We discuss the ins and outs of air cargo revenue management and compare it to passenger RM with Karri Kauppi, Finnair’s Head of Cargo Revenue Management and Pricing.
We spend a lot of time talking about passenger revenue management, but there is another form of revenue management that airlines practice involving air cargo. Although similar in many ways this form of RM, has its own unique set of complexities. The shipping process could look a little something like the graphic below.
Image Courtesy of ScienceDirect
One of the biggest differences air cargo and passenger RM is that air cargo distribution is still handled primarily offline.
“The air cargo market is a $102B market which is still offline and immensely intransparent. It takes a forwarder hours to get quotes from airlines, bookings aren't made online, documents aren't digital and communication asynchronous,” says Laura Weitz, Senior Manager, Cargo One, a Berlin-based tech company aiming to digitize and bring greater efficiency to the air cargo process.
“The air cargo market is a $102B market which is still offline and immensely intransparent."
“Traditionally, freight forwarders would send emails, mostly in blind copy, to several airlines, requesting quotes for an ad-hoc shipment. They would then wait until the airlines respO&Ded. That waiting time could be anything from 30 minutes for customer-oriented airlines to 7 hours for others. They would then compare these offers based on length, layovers, products, price and other qualitative offers and revert back to the shipper.”
To get the complete rundown of the air cargo RM world, Kambr Media decided to go straight to the source. We caught up with Karri Kauppi, Head of Cargo Revenue Management & Pricing, Finnair. Previously, Kauppi held roles within the passenger RM side, enabling him to give perspective on both sides of RM practice.
Kambr Media: Maybe you can start with giving a very basic overview of air cargo RM practice.
Karri Kauppi: I think the elephant in air cargo RM is that for every flight we operate, we first must forecast the capacity so we can understand how much space we can sell. Unlike on the passenger side where the amount of seats is rather standard, the cargo capacity will vary based on the route, the aircraft, the number of passengers, the number of bags they are carrying and other metrics. So that is our starting point; we need to forecast what we have available in the flight, unlike on the passenger side.
And what other differences are there between air cargo and passenger RM?
My bold argument is that at the end of the day, this is where the biggest differences end. Highlighting the other major items that are there, on the passenger side – due to the nature of the business of the individual passenger booking tickets – you get a lot more queries.
This creates some limitations to the air cargo revenue management side. Confounding this problem is that we don't have an online distribution process. The air cargo market is not efficient enough to allow you to leverage the most out of revenue management, but luckily that’s changing in a bit.
Then we come to the other parts which are discussed as being a difference in cargo and passenger side RM. The short booking window is quite evident. For example, at Finnair we have a 21-day booking window. In my previous positions, we had even shorter booking windows. This adds in a few degrees of difficulty, especially when you need to start dealing with forecasting the demand on the flight.
"I would like to believe that revenue management as a practice itself is similar."
But saying that, I've also been working on the passenger side of flights which has a similar type of a booking window. So, I don't think there's anything different or anything problematic in that sense. I think the biggest difference is that unlike in passenger RM where that size booking window is happening on some routes, in air cargo the windows are that small for every route. That's a big difference.
The other major difference is that every cargo query varies in size. Thus, there is no standard size of cargo. It can be anything from one kilo to 15,000 kilos. And that again adds in a bit of complexity into the world of revenue management. I do understand that there are a lot of groups (fare classes) to account for on the passenger side. So, even in that sense it's similar.
In short, I think there are clear differences and there are its own nuances, but I would like to believe that revenue management as a practice itself is similar. That's my experience in the world. Even though I know people in cargo tend to want to believe that it's something that nobody else deals with (just as I’m sure passenger revenue managers feel the same), at the end of the day, we’re all dealing with rather similar topics.
Can you talk about how the aircraft affects the process? For example, sometimes you add cargo to a passenger plane and sometimes there's exclusive cargo planes.
Well, it depends. At Finnair we only have bellyhold, meaning we only use aircraft that is also carrying passengers. We used to operate some freighters so the difference is that obviously everything is just for cargo.
In terms of the revenue management, in theory the practices are the same. Usually it goes in a way that the freighter operations are slightly different because it's crucial to get that plane as full as possible just to avoid making a loss. Maybe the big difference there is that freighter operations are then generally a combination of multiple O&Ds whereas in the passenger aircraft (even though we're selling multiple O&Ds) we are always working per leg.
Then do you always have a fixed section of the aircraft for cargo or is that sometimes influenced by, for instance, how much whole luggage passengers would purchase?
Everything is influenced by how many passengers we are forecasting to have onboard and understanding what are the general route characteristics. What has been the history of the route, how many bags are being checked, etc. We have to forecast every day for every flight and every aircraft. That is how we determine how much actual cargo capacity we have for sale.
Image Courtesy of Finnair
With that being said, how do you think the onslaught of long-haul, narrow-body planes like the Airbus 321XLR will effect air cargo transport? Is this a topic discussed in the air cargo RM world?
I'm aware that these kinds of studies have been made and it depends on the network that the operators are flying to. I would argue the majority of the routes where the hold is more than five hours, it will be extremely difficult to also fit a significant amount of cargo on board. The aircraft itself remains pretty much the same as far as I understand. The only difference is that there's going to be even more fuel tanks taking even more of the cargo capacity.
Speaking of fuel tanks, how do you factor in fuel burn? Because of course planes want to fly more efficiently and you do that by carrying less weight, but then that's counter to filling the supply of cargo.
That's part of the revenue management projects that we do. And it's something I didn't mention. In cargo we really take good care that we don't take a loss.
In cargo, there is a lot of additional costs involved. There is a cost of building up the cargo, breaking down the cargo, and all those things. Fuel is one of those things as well. We do make a calculation where we see what has been the historical fuel burn in kilos and we convert that on a route-level basis into euros, and we make sure that that is always accounted for.
You just touched on one, but what are some of the other common metrics used in air cargo RM?
What we want to follow is what are the O&D level costs. That's the baseline for everything that we have. The other basic metrics are used to calculate how accurate is our capacity forecast. Similarly, we also need to measure from the operational side how many cargo offloads we have because we need to understand whether it's our forecasting or not that is causing the cargo not to fly.
We measure the overbooking levels that we have and the accuracy of the overbooking forecast that we have and then how much money we are making. That's usually factored as a per kilo or as a per volume metric (cubic meter). The difficult part is that technically there isn't a straight up answer as to which one you should be looking at, whether it's euros per kilo or euros per metric cube. And the reason for that is that some flights are more restricted by the cargo space i.e. the cubic meters and then some flights are more constrained by the kilos they can carry. It's route dependent, but those are usually the ones that we are looking at.
Looking at that, how does pricing work?
Well the basis of the air cargo pricing goes in a way that's there is a chargeable weight. And that chargeable weight is defined by IATA. It's 166.67 (1/6) kilos per cubic meter. So it's either the cubic meters of the shipment times that conversion or the actual weight, whichever is higher. And that's the weight that we then multiply at the rate that we have on hand.
Network planning and route planning must be very complicated too, because it's a little different than carrying a passenger who has a mouth and can speak. The freight doesn't have a say in how many, for instance, legs its trip has. So how do you decipher how to get freight from one place to another?
The cargo, the cargo revenue and the expected cargo revenue as per route, those fit into their own network planning systems similarly to the passenger side. And, so in that sense it's no different than what is done on the passenger side.
Image Courtesy of Finnair
I do understand the cargo necessarily doesn't care how many stops it takes. But, every time aircraft land and take off, the cargo potentially has to be built and then usually also broken down. So when you add in a lot more legs, you add in a lot more possibilities for something to go wrong, in terms of the cargo.
Talking about supply chain and logistics, reliability is considered a major factor. I would argue that even though the cargo (the shipment itself) doesn't care how many stops it takes, the people who are booking the cargo and paying for the shipment care.
When we are talking about the transferring of cargo, even the shortest transfer times are taking hours. When we add in a lot of legs, it also adds in quite a lot of length into the shipment's travel time, and then usually it goes in a way that it's not that desirable for the customer. Since the world is so well covered nowadays, even with two stops, it doesn't usually pay its value.
Taking that into consideration, if your customer has different shipping products, for example, if it is standard express or next day, does that get factored into pricing or your own forecasting then?
It does in terms of pricing, in terms of forecasting and in terms of the optimization of how it gets to its destination.
We don't forecast products separately, but we do price products separately. The industry practice is that cargo is categorized in a certain kind of weight bracket, and those brackets are used in the pricing. So for example, if there's anything below 45 kilos, anything between 45 and 100 kilos, anything between 100 and 300, 300 and 500, and so on and so forth.
Then When it comes to special cargo, there is a practice of using special handling codes when you do the cargo shipments. So if there's something that we operationally need to take into account, for example, if it were pharmaceuticals that would have to travel in a controlled route temperature. Then the freight forwarder would insert a special handling code and then we use those special handling codes to create prices for the different products. That’s just one way to segment the cargo that we have.
That's a good point you make. I imagine the type of cargo also adds to the complexity. For example, if an aquarium wanted to transport a beluga whale (which was recently in the news), then that adds a whole different dynamic.
Yeah, absolutely. Many times, we are transporting live animals, for example. It adds complexity to the operation and therefore it has to be reliable.
Sometimes we have to deny cargo not because of the complexity itself but, for example, in terms of the aircraft characteristics that we have. There are situations when we cannot guarantee that we will be able to carry that cargo. If we would have, for example, a big shipment that would cause a temperature excursion in our aircraft cargo hold.
We don't have temperature control in every aircraft. For example, we cannot carry shipments that need to be transported at 5 degrees centigrade together in the same cargo hold with a shipment that should be traveling at room temperature. Those are the kind of possible exclusions we have and those are the situations when we have to say, "No." Because we are line-haul cargo operators, we tend not to get the weirdest queries of carrying lions and stuff like that. Some other guys take care of those.
Looking into the future of air cargo, what are your thoughts on companies such as Amazon who continue to grow their own fleet? Do you see that as something good for your industry or a hindrance as they're taking away larger chunks of the pie and controlling distribution on their own?
I think it's great. And I don't see anything wrong with adding competition to the market and making sure that it's more efficient in that sense. So I welcome all the competition and I think it's great if they could do it successfully. I think that's good for the whole supply chain that we have at hand. I'm also a customer of e-commercial air cargo. So obviously I'm happy if I get my shipments within a day. So I think that's a good thing.