Few airlines still need to be convinced about the worth of yield management systems in the passenger business. Now some of the major combination carriers are beginning to turn their attention to the aircraft belly, asking whether revenue management techniques cannot now be applied to raise freight yields.

The answer is that they can and that the potential rewards may be just as persuasive. Experience suggests that even an incremental gain in cargo revenues of say 1% a year, could help offset the $1-3 million cost of a revenue management project perhaps as early as the first year of operation. The bottom line is that a cargo operation which knows its markets and its cost structure, and can take consistent, educated decisions on the basis of that information, will hold an advantage over competitors who do not. Managers can then begin to maximise not just revenues, but profits.

The stakes are potentially high. The international air cargo market is worth some $40 billion a year and it is still the combination carriers that dominate. But the traditional air freight market is changing fast and traditional carriers may need to change with it.

First, information technology is turning the business world into one, fast-responding network. Customers around the globe are demanding better and faster products. At the same time, manufacturers and distributors are streamlining their supply chains, with few companies, now willingly to hold stock. Smaller inventories and faster development cycles mean that the demand is moving towards smaller and more frequent shipments. It also raises the shipper's need for efficiency and reliability.

Finally, the volume of information being assessed by shipping customers is also becoming increasingly weighty. In fact, the information about a shipment is becoming as important as the shipment itself.

In short, the air cargo market is rapidly switching from a transport commodity to a value-added part of the logistics chain. The integrators are already in place with a seamless high-value, high quality service, while a divide is emerging between those forwarder/carrier combinations that can meet the expectations of consistent, time definite and reliable service and those who cannot. Airlines and forwarders face a clear choice - either to remain as they are and accept commodity rates or emulate the service levels on offer from integrators.

For the cargo airlines that choose to compete, the first step is to find the right partner. Forwarders are themselves consolidating around a handful of more powerful companies with ever-widening networks and increasing economies of scale. These companies are increasingly focused on delivering high levels of service and therefore high yield business.

Defining the products

It is not enough, however, simply to identify the high-yield business; the airline needs to create the right set of products to attract such customers. With the right, differentiated products, the yields will follow. After all, high service level forwarders are somewhat price inelastic, willing to pay a premium, provided that the carrier delivers on reliability and availability.

Then comes the task of managing the high-end products to maintain their value. A starting point is to divide up the available space into differentiated levels of priority. For example:

A - must ride

B - probably ride

C - might ride

Overbooking levels can then be set accordingly. A can never be overbooked, B can be overbooked provided that it remains manageable, and C is normally overbooked as standby freight.

This nesting will help to even out any overbooking errors so that the highest yielding products do not suffer. So if there is high demand for A-level priority business then space can be borrowed from B-level freight, which can in turn ease out lower-yielding C-level. The ultimate goal would be to see the highest value freight fill the entire belly hold.

Of course, overbooking needs to be intelligently managed, which is where a revenue management system comes into its own.

Managing the data

The fundamental building blocks to cargo revenue maximisation begin with sufficient, reliable and accessible data. Full air waybill capture is a good starting point. The waybill history should be stored in an accessible format in a database that can be updated daily.

This is no trivial matter as specialists in the building of airway bill data warehouses will testify.

Most carriers only store airway bill information after it is processed by the finance and accounting systems. Other key pieces of information about bookings, including what changes were made and when, are not captured. Yet these are fundamental elements that allow carriers to better understand customer and booking patterns which can then be used in decision making processes. For example, forecasting demand for space on a particular flight or a certain product.

The real challenge is not just to capture the complete life cycle of a shipment from original booking through to invoicing, but to do so in a dynamic and timely way. With new developments in data handling and communications, it is now possible to build an airway bill data warehouse that receives seamless, real time updates from reservation systems - and with minimal changes to existing systems.

Flight schedules and passenger forecasts can be fed direct from the passenger yield management system, to sit alongside the airway bill history, so helping cargo forecasters calculate the likely availability of space on a flight.

As every cargo manager knows, the amount of weight and space available for freight normally remains uncertain until precious few hours before departure. In part that is because freight is loaded last. Fuel, passengers, baggage, and mail all take priority. It is not unknown for an airline executive to have a case of wine or a new car loaded ahead of freight.

Another reason for the uncertainty hinges on the fact that freight literally has a dimension that the passenger business simply does not. A passenger system will allot a seat to every customer. But the cargo system needs to take volume into account as well as weight. That adds uncertainty to both demand and capacity.

Unconstrained demand

Often, shipment dimensions cannot be given accurately at the time the booking request is made. Often the actual dimensions received at tender do not anyway become part of any permanent record. Since flights tend to reach their volume limitations before they hit weight limits, some heuristic calculation, such as a density code, is needed to forecast likely volumes.

The first step is to use historic data to gauge the total market demand regardless of the airline's available capacity. This unconstrained demand is set for each each product type by origin and destination (O&D) and time of day.

Once the unconstrained demand is clear, it can be married up with the available capacity, using price as the balancing mechanism. This balancing act is carried out by an optimisation programme designed, to maximise cargo revenue within the constraints of the airline's freight operations.

The output of the optimisation is usually a "bid price" that a shipper must meet to book space on the aircraft. The bid rate can be either be in the form of an allotment (promised space over time) or a request for a single shipment, depending on the time horizon for the decision.

If the booking request does not overcome the bid price hurdle, the system can supply the cargo reservations agent with information about alternatives. That could be an up-sell to another product, or a different itinerary that fits better with the price being offered.

The system's own router will calculate alternatives, using information from the carrier's schedules across the network. The router also applies business rules to the routings, such as the minimum connection times, the maximum number of connect legs or the degree of circuitous flying that is economically viable.

In reality, most cargo customers, unlike passengers, are more concerned with speed and reliability than with routings. That gives the cargo carrier an opportunity to route shipments away from congested bottlenecks and give a better spread of revenues across the network.

For example, a booking request comes through the reservation centre to ship between a hub airport and major destination. The route is consistently oversold, so the bid rate is high. The router will evaluate alternative feasible routes which meet both the shipper's requirements and the carrier's business rules. It may, for instance, be feasible for the freight to travel via a couple of intermediate points on the network before arriving at the final destination. It could make the final leg of its journey by truck from a less-congested cargo centre.

Doing so would preserve the yield by employing underused routes to retain valuable direct capacity on a high-demand route.

Removing the politics

Effectively, the cargo revenue management system will allow decisions to be taken that make optimal use of the whole network. If accepting a shipment benefits one area to the detriment of another, then the choice will not be made. There will be times when the users override the system's decisions, but overall it provides the basis for objective network-wide decision-making, taking away the guesswork and the politics.

Sales decisions can be based largely on economics and customer relationships, rather than on personalities or territories.

If one sales arm competes with another for space, the shipment offering the highest net yield is accepted regardless of company politics or rivalries. In fact, the demand forecast can be used to set reasonable sales targets or benchmark performance.

But it is equally important that short-term transactional decisions are not be made at the expense of longer term goals. If repeated often enough, a series of flawed short-term decisions can snowball before the long-term consequences become apparent and a valuable relationship with a shipper can unravel if not treated as a long-term relationship.

Such medium-term relationship decisions can also be supported by revenue management system, however, by asking questions such as:

* Do we favour allocations or hold out for free sale?

* Which customers are providing the most value from a network perspective?

* When should unbooked allocated space be released for free sale?

It may be appropriate to base allotment and contract decisions on a mix of both yields and the value of the customer. Suppose a shipper wants to contract for a position on Tuesdays on a coveted route. The offer is 10% below the going rate and 30% below the average non-allotment rate on the leg. The decision will not be made on yield alone. This customer may support the airline on other, less desirable segments or may have much more business with other carriers that can be earned if service on this leg is granted at this price.

To compensate for this customer value, various business rules can be added to the optimiser that will allow the user to weight customers according to a user-defined value. This weighting would up-rate a valued customer even if they are not offering the highest rate for a particular route.

Scenario "what if" planning can also help with long term, strategic decisions. The user can change the business rules and see what effects they would have. For example, it would be possible to see the results of a change in aircraft type, so helping to support fleet or route planning decisions.

Implementation

Like any other major high technology project involving process change, there will inevitably be internal hurdles to overcome along the road to implementing a revenue management project. Some employees will need to be retrained and some positions may become redundant. The appointment of a project champion and internat project teams are essential. Also, if consultants are used, involve them from the start so that they have time to learn the business and foster objectives within the teams. To make a large-scale project more manageable, teams can implement parts of the system piecemeal, building up to full functionality over time. As each new piece is added the benefits should begin to build, towards the final goal of a full revenue management system.

Source: Airline Business

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