Author’s Note: This is a guest blog post by Mark Heuchan, Solutions Consultant, JDA Software. Mark is an air cargo business consultant and works closely with me as part of JDA’s Freight Transportation practice.
Six months into 2012, it’s still a volatile and risky environment for cargo carriers. According to an article in Inbound Logistics titled Air Cargo Growth in Holding Pattern, hitting bottom might be a sign of better times to come. The article states that freight demand was down 4.2 percent year-over-year according to the International Air Transport Association’s (IATA) April 2012 global traffic results. Surprisingly, while freight demand is down, passenger demand is rising quite sharply (up more than 5 percent YTD).
The logical explanation is that the operation of more costly freight services has been curtailed, as carriers find that the expanding belly-hold capacity can meet more of their requirements. In particular, carriers in Asia and Europe both managed to reduce their international freight capacity at a time when corresponding passenger capacity was growing.
It is also worth remembering that air freight in total does not achieve the same load factors as passenger freight, as many combination carriers operate schedules more aligned to tourist than industrial requirements. For example, flights to and from the Caribbean carry very little on the lower decks. For the Asian and European carriers to continue maintaining freight load factors of around 60 and 50 percent respectively, many routes must still be experiencing strong enough demand to exercise some selectivity in freight accommodation. Another reason that FTKs (Freight Ton Kilometer) drop in a downturn is that with less freight being flown, it becomes easier to find capacity on direct – rather than indirect – services, thus reducing the overall distance flown.
However, the oft-reported FTK is not a tangible product that airlines sell. Airlines measure their results in terms of:
- How many tons did we sell?
- How much revenue did we make?
- What was our net profit?
A carrier operating at high-load factors but at uneconomic yields may report attractive FTKs, but potentially only generate profits for its handling companies. The high-load factors are a sure sign they are making profits for their customers as well. I believe it’s time for this industry to start measuring success differently using the most sophisticated revenue management practices and solutions. Consider the following:
- First, carriers should recognize the importance of tracking the contribution earned by each kilo carried and ensure that no freight is carried at a loss. Carriers should use revenue management solutions across their entire network to select the most desirable customer business to enable profitable decisions at each step of the process.
- Second, integral to measuring contribution is a core forecasting philosophy that relies on science and operates on the principle that the salespeople working with the customer can ensure the forecasts are “always right.” Carriers should provide their organizations the necessary tools and processes to ensure that a collaborative framework enables easy sharing and reviewing of forecasts — a process that is bound to improve accuracy.
- Third, all carriers should invest in understanding their costs to the most granular level possible. Many carriers already do, but if every kilo carried is to be profitable, then every kilo carried must be costed accurately. This means carriers must have an accurate understanding of all fixed and variable costs.
- Fourth, determination of the optimal contribution-generating plan is achieved through network optimization, which ensures that the rates being charged are representative of the market and the carrier’s own demand/supply balance. Recent advances in price optimization technologies are able to consider market data explicitly to ensure a proper and profitable market rate is set for every transaction.
- Finally, carriers should adopt dynamic rating engines that price every transaction request based on the specific booking or allotment request characteristics and current conditions. These engines allow for dynamic definition of pricing rules and execution to ensure that the right (and profitable) rate is offered for the right customer at the right place and time — every single time.
Air cargo shares a common characteristic with every other industry — that volume on its own is not a measure of success. Historically many large companies have generated huge turnover while smaller competitors have better exploited their assets and markets, resulting in greater profitability. Revenue management is the science and the process that drives profitability. In my estimation, the tougher the economic climate, the greater the need for it. What are your thoughts?