaps and Disputes: Under CPT, the seller is not obliged to obtain insurance for the buyer. The risk transfers at the origin airport, yet the buyer may be unaware of a loss until the goods fail to arrive at the destination. Without proactive cargo insurance, the buyer bears the full financial loss, leading to disputes.

• Letter of Credit (LC) Complexities: CPT complicates LC documents. The seller pays to the destination, but proof of delivery is generated at the origin. If goods are lost after risk transfer, the buyer must reimburse the bank under the LC and pursue an insurance claim—financially and operationally challenging.

• Lack of Control Amidst Liability: The buyer bears risk during transit but has no control over the seller-selected carrier. Poor carrier choices can result in delays, damage, or loss affecting the buyer.

Mitigating CPT Risks: Authoritative Guidance

• Mandate Cargo Insurance: Buyers must arrange all-risk marine/cargo insurance from the point risk transfers, or opt for CIP where the seller provides minimum coverage.

• Precision in the Sales Contract: Contracts should explicitly state “CPT [Named Place of Destination]” and clarify that risk passes at handover to the first carrier. Assign responsibility for arranging and proving insurance to the buyer.

• Enhanced LC Terms: Buyers can stipulate LCs include a copy of the insurance certificate/policy in the buyer's name, ensuring documentary proof of risk coverage.

• Operational Due Diligence: Even without controlling the carrier, buyers should vet the seller’s carrier choice, assessing reputation and track record.

For a buyer, the question is not just cost but assuming uncontrolled risk. FCA often provides a cleaner, more controlled risk transfer, favored in structured trade finance. With CPT, treating insurance as mandatory is the only way to protect financial interests.

3. CIP – Carriage and Insurance Paid To (Risk-Protected Option)

How It Works

CIP is CPT plus mandatory insurance. Under Incoterms® 2020, the seller must purchase Clause A coverage (Institute Cargo Clauses), which is “all risks” coverage. This is stricter than Incoterms® 2010, where minimum coverage (Clause C) was enough.

• Seller arranges and pays freight + insurance.

• Risk still transfers to the buyer once goods are delivered to the carrier at origin.

Why CIP Matters in Air Freight

• High-Value Goods: Electronics, pharmaceuticals, or luxury items where risk exposure is unacceptable.

• Bank Requirements: Many banks financing trade via LCs or forfaiting mandate insurance under CIP to protect collateral value.

• Cross-Border Trust Issues: Buyers in emerging markets often demand CIP to reduce dependency on their own insurers.

Practical Insight

Many traders misinterpret CIP—believing the seller carries risk until delivery at destination. In reality, the seller merely pays for insurance on the buyer’s behalf. Risk transfer still happens at origin, meaning insurance claims belong to the buyer, not the seller.                                                                      

Incoterm	Seller’s Role	Buyer’s Role	Risk Transfer Point	Best Suited For
FCA	Export clearance, delivery to buyer’s carrier	Arranges freight, insurance, import	At carrier’s custody (origin)	Standard air freight; LC-friendly transactions
CPT	Export clearance, freight cost to destination airport	Insurance, import clearance	At carrier’s custody (origin)	When seller can secure cheaper freight rates
CIP	Export clearance, freight + Clause A insurance	Import clearance, extra insurance if needed	At carrier’s custody (origin)	High-value cargo; LC-driven trade; risk-sensitive shipments

Key Considerations for Your Business

To make the best choice, keep these strategic points in mind:

The "Mismatch" is the Core of CPT/CIP: The fundamental characteristic of both CPT and CIP is that risk transfers to the buyer at the first carrier in the country of origin, while the seller pays for the main carriage. This is a deliberate and important distinction to understand.

CIP Insurance is Often Minimal: 

While CIP requires the seller to insure the goods, the standard coverage is often a basic policy (like Institute Cargo Clauses A). For high-value shipments, the buyer may still need to arrange for additional insurance to ensure full coverage.

FCA is Aligned with Modern Trade:

FCA is highly recommended by experts for containerized and multimodal shipments as it provides a clear and logical point of risk transfer that aligns with modern supply chains. It is often a better choice than older terms like FOB for these scenarios.

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