What does the term pricing mean to you, I asked a few guys that I know of who work in the airline cargo departments? Here is a sample of the answers that I got:
“Picking up the appropriate rate for a shipment at the time of booking? she said, to which I responded, “Isn’t that online rating?” She rolled her eyes and quipped back, “We don’t have data in the cargo industry like the MIDT in the passenger side to really talk about pricing."
A few of the revenue accounting experts enthusiastically responded the rating functionality within the revenue accounting system is what is defined as pricing in the air cargo world. "Hmmm…isn’t rating nothing but application of rates from the rating engine that comes with the revenue accounting system or a Res/Ops system? In other words, rating is a function of maintenance and application of rates and prorates. Would you agree? And plus how do you come with those rates? ”, I asked. “We never looked at it that way. We always thought the act of rating is pricing as opposed to focusing on what should be the basis of coming up with those rates. You may have a point!”, the revenue accounting manager retorted grudgingly giving me some credit.
A long term veteran in the revenue management department from my alma mater quipped, “Pricing means hurdle prices or bid prices generated by revenue management systems”. Bid prices or hurdle prices are guidelines using which you reject, accept or reroute shipments. The basis of these bid prices are still demand driven by rate and density.
Unlike our passenger counterparts where pricing directly refers to fares and a lot more transparent, the air cargo world struggles to define this and cannot even talk amongst themselves, wary of the recent price-fixing allegations and associated fines.
Pricing in air cargo world in my humble opinion is the determination of what prices to put in the rate sheet. It could be tariff rates, contract rates or spot rates. How do you determine this number? Is there any method to this madness? Most airlines solely depend on hearsay and experience of the sales teams in combination with some 3rd party data to come up with the prices.
There was one air cargo pricing head and sales head who were brave enough to admit to me that they go into meetings with forwarders where the forwarders let them know how much business they give to the airline and how much should the airline price their space. I was shocked but at the same time I understood his plight.
Can there be any intelligence and decision support built into a model to recommend a consistent way of producing these prices? Should airlines consider various pricing drivers like customer value, competition and maybe even price elasticity to come up with prices?
As a first step, an airline needs to understand and comprehend the effect of customer value, competition, costs and price elasticity. Once you model these, suggested prices need to be converted into average prices by different weight breaks as well as container/pallet types.
I have some answers on the above topic and I look forward to hearing from you on your thoughts in the comments section below.
-Mukundh Parthasarathy
VP, Cargo Product Management & Marketing
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