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.”
Historically, the carrier would over-book it flights by 20 percent, running the risk of bumping shipments and annoying customers if too much cargo showed up on a given day. More often, the reverse was true, and capacity was not being fully utilized.
“Now the data shows us on what route and on what day we can overbook and by how much. We may know that every Wednesday, a big forwarder is coming in 10 percent below his permanent booking on a given route. In time, we will discuss that with him, but in the meantime, we know we can offer that space,” Lloyd says.
Virgin’s cargo department also manages the carrier’s passenger baggage configuration. This business model is a bit unusual, Lloyd admits, but he says it allows them to better manage capacity.
“Historic data over the last one or two years tells us we need seven containers [for passenger baggage], where the passenger team might have requested eight or 10,” he says. “We can factor in variables that may increase baggage demand, such as ski season or Asia’s Golden Week holidays.”
Dominic Kennedy, RM manager for Virgin Atlantic Cargo, says pre-bookings now run at 50 percent to 60 percent. Free-sale capacity is released around 14 days before departure and is sold only if a customer’s request meets the system’s minimum-rate requirements for the sector and product type concerned.
“We produce a flight-specific demand forecast and continually monitor booking curves for each flight, adjusting the rate according to changes in demand. Modeling accounts for historical patterns, route dynamics and seasonality,” Kennedy says.
“Small cargo is normally accepted, even on seemingly full flights. Smaller shipments can be consolidated with larger ones to optimize available capacity as well as attracting a significant yield premium. He adds that Virgin constantly monitors show-up rates, but “it can be difficult to get right on every flight, so overbooking is applied with extreme caution.”
CargoMax is integrated into Virgin’s Voyager system, and the program can interface with passenger reservations, revenue management and the flight-management system. This allows the capacity-management specialists in the head office to “almost recommend” a load plan to the handlers at London Heathrow, Lloyd says.
Emirates’ Kumar believes back-office tools, providing as much information as possible about the dimensions and density of booked shipments, will help the cargo manager in the carrier’s Dubai hub trying to coordinate shipments from Australia or Hong Kong and refill a B777 flying on to London.
“The manager can see at 24-hours-to-go how the flight is shaping up and can go for smaller packages,” Kumar says. “He will know roughly how many of the eight-pallet and 20-container positions are available, depending on variables such as passenger baggage and temperature.”
Heat can be a major factor. A B777-300ER departing Dubai at 7:30 a.m. or 8 a.m. loses a tonne of cargo for each degree of temperature increase because of fuel expansion.
As at Virgin, everything ultimately depends on load management — the people in the warehouse who have to maximize the loading of each container and position it optimally in the hold. “We operate the standard IATA density calculation, whereby 1 kilo displaces 6,000 cubic centimeters (1:6), but on certain routes, although you’re still selling on a 1:6 basis, the cargo may be bulkier, and you may be loading at 1:7. A good mix of product and density enables you to optimize capacity,” Kumar says.
Inconsistent pallet sizes can defeat the best calculations, however. More shippers are supplying skidded cargo, but lack of standardization may make it difficult to stack pallets efficiently.
“We oversell 10 or even 15 percent depending on the time of year and the route, based on past trend analysis,” Kumar says. “It doesn’t result in much offload, and if 1,000 kilos has to be bumped, it’s no problem with a network of our size, where there may be four or five departures a day to the major destinations. We can still make a same-day delivery commitment.”
Indian software developer IBS teamed up with several carriers in a “core group of influence” (CGI) in 2004 to develop a replacement for legacy cargo management systems. Radhesh Menon, manager of airline cargo services at the company, says the result was a flexible RM tool building in the essential components of capacity management, pricing and loyalty.
A rule-based approach either validates bookings or rejects offers that are less desirable on potentially higher-yielding sectors, Menon says. But there is no single measure of how much each customer “matters.” Carriers may place a value on overall business from a given forwarder, repeat business, specific products booked or its level of support on a thinner route.
Overbooking parameters, calculated in anticipation of no-show cargo or under-tendering, can be calculated by segment, allotted space or per individual flight. Statistical models are built around demand forecasts, booking forecasts or dynamic bid pricing — a feature that Menon says “the industry is only just waking up to.”
Members of the CGI offering primarily long-haul services, such as Qantas or South African Airways, historically would take more business up front from loyal customers, giving them the reassurance that their holds would be full even if it was at a lower rate, Menon says.
“Others, like Kingfisher, are used to operating more aggressively on shorter timelines, leaving space open and optimizing capacity closer to departure,” he says.
Menon acknowledges that long-servers can resist the idea of automated RM. “They will advance the merits of gut feel and say they know better than the system. But the benefits are fully now more clearly understood by major stakeholders who know how severly constricted they were by their legacy systems. It isn’t easy to generalize, but most carriers see yield improvements in the area of 10 to 20 percent.”
CGI member airlines are adopting RM technology in phases. Qantas went live with the capacity, sales and yield functions a year ago and is now extending the system to its terminal operations so that handlers will receive load advice in the form of a more advanced version of the freight waybill.
In the last year, IBS has added a new feature to its RM package, providing a Cargo 2000-compliant cargo data management platform. This not only streamlines the process, Menon says, but the new platform could also help carriers provide security agencies with the electronic pre-arrival information they now demand.