Air Carriers: How to be Nimble in a Volatile Economy
It is interesting to read figures from BAA highlighting a decline in air cargo movement, which dropped 2.5 percent between March and April this year. A look at the Q1 financial results of all major air cargo carriers sums up what has been a difficult period for the cargo industry. In an environment where the economy is fluctuating and fuel prices are rising, it is easy to give in and blame problems solely on external factors.
But carriers need to recognize that there has been a steep change in the demand for this industry, and even if demand were to return to previously seen high levels, there are no guarantees that such level of demand is sustainable. Volatility is the new reality and “business as usual” thinking just will not do. Carriers will have to change their strategy and make “being nimble” their new mantra. Three immediate steps can be taken to achieve this:
1. Impose Capacity Discipline
Some carriers are cutting capacity, but the industry as a whole is not doing enough. At the first sign of demand turnaround, these same carriers will bring back this capacity as they did in 2010 after cutting capacity in 2009. When demand is low and planes are not full, it stands to reason that smartly planning and rationalizing capacity is a key lever for carriers. As Alex Lennane points out, carriers should stop planning for growth that might not come or could be fleeting, and instead, figure out nimble ways to manage the present.
2. Ask Your Customers
Getting a handle on accurate demand forecasts is no doubt the most challenging, yet most important requirement for a carrier. A smart mechanism would be to share your forecasts with your customers and get feedback in order to understand the true nature of the demand you are likely to experience.
I’m reminded of an executive at a leading cargo carrier who knew that they should raise the rates in a specific market for a certain customer but the sales force was not prepared to “just ask the customer.” Sales eventually were forced to and were surprised by the response they got, which was something along the lines of “about time you guys caught up with your competition.”
Customers know very well the precarious situation their carriers are in. They also know how important your service is for them to meet their own customers’ just-in-time supply chain objectives. My recommendation is to force the issue. Implement processes and technology that enables collaboration between you and the customer. If a customer is unwilling to collaborate, make your capacity as volatile as their demand is – in other words, let the customer rely on market dynamics on a given day to have access to your capacity. And those that do collaborate with you, reward them with better service and rates.
3. Move to Dynamic Pricing
This third point may be considered radical, but I think it is time for the carriers to move to dynamic pricing and enforceable space commitments. This would be a paradigm shift for air carriers who are famous for their long-term rate commitments to customers and promising capacity with no recourse if the customer does not utilize the allotted capacity.
The irony of this current practice is that customers with rate or space commitments still negotiate to see if they can get a better deal than the one they originally negotiated. If they don’t like a carrier’s response on a given day, they take their business elsewhere. This results in a situation where a carrier is committed to an agreement but the other party is not, irrespective of the nature of the market. This just does not make sense, and certainly does not reflect the dynamic nature of the markets and supply chains today. Given that most cargo carriers are migrating to modern technical infrastructures, being nimble in producing and publishing rates dynamically is easy and does not require the significant manual labor currently required.
Combating Volatility with Dynamism
It is time for carriers to move to new approaches. If everyone agrees that demand is volatile, why shouldn’t pricing or capacity commitments be equally dynamic? If customer tendering behavior is erratic, why shouldn’t carriers be prudent about how long they will hold a space commitment? Pricing and revenue management solutions that can react to short-term market behavior and recommend appropriate action – whether for rates or for capacity control – exists and should be put to good use by every carrier.
With such a paradigm shift, carriers can control their own destiny. Much like the example I quoted above, should carriers move to this new approach, customers will respond positively to increasing collaboration. Why wouldn’t they want to tell the carriers what their needs are met and get excellent service in return? The time for action is now. If not, I worry that the stories of significant quarterly losses in this industry will not be relegated to history anytime soon.