The complexity of the air cargo business demands a dynamic pricing strategy that allows carriers to quickly and efficiently adjust their rates in response to fluctuating market conditions. The carriers that learn to do this most effectively will have a distinct competitive advantage. How well is your airline using the following factors to set prices?
Economic conditions directly impact supply and demand - factors at the heart of all pricing decisions, regardless of industry. That is certainly true for air cargo. In booming economies, demand for air freight services can exceed capacity, which leads to higher prices. Alternatively, during economic downturns or specific low load factor routes, demand drops. Carriers lower prices to fill up space that would otherwise go unused.
The April 2015 Airline Business Confidence Index, published by IATA, relies heavily on that historical correlation. The report projects that volumes will continue to expand over the next 12 months due to increases in business confidence and economic growth in developed countries. Sixty-three percent of survey respondents, for example, indicated that they expect volume to increase, and that expectation is supported by gains in world trade and business activity. That increased demand should be considered when setting prices but must be balanced with other factors. Carriers must also be ready to respond quickly to worsening economic conditions. Lowering prices is a standard response, but there are alternative strategies, too, such as combining routes, reducing flights, optimizing routes for fuel efficiency, and assessing surcharges for partial loads.
Regional factors affect supply and demand as well as operating costs. Circumstances like war, civil unrest, labor strikes, epidemics, and terrorism can both lower demand and make it costlier for carriers to operate in a given region. That puts pressure on carriers to lower their prices just as it becomes more expensive to deliver services. However, regional factors can also work in an air cargo carrier’s favor by shifting business from other sectors, as in the event of a labor strike at a port. In that case, air carriers might raise their prices to reflect the increased demand.
A quick look at industry statistics makes it clear that regional factors are still very much at play. FTK growth in the Middle East is up over 50 percent, while North American and Asian Pacific routes are showing a small decline. These differences can, in part, be attributed to Open Skies agreements and BRIC access to those emerging countries within BRIC. Historical data support the connection between air service liberalization and economic gains, while restrictive bilateral or protectionist agreements depress economic growth. One survey reported that, in the year immediately following national/regional liberalization, traffic growth increased an average of 12-35 percent. In a few individual cases, growth increased by almost 100 percent.
Airlines can therefore optimize their pricing strategies by sorting historical data by region, thus identifying regions with both the highest demand and the most competition, and setting their prices accordingly: raising prices when demand exceeds capacity, and lowering prices when stiff competition requires it. Exports from BRIC countries, for example, are typically greater than imports. There will, therefore, be a higher demand for flights from those countries, meaning that those flights can be priced higher than routes into BRIC countries.
Operating expenditure can vary widely and change rapidly. The price of fuel is a prime example. Fuel prices are currently low and expected to remain low for a while, thereby reducing one of the biggest operating costs (although many hedge buyers have yet to see the benefits). However, consumers are well aware of decreased fuel prices and expect to see that reflected in shipping rates.
Fuel is just one factor. There are many others to consider, including tariffs, landing fees, parking fees, security measures, etc. In addition, environmental issues costs are a growing concern on a number of levels.
- Fees: Some airports impose environmental surcharges. London’s Heathrow, for example, recently proposed increasing environmental charges to address noise pollution. Such charges can significantly affect regional differences in profitability.
- Regulations: Environmental regulations also have an impact on operating expenses and profitability. Some airports have restrictions aspects like flight patterns and time restrictions. Complying with those restrictions can impact a carrier’s bottom line and affect everything from fuel usage to training.
- Research: Environmental pressures demand that airlines continually search for ways to lessen their environmental impact. That research must somehow be funded.
The combination of those factors demands a pricing strategy that is specific to a given route. An air cargo management solution can store and analyze data on all of those factors and present operators with optimal pricing recommendations.
Time and Temperature-Sensitive Cargo
Sea freight has long been the only option for shipping products that require a temperature-controlled environment, while air cargo has been the method of choice for shippers with short lead times. However, the increasing availability of temperature-controlled ULDs is changing that dynamic, opening up a new customer segment for air freight carriers: customers whose products are both time-sensitive and temperature-sensitive. An example would be sending life-saving medications to an area struck by a natural disaster: They must be shipped at a controlled temperature, but the need is too urgent to send them by sea freight. Carriers can charge higher prices for these shipments, and even offer temperature-controlled ULDs as a service upgrade. This has allowed air freight to become a profitable niche product offering for airlines.
On the other hand, lengthy shipping times for delays in the air cargo services close the gap between air freight and sea freight. The average delivery time of six days may not offer some customers enough of a benefit to justify the cost. It’s clear that speed is a big competitive advantage for the air cargo industry, which is the reason behind the push to cut 48 hours from the average delivery time by 2020. A big part of that initiative is e-AWB, or electronic air waybill, which will eventually eliminate the paper documentation that slows the process down. A robust air cargo management solution can make electronic documentation available to everyone who needs it instantaneously. And the faster air carriers can complete shipment, the bigger the differentiation between them and sea freight providers.
Premium and Value Add Services
One of the primary competitive advantages of air freight over sea freight is the ability to offer premium services at a higher price. Unlike sea freight, where all shipments are treated the same, air freight carriers can set tiered pricing based on things services like packing, door-2-door service, express delivery, shipment tracking, and shipments that require special handling, like food with a short shelf life, hazardous materials, or human remains. Also, while cargo-only carriers have the advantage of exactly knowing what their capacity is, combined carriers don’t. The freight capacity for passenger flights that carry belly cargo fluctuates depending on the number of passengers and how much luggage they have. Therefore, combined carriers can offer shipment prioritization as a premium service. Customers can pay more to ensure that their shipments jump to the front of the line in the event of a shortfall in capacity.
Weight and Volume
Weight and volume of shipments determine the potential pay-off for any given flight. Traditionally, weight has been the determining factor when quoting a price. However, volume must be considered as well. A shipment that is light in weight but large in volume takes up space that could be used for other shipments, thereby reducing revenue for the flight. The most effective pricing strategy is one that encompasses both measurements and relies on the one that will generate the most revenue.
However, airlines must ask themselves if the old formula for calculating rates based on weight and volume are still effective. Irregularly shaped items, for instance, can take up more space than their actual volume would indicate. While they may not actually occupy all of the space, it can no longer be used for other cargo and therefore loses any value. That loss of revenue must be recouped somehow.
The air cargo industry is highly complex. Setting rates that are both profitable and competitive requires analyzing many constantly shifting factors. Going forward, air cargo success stories will be those carriers that implement a dynamic and agile approach to pricing by embracing next-generation cargo management platforms.