Entering the Next Dimension of Cargo Revenue Management

Entering the Next Dimension:Cargo Revenue Management

Anand MedepalliVP, Freight Transportation


The Market is Poised for Growth

“The air cargo freighter fleet alone willdouble in the next 20 years. Meanwhile shippers moving

freight on passenger aircraft will drive even more growth. Our global marketforecast foresees investment

in freight-bearing aircraft exceeding $3.5 trillion in thattime frame.”

John Leahy, COO for Airbus

Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL

“The air cargo freighter fleet alone willdouble in the next 20 years. Meanwhile shippers moving

freight on passenger aircraft will drive even more growth. Our global marketforecast foresees investment

in freight-bearing aircraft exceeding $3.5 trillion in thattime frame.”

John Leahy, COO for Airbus

But IATA Says 2012 Looks Tough…


Capacity Growth + Yield Pressures =Perfect Case for Revenue Management!

Source: http://www.iata.org/pressroom/pr/pages/2011-09-20-01.aspx

Yet Cargo RMS Adoption is Low...

Only 21 out of 70 carriers listed in Air Cargo World’s “Top50 Carriers in 2010” list* have invested in RMS

Only 16 of them use their RMS in some form!

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Capacity Management OnlyUsing Short-term RMS


Only 21 out of 70 carriers listed in Air Cargo World’s “Top50 Carriers in 2010” list* have invested in RMS

Only 16 of them use their RMS in some form!

* http://www.aircargoworld.com/Air-Cargo-News/wp-content/uploads/2011/09/Top-50.jpg

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Using Short-term RMSUsing Allotment PlanningUsing BothAbandoned RMSUnhappy with RMS

Origins of Cargo RM

Passenger RM provided a guideline…

A sophisticated shiny solutionwas the answer…

Errr... what was the question again?


Passenger RM provided a guideline…

A sophisticated shiny solutionwas the answer…

Errr... what was the question again?

Question: “Can the RMS Cope withThese Issues?”

Cargo businesses: B2B isrelationship-driven anddecentralised

Multi-dimensional capacity &Multiple timeframes

Few customers havenegotiated rates & allocations

Multiple decision makingpoints

Decision making times arereally short


Cargo businesses: B2B isrelationship-driven anddecentralised

Multi-dimensional capacity &Multiple timeframes

Few customers havenegotiated rates & allocations

Multiple decision makingpoints

Decision making times arereally short

Cargo RM Set About Answering thatQuestion by Enabling These Processes...

Capacity ForecastingOverbookingDemand ForecastingCustomer “Tendering” BehaviourAllotment PlanningRouting & CostsHurdle RatesBooking Control


Capacity ForecastingOverbookingDemand ForecastingCustomer “Tendering” BehaviourAllotment PlanningRouting & CostsHurdle RatesBooking Control

It Made Sense...

STRATEGIC

SUPPLYDEMAND

SupplyCalendar

Network &Equipment

Value ofNetworkChanges

Contracts &Sales Targets

TargetMarkets

Products

StrategicMarketing

Product &Network

DevelopmentTargeting

Relationships


TACTICAL

OPERATIONAL

SupplyCalendar

Value ofCapacityChanges

AvailableCapacity

Value ofAd Hoc

Capacity

Contracts &Sales Targets

ContractPerformance

Bookings &Forecasts

ContributionGuidelines

CustomerRelationshipManagement

Sales &Promotions

CapacityPlanning

Routing &Capacity

Forecasting

AllotmentPlanning

BookingAcceptance

What has Worked Thus Far?

Capacity Forecasting & Allotment Planning =Have Worked Reliably and There Has BeenAcceptance!

Demand Forecasting & Optimal Hurdle Rates =Proved Hard to Get it Right. But Math wasGreat!


Capacity Forecasting & Allotment Planning =Have Worked Reliably and There Has BeenAcceptance!

Demand Forecasting & Optimal Hurdle Rates =Proved Hard to Get it Right. But Math wasGreat!

Let us Break this Down...

As long as RM supported natural business processes,there were no arguments

But when RM forced some business processes, thefighting started

And not enough attention was paid to demandforecasting – it was seen more as a means to an end; notas a fundamental business process


As long as RM supported natural business processes,there were no arguments

But when RM forced some business processes, thefighting started

And not enough attention was paid to demandforecasting – it was seen more as a means to an end; notas a fundamental business process

The Next Dimension of CargoRevenue Management

Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 11

Natural Business Processes

The attitude that “Forecasting is a Means to an End” must change


Adopt forecasting as a corecompetency

Collaboration within stakeholdersand customers is key

Forecasts are what they are;as long as Hurdle Rates are good


Rate Optimisation

The natural thing to do is to set pricesrather than control availability

Advent of 3rd party data sources &recent advances in price optimisationtechnology will allow you to:• relate changes in price position to

changes in demand• increase awareness of how pricing

affects forwarder behaviour• recover some of the advantage that

a well informed forwarder has overyou!

“lift the profits, or someone else will”Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL

Rate Optimisation

The natural thing to do is to set pricesrather than control availability

Advent of 3rd party data sources &recent advances in price optimisationtechnology will allow you to:• relate changes in price position to

changes in demand• increase awareness of how pricing

affects forwarder behaviour• recover some of the advantage that

a well informed forwarder has overyou!

“lift the profits, or someone else will”


Allotment PlanningUse demand forecasts! If youroptimisation solution doesn’t know allthe alternatives, it cannot optimisefuture allotments• Just re-evaluating your old

allotments is not enough

No cherry picking! Customerallotments can be all-or-nothing, nopartial acceptance. Model linkedtraffic flows.

Remember risk! We offer allotmentsto make our revenues morepredictable – unreliable traffic flowsbelong in the spot market.


Allotment PlanningUse demand forecasts! If youroptimisation solution doesn’t know allthe alternatives, it cannot optimisefuture allotments• Just re-evaluating your old

allotments is not enough

No cherry picking! Customerallotments can be all-or-nothing, nopartial acceptance. Model linkedtraffic flows.

Remember risk! We offer allotmentsto make our revenues morepredictable – unreliable traffic flowsbelong in the spot market.


Overbooking

Move away from the traditionalcapacity-orientated focus onoverbooking to what it really is: afunction of customer tenderingbehaviour

Unlike passenger RM, there is noreliable metrics associated with“denied boarding”

Use acceptable offload riskmodels to estimate service levelfailure “costs”

Explicitly model under-booking aswell


Overbooking

Move away from the traditionalcapacity-orientated focus onoverbooking to what it really is: afunction of customer tenderingbehaviour

Unlike passenger RM, there is noreliable metrics associated with“denied boarding”

Use acceptable offload riskmodels to estimate service levelfailure “costs”

Explicitly model under-booking aswell

And, Trust the SystemAutomated Booking Control

Ensure the routes you sell arereflected accurately in the optimisationengine

Capture costs accurately

Ensure unbiased forecasts andincorporate all available information• If demand forecasts are “accurate” or

acceptable, hurdle rates will be“correct” and “acceptable”

While setting the right rates is thenatural thing to do, controllingavailability on a given day is asignificant lever to improve profitability


Automated Booking Control

Ensure the routes you sell arereflected accurately in the optimisationengine

Capture costs accurately

Ensure unbiased forecasts andincorporate all available information• If demand forecasts are “accurate” or

acceptable, hurdle rates will be“correct” and “acceptable”

While setting the right rates is thenatural thing to do, controllingavailability on a given day is asignificant lever to improve profitability

Don’t let Perfect be the Enemyof Good

Focus on natural business processes

“Race” through the implementation ofbasic end-to-end solution: Use the80/20 rule; Stop spending “years”perfecting one module

Focus on low hanging fruit; avoid thecomplicated bits (as a first step)

Measure benefits, spot opportunities,and improve the most promising areas

Automate prioritisation of the requestqueue; Get to automated bookingcontrol “fast”


Focus on natural business processes

“Race” through the implementation ofbasic end-to-end solution: Use the80/20 rule; Stop spending “years”perfecting one module

Focus on low hanging fruit; avoid thecomplicated bits (as a first step)

Measure benefits, spot opportunities,and improve the most promising areas

Automate prioritisation of the requestqueue; Get to automated bookingcontrol “fast”

For the Benefits are Tremendous

“Companies using revenue and profit optimization modules for revenue management reportednet revenue increases of 2.5 to 7.5 percent”

- Nucleus Research; http://www.nucleusresearch.com

“The Capacity Forecasting module has improved our accuracy by over 15% resulting in Millionsof dollars in benefits – and this is just Phase 1 of the project!.”

- Vice President, Revenue Management


- Vice President, Revenue Management

“Our demand forecasting accuracy improved by over 10% with a longer horizon that allows usto plan budgets, forecast revenue and optimize prices with better information.”

- Managing Director, Revenue Management

“Our revenue management solution has delivered 2.5% revenue improvements year on year.”- Managing Director, Revenue Management

Carriers have a done a good job of focusing on business processes;change management and training

– But focus was primarily around RMS– There is a need to move to being RM principles-centric

This means:– The organisation is “militant” about “one number truth”– CEO demands a budget that is based on consensus-based demand and sales

forecasting– Sales forecasts are based on rigorous and collaborative demand planning– Rates are set based on system profit and are not seen as one-offs– When sales demand an allocation or a rate for a transaction, they mean to say

“profitable” allocation or “profitable” rate– Sales incentives are aligned with RM principles– Operations are working with RM to understand preliminary loading plans– RM-based metrics and reports drive decision making– Etc. etc.

Finally, Shift to a RM Principles-Centric Organisation


Carriers have a done a good job of focusing on business processes;change management and training

– But focus was primarily around RMS– There is a need to move to being RM principles-centric

This means:– The organisation is “militant” about “one number truth”– CEO demands a budget that is based on consensus-based demand and sales

forecasting– Sales forecasts are based on rigorous and collaborative demand planning– Rates are set based on system profit and are not seen as one-offs– When sales demand an allocation or a rate for a transaction, they mean to say

“profitable” allocation or “profitable” rate– Sales incentives are aligned with RM principles– Operations are working with RM to understand preliminary loading plans– RM-based metrics and reports drive decision making– Etc. etc.

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Entering the Next Dimension:Cargo Revenue Management



Entering the Next Dimension of Cargo Revenue Management

Technology

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