Air cargo is increasingly becoming an important source of revenue for airlines across the world. On an average, the revenue from cargo is 13% of the total air traffic revenue, and up to 40% for some airlines. Recognizing the revenue generating potential of an efficient cargo department, experienced airlines have transformed this sideline operation into a vital component of their business strategy. Cargo is no longer considered as a cost center at many carriers. More and more carriers are making Cargo as a profit and loss unit and several carriers treat them as subsidiaries; in many large carriers, Cargo is a separate company. This is putting the pressure on Cargo business units to capture as much of a market share as possible and carry the right type of cargo within the constraints of the network in order to increase revenue and maximize profitability. The success of an air cargo operation can be impacted by a number of factors – lengthy unproductive processes, untimely flight schedule updates, inaccurate data availability, and uninformed and inconsistent decision making. Airlines require automated decision support tools to help manage cargo operations at an optimal level, thereby increasing revenue while maximizing profit and improving customer relationships.
In the early 1980s, revenue management techniques were first applied in the airline industry as a method to increase revenues resulting from passenger sales. With the success of revenue management to improve passenger revenues, these techniques were applied to other business areas, such as hotel, railroad, car rental, and cargo. World’s first revenue management (RM) system for cargo was developed and installed in early 1990s. Today, there are about twenty carriers in the world that use a cargo revenue management system and there are about three major vendors that provide full-fledged cargo revenue management software. Airlines use a Cargo RM solution in one or more of the following ways to generate additional revenue and profitability:
Capacity Planning - Knowing the capacity available for sale accurately at the very beginning of the booking period is very important so that demand is not spilled or turned away which in turn increases revenue. Benchmarking and post-implementation measurement of benefits from capacity planning shows revenue improvement of up to 5%.
Allotment Management – How much space should be allocated to a station or customer based on revenue, cost, usage, type of cargo, etc.? Allocating space to the right station or customer and considering the possibilities of satisfying allocations among multiple routes considering network effects helps to increase revenue from allotment sales by up to 4%. Hurdle Pricing Guidelines - Determining minimum acceptable prices (or hurdle prices) to sell cargo based on flight capacity, demand, and rate and density of cargo. Carrying the right freight mix in terms of rate and density maximizes the revenue and contribution from the 3-dimensional cargo capacity. Benchmarking measurement of revenue benefits from using hurdle pricing is up to 6%.
RM Solution Overview
An overview of the Cargo RM system from business, process, and technical perspectives is presented in this section. The business aspect provides a discussion of the functional requirements of the solution. The process description addresses the User Interface aspects of the solution. The technical part discusses the architecture, data and data sources, interfaces, and integration with other cargo and external systems. The system has the following features:
Automatically process key revenue management modules at night for up-to-date flight capacities, overbooking levels, demand forecasts, allocations and bid prices.
Interactively run revenue management modules and options to review and modify model outputs as well as change model inputs.
Ability to create weekly, monthly and yearly management reports on service failures, load factors, and revenues.
Pro-actively manage flights by alerting users when certain conditions are met or not met in terms of potential service failures or revenue opportunities.
Manage flights in a simple and more efficient way with user-friendly interactive screens.
The features and functionality of the RM solution addresses the following business functions:
CAPACITY FORECASTING - determine available cargo space by flight for future departures.
SHOW-UP RATE FORECASTING - predict flight leg-level booking behavior in terms of no-shows, cancellations, and over/under tendering.
OVERBOOKING - determine the amount of additional capacity to be made available for booking, to offset the impact of no-shows, cancellations, and over/under-tendering.
ALLOTMENT MANAGEMENT - determine the mix between permanent bookings and free sale as well as the allocations among various stations and customers.
DEMAND FORECASTING - project origin/destination demand based on historical data and current bookings.
BID PRICING - determine minimum acceptable price (‘bid price’) for a shipment considering network demand and capacity.
MANAGEMENT REPORTING – reports on flights, customers, stations, etc in terms of usage, load factor, revenue, etc.
ROUTER - generate operationally feasible routes considering shipment, aircraft, and network characteristics
BOOKING EVALUATION – ability to evaluate a booking request considering rates, routes, and bid prices
The RM system User Interface (UI) allows the user to perform the following key functions:
Logon to the system
View, add, delete and modify user-specific views
Set defaults and overrides
View dashboards with drill down capabilities
View and modify outputs of the various RM components such as capacity forecasting, overbooking, and bid pricing
Interactively run RM components as needed
View critical flights and add, delete or modify criticality parameters
Process booking requests
Overall, a revenue management system can increase revenue by up to 10%. The extent of revenue benefits from using a RM solution depends on a number of key factors such as the level of sophistication of current revenue management method, business process alignment with revenue management, data quality and availability, product acceptance at all levels within the cargo organization, and users believing and using the system. In addition to the financial benefits from using a RM solution, airlines have realized additional benefits such as increase in productivity, up-to-date availability of data, consistency in decision making, and improved response time.
In addition to tangible benefits, there are several intangible benefits an airline can realize from implementing an revenue management system:
Consistency in decision making
Faster response time for booking request processing
Up-to-date availability of key data
Identification of critical flights to focus