Cargo RM Level One - The Basics of Cargo Revenue Management
Cargo management has always been one of the most operational and dynamic aspects of the air transportation business. While the first commercial flight in history was an all-cargo flight carrying mail, revenue management as a scientific domain using automated tools was first initiated in the passenger transportation business of commercial aviation. In recent years, revenue management is rapidly being adopted in the cargo world, and as such there is more and more demand for systematic cargo management business processes, tools, and decision-making support.
This course includes 6 modules which will provide you with a general overview of pricing and revenue management concepts and theories or cargo revenue management. The training manual is an electronic Adobe Acrobat PDF file with over 100 pages, and in color. The manual can be downloaded and printed, or viewed from our online learning center. Module related powerpoint presentations and comprehension assignments are included.
Relevant articles, papers, and presentations, have been collected and are available from our online learning centre, to enhance the learning experience, and provide real-life examples and case studies.
A highly qualified instructor will be assigned to guide the participant throughout the duration of the course. The instructor will provide feedback on each comprehension assignment as well as the final assignment paper. Please note that all our instructors possess current practical working experience in pricing and revenue management.
The six modules cover the following information:
Module 1: Managing demand
To understand how airlines can manage demand for passenger seats, it is important to realize that airlines are a service industry and the seating and cargo capacity in an airplane is fixed.
Airlines are in business to provide customers with a service - transportation from A to B - as opposed to a physical product. Other businesses that provide services include bus companies, hotels, restaurants, and theatres. The customers of cargo transportation typically include freight forwarders (agents), freight brokers, surface transportation companies, shippers, as well as airlines themselves for third-party lift.
Unlike manufacturing companies that produce products that can be made in advance and stored for future sale, service industries offer consumers a perishable commodity. Once a flight departs with empty capacity, an airline loses any chance to earn revenue from the unsold space.
In some types of transportation, for example, a subway, seating capacity is elastic. As more passengers arrive in a subway car, they fill up the remaining seats and then stand in any available space. In an airplane, on the other hand, both seating and cargo capacity is fixed. Arriving passengers are assigned to specific seats, cargo is loaded to specific cargo positions in the belly-hold of combination aircraft, or on the maindeck for all-cargo aircraft (also called ‘freighters"). Offering more flights, either by flying existing planes for longer periods of time and minimizing down time or by leasing extra planes can stretch capacity for a particular route. The first step of revenue management (RM) is to understand the characteristics of passenger demand, the strategies for managing the demand, and the forecast of demand.
The very first step of revenue management (RM) is to understand the characteristics of airline demand, the strategies for managing the demand, and the forecast of demand.
Module 2: Differential pricing
This module deals with the complexities often faced in cargo pricing. Differential pricing, or variable pricing, is used by transportation services to provide cargo rates at different amounts that will appeal to different market segments and will control demand levels. This is typically done to segment between allotment (or permanent/recurring booking) space, free-sale space, or the capacity made available for different cargo marketing products (express, deferred delivery, small parcel shipments). Setting rates and rate contracts for cargo schedules involves segmenting the market, finding out fixed and variable costs, knowing the rates offered by competitors, and being familiar with customers' preferences. The latter is complicated by the fact that oftentimes, cargo rates are opaque and contracted between carriers and forwarders and not published in any fashion.
It is difficult to calculate the costs involved in delivering a service, notably in the cargo business that depends on shared capacity with a passenger division (combination carrier), although techniques are used to identify these costs. Transportation companies need to know the costs of providing their service, however, to set variable price levels that will produce desired profit margins.
Transportation companies have a high ratio of fixed costs to variable costs. Fixed costs for a departure can include the cost of fuel and fees, although some components remain variable as even fuel depends on how much additional weight (cargo) is loaded onto an aircraft.
Module 3: Allotment & free-sale capacity control
Cargo space is a perishable inventory. At departure, opportunity to generate revenue from empty space is lost forever. Maximum revenue gains can be captured from a departure if all capacity is sold and all demand for last minute high revenue express cargo is met. "Capacity control" of cargo space is the process of controlling the sale of different capacities for different types of cargo demand for each departure, including the management of space made available for permanent or recurring bookings (allotments) vis-à-vis free-sale capacity.
"Optimal" cargo space allocation can lead to large revenue and profitability gains.
Module 4: Performance measurement
They say that if you can't measure it, you can't manage it. Performance measurement involves watching values of performance measures (units of measure), to find out progress toward specific, defined objectives. In the transportation industry, performance measurement can be used to record when and where cargo is being transported. It can spot variations or trends, measure outcomes of business strategies, document changes in revenues, estimate outcomes of sales strategies, and show how well airline objectives are being met.
A successful performance measurement system is comprised of a balanced set of a few measures (key performance indicators). Transportation performance measures include spill, stifle, spoilage, and denied transportation/offloads. The performance measures should be logical and clearly defined. If the measure is new, the carrier should try to identify existing data sources or it may have to create new sources. All data sources need to be credible and cost-effective.
A performance measurement system should specify the data needs (data source, quantity, population), frequency of measurement, calculation methods (equations and definitions of key terms), and final report specifications (data comparisons, chart and graph types). To be most useful, raw data should be transformed into understandable information that is readily available to airline employees working in various departments.
This module presents a review of the reason behind performing and updating a performance measurement system in a transportation company. It then discusses of several types of performance reports including advance booking report, cargo load factor report, denied transportation/offloads and spoilage report, spill and stifle report with exception alerts, and historical cargo demand report.
Module 5: Scheduling and capacity adjustments
A transportation company's scheduling process decides where and when it will operate and what equipment it will use. This has long-term, medium-term, and short-term phases. It is a key determinant of a company's profitability, since it aims to match customer demand with supply (seat and cargo capacity). To increase revenue opportunities in today's fast paced, ever-changing global marketplace, carriers need to adapt quickly and efficiently. Effective scheduling and capacity adjustment becomes a means to an end.
The key to ideal scheduling is to balance supply with demand. Customer demand for cargo is influenced by four main causes: cargo space and dimensional characteristics (volume/weight), departure times, equipment types, and delivery of service. For example, some time-sensitive customers might seek departure times that enable them to meet important cutoff and delivery times, while others require critical Unit Load Device (ULD) type capacities in order to satisfy online or interline transfers and connections.
Module 6: Building a revenue management organization
To build a successful revenue management (RM) organization, three key elements are needed. First, the carrier must select suitable RM systems and tools. Second, they must put the right people in the right places. Third, they must design and set up a robust process. Success needs paying careful attention to both people and processes. Often RM is defined by systems, data, forecasting, origin and destination (O&D) processing, and revenue optimization. But these are just tools of RM. An RM system only works well when skilled people follow carefully designed processes.
Many carriers have succeeded (and continue to succeed) in realizing incremental revenues by using RM systems. In the same competitive environment, other carriers have created and took apart their RM organizations, and their expensive RM systems stay idle. Still other carriers have shut down their RM systems and switched back to doing manual inventory control, because they could not achieve expected results. Why are some companies successful in applying RM principles while others fail? A closer examination of the latter carriers will likely reveal that their people and processes were not managed properly.
People are by far the most valuable resources of an RM organization. Some airlines have achieved success by paying attention to managing people. They believe that if the company takes care of their employees, their employees will take care of the customers, and the shareholders will also be happy. The same philosophy can work when managing an RM group. The challenge lies in deciding how to apply this philosophy.
RM staff members interact with employees in many different departments ranging from strategic to operational. They continually react to market changes by adjusting schedules, prices, and inventories to match swings in demand. To help make the right decisions, they need a well-structured process.
The objective of an RM organization is to increase the profitability of the company by applying knowledge about the market and the competition, and by using RM systems and tools. This module, "Building a Revenue Management Organization," will first describe people and processes. Next, it will characterize different types of RM organizations and close by reiterating the importance of RM.