Mercator Blog

Challenges and Opportunities in Air Cargo Revenue Management

By Sandeep Fernandes on 04 April 2016

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Revenue management has been utilized within a wide range of industries for over three decades. Passenger airline carriers were the first to leverage the benefits that revenue management brings to a business. Other industries whose businesses center on offering products or services that are perishable, limited, and price differentiable soon followed.

Revenue management isn’t a manual – or mental – process; it requires IT solutions that can analyze data effectively and correlate historical, near-time and real-time information in order to make accurate forecasts on demand and supply, and then automate many actions that enable a business to optimize revenue. These actions may occur at the flight, segment, or system-wide level.

 

Fundamental Cargo Challenges

The basic business functions of air cargo present specific challenges for the revenue management processes. None of these challenges are insurmountable, given the right solution and the correct deployment of that solution.

Uncertain Capacity: Unlike passenger airlines, which have a fixed capacity (number of seats), air cargo deals with uncertain capacities determined by the dimensions, weight, volume, and positioning of cargo for each flight. On a passenger airline, although the occasional single passenger may book more than one seat for his or her own comfort, the overall dimensions of passengers do not determine capacity – fixed seats do. In fact, almost every business that utilizes revenue management is working with fixed capacities.

Number of Customers: In comparison to many businesses using revenue management, air cargo serves a limited number of customers. Dealing with large numbers of customers simplifies the process of pricing according to supply and demand. Additionally, the behavior of one customer among many will rarely dramatically shift profit potential and capacity, where the actions of one customer among few will often have an extreme impact on profit forecasting and potential.

Origin and Destination (O&D) Complexities: Air cargo shipments are one-way, unlike passenger flights. This results in doubling the workload for cargo revenue management, since there is no return trip to count on. Moving cargo may also require synchronization of multiple touch points, including flights, trucks, regulatory/security checks, varying loading and handling requirements, special services such as temperature control, and specific deadlines. These must all be factored into revenue management to make correct decisions, meet customer agreements, and generate profits.

It’s a difficult balancing act, to be sure. But with the right tools, people, processes, and policies, revenue management will measurably drive profits, increase efficiency, and enable an air cargo company to deliver excellence.

 

Applications of Revenue Management in Air Cargo

Capacity Forecasting

As discussed above, air cargo revenue management focuses on optimizing the available space on each flight. Forecasting capacity of future flights is therefore the basic foundation of cargo revenue management – all further decisions will be based on this estimate.

Mathematically, it’s not a difficult equation: physical capacity of the airplane minus space reserved for other uses. Factor the maximum weight and volume, or container positioning dependent on the physical dimensions of the plane, and you have your answer.

Of course, it’s not that simple. If your flight includes various aircraft types, capacity will obviously vary. If your airline carries both passengers and cargo, last minute passenger bookings – and the associated baggage space and weight – must be factored in. Cargo weight will result in variances in fuel weight, resulting in capacity shrinkage for flights carrying the proverbial heavy load. Environmental challenges may play a part as well.

These challenges point to the need for robust analytical capabilities in an air cargo revenue management solution. The tool must be able to pull data from across all touch points in order to gauge historical trends, recent events and real time shifts. Based on this information, you can confidently predict capacity, and price aggressively in response to both available capacity and booked capacity.

The basic formula is that prices go down to sell space, up when space is at a premium. But smart revenue management is more sophisticated, and will consider capacity vs. profitability potential on particular routes, passenger value, factors that may lead to delays, acceptable over and under booking levels, and specific shipment agreements for time/environment sensitive products such as pharmaceuticals.

 

Demand Forecasting

Demand forecasting predicts the revenue potential for a particular flight, based on anticipated cargo, capacity, and rates charged.

Here again, historical data reveals long-term trends which are evaluated against current business conditions. Demand is determined by predicted capacity needs and shipment requirements (special services). Shipments are segmented by anticipated revenue and density (rate and load mix), and forecasting is conducted for each segment and each flight. Level of demand is then forecasted, so that rates can be determined (bid price optimization) and, if necessary, services optimized to meet demand.

Demand forecasting can also be conducted at the leg and O&D levels. Additional data, including flight network structure, special services, risk management, allotment management, and economic trends, can also be factored in, depending on the volume and quality of data an organization can access. It’s often best to launch a revenue management with less complex forecasting, and layer in additional sources of business intelligence going forward.

 

Market Price Segmentation

Once carrying capacity has been determined and demand forecasting has been conducted, the next step is determining possible segmentation based on markets and price that can be charged.

If a flat rate per pound (kilogram) is assessed for the entire flight, revenue is tightly tied to carrying capacity. But if rates vary based on demand, profit potential is expanded for the same carrying capacity. It’s easy to see the potentials, and the price differentials are based on justifiable factors that shippers fully understand. (Segmentation can also be based on special services, as well as capacity, layering in another level of potential profitability.)

Pricing optimization is based on level of demand, constrained by capacity (and, sometimes, special services.) Factored together, these data sources reveals the optimal bid price for each flight, as well as the revenue classes for each flight. The bid price is the minimum price acceptable, and will vary according to predicted demand and capacity. Bid prices may also vary due to shifts in demand, which will be reflected in available capacity.

Demand and supply pricing produces a “gradient” of optimal pricing and load mix, to maximize profit-per-flight. The revenue management solution will monitor and control sales based on predetermined pricing levels, and alert when changes may need to be made.

Topics: Cargo, Revenue Management


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