Lift the Profits: 5 Strategies for Air Cargo Carriers
Many say the good times when air cargo saw more than 5 percent compound annual growth rate (CAGR) over a decade are now over. The growth faltered in 2008 and 2009, but in 2010 hopes were raised when the industry showed a record 18 percent surge in traffic (largely due to re-stocking), only to see falling and stagnant demand in 2011.
This year is not likely to fare much better with IATA announcing that it is downgrading its 2012 forecasts for airline and airfreight profitability with freight yields likely to continue their stagnant performance from 2011. And with the world GDP growth teetering around the 2 percent mark, many wonder if the airline industry itself will slip into the red in 2012.
IATA’s concerns are fueled by the weak global economy and falling business confidence, particularly in Europe. Compounding this concern is the weaker-than-expected performance of the Asia Pacific market, driven in large part by falling demand for Asian manufactured goods from U.S. and European consumers. Add to this the continued high costs of fuel and IATA’s predictions of severe pressure on profitability and yields for air cargo carriers in 2012 suddenly seem plausible.
Perhaps it is time to recognize that the stability of long-term growth trends for air cargo seen in the past is in fact in the past. The new reality could be that of shorter cycles of boom and bust with planning cycles spanning weeks and not months. What should the carriers do to soar again? Five strategies come to mind:
- COLLABORATIVE FORCASTING PRACTICES. Many air cargo executives have expressed serious doubts about anyone’s ability to predict demand with any reasonable accuracy. There is some merit to this skepticism, but it is also true that there are predictable flows with which a good forecasting system can work. For the rest of the flows, or to improve accuracy in the good ones, it is time air cargo carriers embraced the notion of collaboration in a formal sense, where there is a simple and frequent share of information within the organization but more importantly with the main customers who provide the most traffic and revenue. This would be a win-win: air cargo carriers get more predictability for their planning; customers get reliable service plans, access to capacity and stable rates. Solutions exist to enable this capability; however, carriers can start this even without a system in place.
- PROFITABLE RATE SETTING. There is a significant need for an air cargo carrier to be able to come up with rates that it can publish and which, on average, prove to be profitable, stable over a period of time and in keeping with the market conditions as well as competitor actions. Recent advances in market data availability from third-party sources such as IATA’s CargoIS make it possible for the carriers to map demand accurately to fluctuating capacity and optimize the rates while taking market data and market response into account.
- AGILITY. Air cargo carriers operate in a volatile environment where things are changing constantly. If planning cycles have indeed shrunk, then what used to take weeks to prepare must now be done in a matter of days. Air cargo carriers, and in particular belly carriers, need to be agile and must have the ability to react to up-to-date information on both demand and supply by constantly evaluating key metrics such as load factors, allotment utilization, customer performance, etc. and change the plans in a dynamic manner to meet the needs of the hour.
- VISUALIZE LONG-TERM PROFITABILITY. Short-term gains are always required, but if we agree that we are in an era of short economic cycles, then it becomes imperative that the industry have a long-term view on profitability. Carriers will have to be ruthless in identifying loss-making customers and loss-making routes and take steps to address them. Belly carriers must demand a seat at the table of the airline to influence capacity planning and encourage the passenger side to include cargo demand into their planning process. Reducing freighter capacity – even if it means losing an old customer or some traffic on a route – might be a better strategy if it shows that network profitability will improve. Certain carriers such as Singapore Airlines have started doing this, but they must do so with long-term in mind. Many carriers took this step in 2009, but brought the capacity back into service in a hurry as soon as the first uptick in demand appeared in 2010. This time around though, I hope carriers show a bigger capacity discipline. It is time this industry acknowledge they have an over capacity situation on hand and take steps to address it.
- EFFICENCY. This is a big buzz word, but it has never been more important. Operations and commercial divisions typically work in silos, but for air cargo carriers to squeeze maximum profitability both functions must work closely together. What you sell is what you carry; and operations must be in step with this simple philosophy. Here is where revenue management can play a significant role. Much like the scrum-half in rugby, revenue management could be the objective broker of information between both sides. For instance, they can provide advance information on likely bookings and likely load plans to operations, and also keep them informed about such information as likely cancellations and no shows. In return, operations can inform revenue management about what can be achieved operationally and what the likely problems are, so that revenue management can advise commercial teams on what kind of customer service level agreements would be achievable before such agreements are struck. If operational and commercial teams work towards the same selling plan and towards common goals, with revenue management playing the objective information broker role, significant efficiency can be gained.
Focus on Winning
Smart carriers should look into the approaches outlined above and start adopting them in their organizations. Simple reports, usage of available third-party information, and better collaboration amongst divisions can get the ball rolling. As organizations get better at this, investing in sophisticated revenue management technologies will help supplant many manual processes and enable analysts to focus on winning profitable business.
We have been here before. Post 9/11 and post SARS, this industry went into a contraction mode, but it did recover to a healthy position and proved its resilience. I believe this situation is no different and this industry will rebound. It stands to reason that if a carrier is able to shine during this downturn, it is in the best position to generate significant profitability when demand and growth eventually return. I don’t think 2012 needs to be a doom year for air cargo carriers after all, but I’m curious to get your thoughts.
Do you agree with these principles and if so, do you have any examples to share of their success?
July 16, 2012 Update
Want to learn about the key benefits of revenue management solutions that can give air cargo carriers the lift they need to succeed? Read my article in the July 2012 issue of JDA’s Real Results magazine where I discuss how to overcome lack of visibility, achieve deeper customer insight and increase confidence.