Module 36: Understanding of Cargo Revenue and Forecasts Management THE DEVELOPMENT TEAM

Transcription

1 Paper 8:Cargo Operations and Management Module 36: Understanding of Cargo Revenue and Forecasts Management THE DEVELOPMENT TEAM Principal Investigator Co-Principal Investigator Paper Coordinator Paper Co-Coordinator Content Writer Content Reviewer Prof. S. P. Bansal, Vice Chancellor, Indira Gandhi University, Rewari Dr. Prashant K. Gautam, Director, UIHTM, Panjab University, Chandigarh Prof. S. P. Bansal, Vice Chancellor, Indira Gandhi University, Rewari Dr. Amit Katoch, Assistant Professor, UIHTM, Panjab University, Chandigarh Ms. Chitra Kapoor, Assistant Professor, ITFT College, New Chandigarh Prof. S.Kabia, Chairman, Institute of Tourism and Hotel Management, Bundelkhand University, Jhansi

2 ITEMS Subject Name Paper Name DESCRIPTION OF MODULE Tourism & Hospitality Cargo Operations and Management Module No. 36 Module Title Objectives Keywords Understanding of Cargo Revenue and Forecasts Management To study about revenue Management and Forecasting in Air Cargo Industry, Its Role, Importance,components, techniques and Benefits Air Cargo, Revenue Management, cargo agents, profit maximization, customer behavior 1. Learning Outcome TABLE OF CONTENTS 2. Introduction to Revenue and its Management 2.1 Challenges in Air cargo Industry 3. Air Cargo Supply Chain 3.1 Categories of transportable goods in Air cargo 4. Air Cargo Revenue Management 4.1 Characteristics of Industries which applies Revenue Management (RM) techniques: 4.2 Complications of Revenue Management 5. Features of Revenue Management System for Air Cargo 6. Components of Air Cargo Revenue Management 7. Air Cargo Rates 8. Concept of Segmentation in air cargo Shipments 9. Cargo Revenue Management Model 10. Data Requirements for Cargo Revenue Management 11. Benefits from Implementing Revenue Management (RM) 12.Summary

3 QUADRANT I 1. Learning Objective After completing this module, students you will be able to: Understand the meaning and Concept and basics of Revenue Management in Air Cargo Industry. Understand the Role and Importance of managing revenue in Air Cargo Industry. Basics of Revenue Forecasting Components of Revenue Management in Air Cargo Benefits of Revenue Management in Air Cargo Industry. 2. Introduction to Revenue and its Management Figure 1. Revenue Management An effective cargo revenue management system is important to understanding consumer behaviour, accurately forecasts and organizes available supply and demand, leading to improved revenue and profit. Now let s first understand Revenue-It is the income that an organisation or a business venture generate from its normal business activities that can be from sales of goods or services provided to the customer. Profit making and upgrading the services quality to increase market value is key for all organisations. This can be done through revenue maximization which again is possible through revenue management. The primary goal in Revenue Management is doing right work at the right time and in a right way with right price for the target customer. For this an extensive market study is require to

4 evaluate different customer segments and their needs and wants and the pattern of their spending. Out of the different modes of cargo transportation to other countries about one third of it is transported by air across globe. Seeing the latest industry trend, demand for rapid delivery of goods has increased and thus air transportation of goods/freight are in demand. Globalisation of business, rise of e-commerce and quality and Just- in-time Manufacturing have contributed to the increase in demand for transporting the goods safely in bulk through air cargo. Thus generating a huge business for air cargo industry. Table 1. Worldwide revenue of cargo airlines from 2004 to 2017 (in billion U.S. dollars) Source: statista.com/statistics/564658/worldwide-revenue-of-air-cargo-traffic/ With the up rise of low cost carriers, after deregulation, passenger airlines have established revenue management techniques. Revenue management disciplines were initiated by airline industry in early 1980s for passenger airlines only to increase earnings from sales of passenger services. It proved successful and revenue from passenger flights started increasing, seeing the success rate it is further applied to other areas of services and hospitality like cargo, hotel and car rental etc. Revenue Management in air cargo industry is significantly important because of its complex nature as compare to passenger segment.

5 Products sold for air cargo comes with different proportions in terms of their size and weight, they need special care in terms of temperature (some are highly cooled products) and delicacy, co-load ability restrictions (dangerous material cannot be loaded along with sensitive goods or live animals), load should be equally spreaded and properly arrange by the professionals in the cargo aircraft and all safety should be taken care while loading goods on the aircraft in the guidance of professional air cargo staff. 2.1 Challenges in Air Cargo Industry How to know the actual capacity of cargo plane keeping in mind the cargo customer behavior. How to sell the cargo capacity when the demand of customers are changing in term of flights. Determining air cargo routes bearing in mind connect times, cargo characteristics, prohibitions, location limitations, etc. How to determine hurdle prices or breakeven price keeping in view the changing demand for various types of cargo. At the same time considering price elasticity Determining the changing demands of cargo customers and understanding their importance in revenue generation. Continuously updating and maintaining cargo rates and bid prices 3. The Air Cargo Supply Chain Air Cargo supply chain consist of diversified range of service provider including airlines, freight forwarders, Custom House Agents, ground operator etc. working as a team for efficient transport and speed delivery of freight form one place to another in and outside the country. The three main role players in air cargo supply chain are shippers, forwarders/cargo agents, and freight carriers i.e. cargo airlines.finally the goods are delivered to the consignee at the destination may be the buyer or an agent. Shippers are the seller or sender may be an organisation or an individual who sends the goods through air cargo. Carrier are the airline who carries the goods for transportation. Forwarders are agent coordinating between sender and the airline. Senders take help of agents who on the behalf of sender do all the proceeding

6 with cargo airlines.this includes price negotiations, packaging, and transportation of goods, paperwork and custom clearance.thus acting as a middleman, an intermediate. Figure 2: Supply Chain for Air Cargo Vertical integration and the role of integrators Booking a seat in a passenger airline can be done directly through airline counter or through a travel agent or through a consolidator. Booking through an agent allow price comparison of different airlines, however booking directly with airline is comparatively economical as it free from intermediates and their profit margin.where as in air cargo industry it is the forwarder who book space in cargo. Do all communication with carrier airlines on behalf of sender. Sender themselves rarely directly involve in communication due to which there is no transparency in air cargo rates. Shipper have to pay certain charges to forwarder known to him only same manner, every forwarders (the agent) have their own charges for airlines transporting the goods without knowing the competitors rate. Thus no market equilibrium is established in general.integrators are also important, which are cargo agents having their own cargo flight network, to transport air cargo goods.the popular examples are DHL Express, FedEx and UPS. Thus increasing efficiency because they have their own supply chain, less delays of shipment handovers process or related paperwork. The integrators business is growing with large market share of shipment. Understanding the supply chain network and relationship between the supply chain members it is clear that there is a partnership between cargo airlines and the agents the freight forwarder. The airline sell space in bulk to the forwarder as required and demanded by forwarder though a contract. After that forwarder sell these space they bought from airlines to the shipper, do the packaging of goods generally as a single large unit, they combine goods transported during packaging, to be send to cargo airline for transportation. For international

7 cargo, forwarders also help in customs clearance and export import documentation. Airlines sell cargo space in two way: through Allocation or free sale also known as spot sale (ad hoc sale). Allocation means that flights sell cargo capacity to agent much before the departure of that cargo flight in a particular season. (A season is a particular time period, as per the airline with duration varying from a few weeks to one year.). Carriers also sell space to customers on the spot or space-available basis without prior commitments. Ad hoc demand is the demand generated form forwards those who are not in regular contract with the carrier airline. According to a report, Oct titled- Boeing Forecasts World Air Cargo Traffic to Grow Long Term as Economy Strengthens The fleet size of cargo airlines will expand by 70 percent by 2035, adding a total of 2,370 freighters to the market. The forecast sees demand for 550 large production freighters, 380 production medium wide body freighters, 400 wide body conversion freighters and 1,040 medium conversion freighters. Figure 3 World Cargo Forecast Source: Forecast by Boeing on World Cargo Traffic-A report Grow-Long-Term-as-Economy-Strengthens

8 Figure 4 Top Airlines in the World with Largest Share of Revenue from Cargo 3.1 Categories of transportable goods in Air cargo Products which are often transported by air freight are: Goods with a short economic lifecycle (radioactive material, newspapers). High-value goods (gold, banknotes); High-tech goods; Live animals; Pharmaceuticals; Perishable goods (fruits, vegetables, fresh fish, flowers); Spare parts (to prevent production line stops in factories); Expensive goods are transported through air cargo because of fast delivery and least possibility of risk as compare to transportation done by ship through sea route which has more chances of theft as the long duration of shipment on the sea. Also for high valued goods, cost of transportation is comparatively less.

9 Perishables like vegetables, flowers or fresh fish needs fast and timely also safe delivery and same goes for product having short economic life span for instance newspapers. They lose their value after one or few days. Pharmaceuticals those need to be cooled during transportation for them, dry ice is used which is placed in an insulated container. Spare parts is very expensive when factories have linestops: staff cannot work without the spare parts need to run machines which is to be delivered as soon as possible. Besides these types there are many more goods which are shipped using air freight. Some of these need extra care, others may not they can be transported as general shipments, collectively booked and transported in bulk, packed together as a single shipment. This gives economical rate also to forwarder as rate are decided on measurement of shipment basis. 4. Air Cargo Revenue Management Air Cargo Revenue Management (ACRM) is about managing revenue of cargo airline by managing cargo rates and the inventory in the airline and warehouse which includes belly space, payload, and containers. It keeps into account available plane capacity for sale and controlling inventory. For available capacity determination for sale is based on both, the physical capacity and understanding the show up behaviour of already booked cargo. Actual capacity (for both passengers and cargo) is generally overbooked by the airlines because part of the booked demand often does not show up at the flight departure. Inventory control can be done by allocating space to different products and/or customers. Airlines make revenue from the loaded cargo in the airline. Air Cargo is a relationship based business where the capacity is not known and not fixed. 4.1 Characteristics of Industries which applies Revenue Management (RM) techniques: These are: They have a variety of customer: Difference is on the basis of willingness to pay, preference for different services and purchase behavior.

10 Variable Demand: In changing demand it is more important to attract high revenue customers during peak demand, and capacity maximization with lower-revenue shipments. Non flexible Nature of production: A fixed amount of space has to be allocated optimally over different types of customers. Homogeneous good: customer go with economical space available in one flight and not give attention to the quality and value added services offered by other airlines as well. Thus revenue management plays role in pricing similar goods. Industry infrastructure based on date and Information: Important for implementing RM is that demand can be seen and checked accurately. Through analyzing past data, and an information system which informs about present and past events, such as capacity remaining after the space booking done.online booking system helps in proper operation of RM. 4.2 Complications of Revenue Management Specific feature of cargo industry makes the implementation of revenue management more difficult. The main difference between cargo industry and other industry is non-uniformity of customer type of shipment done and revenue generated. There is a difference in every booking, whereas for one particular seat of a passenger airline the ticket price is specified, similarly for a hotel room booking is always with a certain price for a certain number of nights occupied. All this in not possible in air cargo with certainty. Thus revenue management for cargo industry faces many complexities which are: Multi-dimensions of capacity measurement: Capacity in air cargo depends on weight and volume, and density or per piece measurement of Unit Load Device (ULD) positions available (in wide-body aircraft); Amount of capacity availability is not fixed: For Example on passenger aircraft the capacity for air cargo carried depends on the amount of capacity available for cargo after loading all passenger baggage. Also different aircraft has different capacity depending on the size of aircraft.

11 No Specific Routing: For a cargo plane to fly large number of routing options are available as it can fly on any route as long as it reaches the destination on time as per the agreement Allotments/Fixed Space: A large amount of cargo capacity is allotted to permanent customer More flight legs during flying : each flight leg comes with different amount of capacity available for cargo Goods with Restrictions: Some shipments are subject to co-load ability restrictions (for instance dangerous goods (DG)), or are extremely heavy thus making evenly distribution of weight difficult in cargo plane. Loading loss: Because of the unusual shape and size of certain items they become difficult to load on aircraft as they cannot be carried along with single ULD container Imbalance of Export Import: Cargo traffic is a one-way traffic, i.e. trade flow is not symmetrical. For example, more trade from the Asia pacific to Africa than vice versa; Short-term bookings: In case of free sale of capacity booking come at the eleventh hour of departure i.e. 1-2 days before departure of flight. Size uncertainty for already booked shipments: There is often a difference between the amount of capacity booked and what is decided at the time of tender between cargo airline and forwarder. B2B Market: The air cargo industry is a business to business market, which means it is highly dependable on customers less in number Lack of Customer Data: With variety of bookings channels by phone or and practice of online booking is less proper updated customer data is not always available Such complications need to be address while developing a revenue management model for the air cargo industry. 5. Features of Revenue Management system for Air cargo Following features should ideally be there in an air cargo revenue Management system Automatically check, forecast and update cargo capacity, levels of overbooking, demand, space allocations, bid prices and forecasting demand,

12 Show up rate Forecast Generating management reports on the basis of week, months and years separately on different issues related with revenue generation, load factors, service failure etc. Customer Valuation and performance monitoring of cargo airlines, shipment and cargo agents. Effective management of cargo flights with revenue maximization. Figure 5 Features of Revenue Management for Air Cargo Industry Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solutions

13 6. Components of Revenue Management for air cargo Figure 6 Element of Air Cargo Revenue Management Source: A report onentering the Next Dimension of Cargo Revenue Management, Thought Leadership, Continental Airlines Capacity Management It is forecasting the physical capacity available in airline for cargo, checking for the real show up behaviour for booked cargo space from these to setting the overbooking levels. Thus seeing overbooking and physical capacity available gives the total capacity available for sale in the cargo plane also called as authorized space. Allotment Management It determines the split between allotment i.e. the space given to regular cargo agent and free sale space (for non-regular agents or on the spot comers) on flights. Total space granted and total space requested is also known by allotment management. Network Management Based on forecast on demand for free sale, on the basis of free capacity forecasts, with accuracy keeping in mind profitable and feasible routing options and costs. The least

14 adequate charges (or hurdle prices) to be applied to sell cargo space based on price strategy, demand, available capacity and routing type. Revenue management planning is done on two basis: 1. Period of Flight as decide by the airline. Allotment starts at the beginning of every season with an adhoc allotment also afterwards. 2. Booking Period at this tenure cargo flights are available for booking spaces. Generally starts 30 days before departure whereas some open only 14 days before departure. Large amount of cargo bookings occur within two to five days before departure. Network and capacity management is done during booking period. Figure 7 Allotment Management Model Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solution Figure 8 Interactions among Revenue Management Components

15 Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solutions Thus, a good revenue Management system performs following functions: Forecasting Cargo Capacity: This forecast the loading capacity in a cargo plane. Show-Up Rate Forecasting Booking trends are forecasted by looking at turned up rate of freight booked at the time of departure, cancellation rate, empty spaces, less allotments etc. Overbooking gives information about the extra capacity required for booking, counterbalance the impact of cancellation, no show and over and under tendering between cargo airlines and cargo agents. Allotment Management gives the blend between permanent bookings of space by regular agents and free sale of space at the spot. Demand Forecasting On the basis of past and present booking data.

16 Hurdle Pricing - Minimum price accepted for a shipment Cost Model Estimating cost require for different routes taking in consideration different factors like goods handling, fuel requirement, trucking of goods, interline with other airlines etc. Router deciding the feasible routes for shipment though air cargo. Valuable Customer Identification Identifying valuable customers on the basis of volume of business generated, revenue given, and value of cargo transported frequency of booking. Figure 9. Cargo Capacity Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solutions Figure 10. Capacity Forecast Model

17 Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solutions Figure 11. Demand Forecast

18 Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solutions Forecasts provide critical input to airport management and planning. It is important to remember that air cargo is a high-volume, low margin business that is driven by time, service, and cost control. The physical planning extends beyond the parameters of the on-airport buildings to a wide range of business and regulatory interests both on- and off-airport. Cargo forecasts are important to airports for many reasons including master planning and budgeting. In order to produce maximum outcome and to explore full potential by an airport, accurate forecasting is important to determine future trends in terms of traffic generated, customer demand their needs and want and cargo transportation and data collection. 7. Air Cargo Rates Air cargo rates are based on segmentation on different basis. Rates for shipment through air cargo is based on negotiations both during allotment and bid pricing. There are three types of rate categories, which are: Published rates Contract rates Spot rates The published rates that are revealed once in a year are the generalize rate for all the new customers and non-regular customers of cargo airlines. Obviously higher rates than the rates for regular customers. Rates based on agreements called Block Space Agreement (BSA) / allotment contract between agent and cargo airline for a particular space in the cargo airline.these rates depend on customer type, destination, and commodity, size of contract (volume and amount of shipments). Contract rates are usually fixed rates for half a year, but subject to revise if output is not coming. Spot rates are the rate that are given for free sale on the spot for selling cargo capacity. These rates are a result of negotiations between non-regular agents and carriers remaining capacity available, volume of already booked shipments. When the considered flight departs from a large hub which is feeded from the airlines trucking network, rates might also depend on where the booking comes from.

19 Weight and Volume based Charges concept Air cargo prices are always stated on the bases of weight in per kg. But this is not the only criteria rate depends on volume as well and not just weight. For example if one Kg Lead is to be transported it requires less space than transporting one kg of pillow. Because of this cargo airlines always charge an amount based on weight. The standard volume/weight ratio of a shipment is 1:6. Now if we say that why charges are always calculated based on weight which cargo capacity is volume controlled. This is because weight concept is in practice from the beginning more over weight is easy to calculate than volume and third in the new era cargo airlines are so well designed new capacity engines that can carry much more weight than before. But at the same time this cannot be the reason that we cannot change the old concepts and find new ways of pricing. Today new equipment like volume scanners are available, and freight come in fixed packages having a specific volume. Segmentation in Air Cargo Industry An important aspect in air cargo revenue management is segmentation or fencing that is dividing the market into different segment on the basis of paying capacity and willingness of customer and the nature of goods transported. Segmentation is done on the basis of: Booking time getting more discount for early booking The days of shipment (Weekdays are cheaper than Weekends) If the speed delivery is required i.e. as soon as possible or fast delivery is not required. Nature of the product for shipment (perishable/special care/main deck) Flexibility Valuable customers Channels of Booking (online booking discount) Each cargo plane has different fare classes based on monetary value of shipment. These fare classes can be used in revenue management as in passenger airline.

20 Example of Cargo Airlines Fare Classes Table 2. Segmentation Variables for the Air Cargo Industry Source: Thesis Work 2013 on Air Cargo Revenue Management by Researcher ThijsBoonekamp, Netherlands

21 8. Cargo Revenue Management models There are two simulation models for revenue management based on flight legs of the airline. A single flight leg, have a random revenue for all bookings, instead of using different fare classes. The second model simulates 7 flights in one week to the same destination, and thus increasing the possibility of shipments in different airlines as per the flexibility Model 1 It is a fixed model which use two minimum prices based on revenue generate per volume and revenue generate per weight for transporting the shipment. A very easy to implement model and without any complex amendments in present booking process. Model 2 In this model a series of 7 flights are evaluates over one week, one flight per day during the week. The most economical type of shipment is the most flexible to be placed in the already booked flight or in the subsequent flight. Thus the flexible shipment help in more revenue earning by getting an opportunity not to reject the shipment with high revenue even at the nth hour. When a high revenue shipment booking arrives, one can replace a flexible shipment to the next flight to regain capacity. 9. Data Requirements for Cargo Revenue Management Following types of data required for successful revenue management of air cargo - Reference data Data which can give information on aircraft, Unit Load Device (ULD), cost of transportation air routes for transportation etc. Reference data gives information about the types of aircraft that the airlines has, total cargo space available, payload capacity weight and structure in terms of Unit Load Device. Schedule or Time Table of Flights

22 It is of three types: i) Seasonal Schedule available at the starting of every season can get from flight scheduling system. It list all the information about flights (flight number, origin and destination, operational days and equipment required) operated in that particular tenure. ii) Seasonal Schedule with changes presented on a weekly or monthly basis and it overrules the schedule that is existing before the release of it. iii) Operational schedule of flight which is updated in the last hours. Post departure flight data It is the authentic data for a flight collected after its departure which give information about the data for total capacity loaded and utilized, type of shipment transported, weight of the shipment and passenger type etc. This is utilized for calculating cargo capacities also forecasting the availability. This data can be taken from cargo departure control system or cargo load planning system. Customer/Passenger forecast If the cargo is going as a belly space of passenger airline and not in cargo airline then information is required for knowing the capacity that passenger occupied on board. The data predicts passenger number in different classes of the airline in the aircraft for future reference. Such predictions are used in calculating expected weight of cargo and passenger on board, the volume of passenger baggage and cargo containers at the time of departure in the belly area and main deck of cargo. With the help of this data capacity total capacity of cargo airline can be calculated. Passenger forecasts are available on passenger revenue management system. Air waybill data It has three categories of bill generated one which is booked, other one is at the time of tender, and third one is actually flown shipments. Booked and tender data are used for calculating the show up behaviour of customers and agents. It also predicts customers demand

23 Whereas flown air waybill data gives information about actual load flown in an aircraft and is used for reporting purposes. It include shipment data such as shipment is originated from which country,flown to which country what kind of goods transported how many freight is compiled in one load unit,weight of shipment,name of the shipper, name of the consignee, departure through flight number, date and time etc. Figure 12. Data Requirements Sources for Cargo Revenue Management Source: Seminar Report on Air Cargo Supply Chain Management and Challenges by Sabre Air Cargo Solutions Implementation Approach Revenue Management should be implemented in three phase: 1. Managing cargo capacity 2. Allotment

24 3. Bid price management. 10. Benefits of Revenue Management (RM) There are a number of benefits that Revenue Management systems can bring for air cargo industry. 1. Helping in creating price judgment for a different or similar category of products as well as the customer willingness to pay. 2. Increasing customer satisfaction and loyalty. 3. Increase demand and selling capacity by creating flexible fare for freight transportation. 4. Controlling all the booking decisions whether made much in advance by allotments or even closure to departure two three days. Giving financial benefits to the shippers. 5. Shipments are often send collectively as a single packaging. Freight Airlines try to consolidate shipments and revenue is earned according to the weight of shipment whether large and light shipments pay according to their chargeable weight. RM system helps in managing capacity pricing. 6. Another advantage of using RM systems is that it is fully digitalized systems. Instead of booking cargo through s, through phones or by physically being present at the booking site normal cargo can easily be booked online. This proves to be time saving and convenient. This practice is very less at present. 7. The implementation of e-freight has now increased. Improved IT systems becoming more centralized makes the process of digital booking easier. Therefore, a centralized IT system has benefits for both e-freight and RM, cost reduction through e-freight implementation. All these RM applications helps in revenue maximization 11. Summary Revenue Management (RM) practices has seen as best practices for profit maximization and economic viability of airlines industry both for passenger flights and cargo planes handling. Huge competition and unstable economic condition is making hard for cargo industry to earn

25 profit. This is where revenue management techniques can play an important role to overcome the financial problem and to overall prosperity of the cargo industry. In this era of technology when everything is digitalized it is important to predict future for competitive edge. Today all the major sectors of service industry are using revenue management system. Revenue Management for air Cargo is in initial stages and is a growing field learning new concept and implementation models. A proper awareness and training is required for revenue management practices and associated benefits in air cargo industry. There is actually a lot of profit margins in cargo business if revenues is managed properly. But only few airlines across globe is presently using revenue management as a common practice.