The Mystique of pricing in the Air Cargo industry

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 3^rd 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

Higher yields are good, but higher margins are even better

IATA’s most recent Cargo Tracker indicates air cargo business experiencing better operating conditions over recent months, leading to an increase in air freight volumes, stabilization in yields, and a more optimistic outlook for 2013. This is good news for most carriers, but how do you turn this into GREAT news for your organization. The question is as yields stabilize, how can a carrier improve margins? The general answer lies in three key areas: enhancing revenues, preventing revenue leakages, and reducing costs.

Specifically, revenue enhancement comes from rationalizing and streamlining schedule, products, and prices and managing available capacity and controlling access to capacity. Preventing revenue leakage has several dimensions to it, including but not limited to accurate dimensioning (while tendering of shipments), better asset management (ULD tracking), and accurate rating and billing/invoicing. Route optimization, efficiencies in unitizing, staffing, processes and contracts, and reducing service failures can lead to reduction in costs.

While focusing on all of the above areas at the same time may appear to be an insurmountable task, there are some quick hits and low hanging fruits that will have immediate impact to the bottom line. Identifying these areas and addressing some of the inconsistencies and challenges can result in up to 10% increase in margins.

We, at RTS, use our industry recognized Airline BPM 2000 methodology to help carriers realize the financial benefits in terms of margin improvement that involves the following:

• Envision – Establishing management commitment and vision
• Initiate – Communicating to the stakeholders
• Diagnose – Documenting existing processes
• Redesign – Define and analyze new process concepts and design measurable KPIs
• Reconstruct – Reorganize processes, communications and data
• Evaluate – Evaluate process performance

Time is of essence here. Capacity is perishable, so is time…let us talk. Leave me your thoughts and comments below.

Raja Kasilingam

President

Competitive Insight

Historically, cruise ferries have just relied on their own booking data to generate forecasts and subsequent optimization controls without taking into account competitor actions. However there is a growing realization in the industry that passenger booking behavior is influenced by competitor actions in markets where there is a choice. Getting visibility into competitor actions on a regular basis and factoring that in setting inventory levels is imperative for a cruise ferry to retain passengers as well as positively impact the bottom line.

Though most cruise ferries employ some form of competitive insight through manual processes, automated processes to monitor competitor activity and influence inventory decisions have been the exception rather than the rule. Studies have also revealed that using competitor price as the sole criteria in making inventory decisions  typically results in revenue reduction in the long run and so inventory levels need to be adjusted not just based on competitor fares but also characteristics associated with the cruise ferry including seasonal loads, customer loyalty, sailing times, etc.

Automated revenue management systems that can consume competitor data from third party vendors on a regular basis, identify the optimal competitor based on user and system based matching logic and present the results to analysts so as to enable them to make informed decisions can greatly reduce analyst workload while eliminating human error. As awareness increases in the cruise ferry industry about the importance of factoring in real time competitor actions in the decision making process, the need for automated revenue management systems that take into account market conditions and enable analysts make informed decisions is on the rise.

 Would be interested in hearing your thoughts on if and how your companies take into account competitor influences and if you want to learn more about how the ProfitOpt system takes these into account, please feel free to contact me.

Pradeep Bandla

VP Product Management and Marketing