Air Carriers: How to Rise Above the Dark Clouds of Volatile Economy

It is interesting to read the latest IATA figures, which reveal that air transport demand continued to flatten out in August 2012. A look at recent financial results of 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, 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 have to pursue a change in their strategy and make “being nimble” their new mantra. Three immediate steps can be taken to achieve this, which I have discussed in the past:

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 having cut capacity in 2009. When demand is low and planes are not full, it stands to reason that rationalizing capacity and planning capacity smartly is a key lever carriers can exercise. As Alex Lennane, editor of The Loadstar blog, advises, companies 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 forecasting demand accurately is no doubt the most challenging, yet most important requirement for a carrier. A foolproof 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 he should raise the rates in a certain market for a certain customer but the sales force was not prepared to “just ask the customer.” They 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 the carriers are in. And they also know how important your service is for them to meet their own customers’ just-in-time supply chain strategies. My recommendation is to force the issue. Implement processes and technology that enable 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.

3. Move to Dynamic Pricing. 
This third point may be considered radical by this industry, 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 this industry which is famous for its 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 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 with the carrier. And 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 market today. Given that most cargo carriers are migrating to modern technical infrastructure, being nimble in producing and publishing rates dynamically is easy, and does not require the significant manual labor once needed.

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 technology 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 actually be in control of their own destiny. Much like the example referenced earlier, should carriers move to this new approach, customers will respond positively to increasing collaboration. Why wouldn’t they want to tell carriers what their needs are so that carriers can ensure those needs can be met? It is time for a paradigm shift in this industry; otherwise the stories of significant quarterly losses will not be relegated to history anytime soon.

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