Revenue management: Not just a gut feeling
Many in the industry know by now that revenue is not best left up to gut feel. A thesis on air cargo revenue management, produced by a student at the Georgia Institute of Technology in Atlanta in 2006, confirmed that there are scientific and higher-yielding ways of filling an aircraft.
Her research, comprising 123 pages of detailed theory backed by some complex algorithms, led to some interesting conclusions, such as:
• Shipping cargo is more complicated than moving passengers, with many more variables
• “First-come, first-served” will not give carriers an acceptable return on belly-hold space
• Dynamic management can increase revenues by up to 60 percent. This tool basically boils down to effective space allocation, accurate calculation of no-show cargo, clear rules on whether to accept or reject incoming bookings, and better communication between the mainstream commercial cargo and small package/mail sales teams.
Airlines have begun to take a much more structured approach toward cargo revenue management (RM) during the past five years. Emirates, for example, is currently training sales personnel in anticipation of a January rollout of an RM system developed in-house. This will later be offered to third-party carriers as a module within the SkyChain package.
The system, which has been under development for more than a year, combines demand forecasting and capacity-management tools with a pricing engine. Sales teams will have to work on a minimum-bid price basis, as no shipment falling below this threshold can generate a confirmation.
“This will influence sales technique and behavior, and represent a huge cultural shift for our people in the field,” says Pradeep Kumar, vice president of cargo at Emirates SkyCargo. “They will have to explain it, in turn, to their customers.”
Emirates allocates up to 60 percent of available hold space on passenger aircraft to customers with hard-block space agreements (BSAs) or soft-block permanent bookings (PBs), Kumar says. Forwarders on these agreements usually indicate their capacity requirements 24 to 30 days ahead. The balance is offered for free sale, though this capacity may be restricted at first on some sectors to try to encourage a higher rate.
RM has been “more of a philosophy” than a scientific discipline in the past, Kumar explains. “Last-minute free-sale capability depends on the experience and expertise of people working on a particular route. It’s a difficult task to automate.”
Virgin Atlantic already went through RM systems training as one of the early customers for Sabre’s CargoMax system.
“The change process could have been problematic. We had to coach our sales guys through it,” says John Lloyd, Virgin’s director of cargo. “They now have information at their desks giving them the rate bands they can work in, which can change hour by hour. The last thing we wanted was for the sales team to have to wait three or four days for an answer from the revenue management department.”
With the new system, Virgin has seen significant improvement in its bottom line. The carrier’s yield premium rose 8 percent in the past three years, Lloyd says.
“A lot of that is down to revenue management and strategic pricing,” he says. He confesses to “some negative reaction” from customers who did not want to do business with Virgin on its new terms, but claims this was largely lower-end traffic that Virgin could be choosier about accepting with the new RM tools at its fingertips.
On specific sectors such as Nairobi-London, which is dominated in season by a predictable flow of cut flowers, Lloyd says there is a high proportion of BSAs with penalties on both sides for failing to meet contracted terms. Most routes don’t work that way.
Before CargoMax, BSAs and PBs accounted for 65 percent to 70 percent of Virgin’s space allocation, but “were not being managed properly on our side,” Lloyd says. “We were turning traffic away thinking that we had only 1 tonne available, when maybe we had a lot more space.”