Iata World Cargo Mar09


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Publicly presented by Kathleen Mallery at IATA conference in Bangkok Mar 2009

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  • I’m Kathleen Mallery. I live in Minneapolis MN – and I’m loving the opportunity to cheat some days from the winter weather here in BKK. A thank you to Jamison Graff for the invitation. I work for the new Delta in Pacific Revenue Management and Yield Management Development. Prior to the merger I had 18 years with NWA, 10 in I.T. building YM and Pricing Tools, 5 in Pacific Pax YM, 2 in Asia Pax Pricing and RM analysis and the last year in Cargo – frankly re-learning things I thought were absolute truths. My group has responsibility for the pricing and space management of all the flights in and out of Asia. I also have responsibility for implementing new YM (and RM) tools for all entities.
  • During this presentation I’ll take you through some of my experiences in recently transitioning from the passenger world into a cargo world that didn’t have a lot of the underlying RM theory. I’ll tell you the steps I implemented to apply some RM discipline, the successes and setbacks, and a partial list of items I’d still like to tackle.
  • It’s easy to under-estimate the “other” side From my I.T. days, I thought I understood the business pretty well. Then I jumped to the business side – and realized what a small percentage I truly comprehended (plus the humbling experience of having to use tools you’ve developed – all vendors might consider that) While in pax RM we’d work occasionally with Cargo on new route viability. We’d always joke afterwards that they always had the same answer to the “how full will you be?” question – “Well you can weight out or you can cube out”. The true complexity of that simple statement was lost on those of us who have a set number of positions – one person, one seat
  • But we share many business attributes. Very seasonal – though many times opposite Follows supply and demand – US westbound prices are low with excess supply, when flights are withdrawn from a market prices might increase Passenger and Freight alike have to manage through hub complexities. Cargo maybe even more so with ability to split shipments – passengers pretty much need to follow a single route from A to B Plane takes off – revenue opportunity lost We both have to compete with low price alternatives – ocean and truck vs passenger’s options of car or Low-cost-carriers Passengers and forwarders both shop for lowest price – carrier consistently lowest in market will win share And service is key - Customers will pay for superior service at a fair price trade-off
  • Yet, at least at NW, little of the passenger knowledge was harvested into Cargo RM improvements. There seemed to be more weight on the belief the two businesses were too different.
  • After my 1 st day in Cargo – I learned of these complications. It was clear a straight steal of pax technology wasn’t going to work Pax forecasting highly sophisticated, but not right Sparse booking volume - much more like forecasting passenger groups – the church choir goes to Italy or they don’t, the school group that always travels to Washington at Spring Break decides to go over President’s Day weekend. We KNOW bookings are inaccurate – 300 kgs 1 cu meter Short or NO booking curve – and systems not set up to pass data and re-evaluate/re-forecast multiple times per day of departure – passenger always has a night to reforecast At NW in Asia, half the time the ‘bookings’ are on paper being ‘optimized’ and not entered until a few hours before tendering Optimization – cargo stations have typically ‘owned’ their flight – not thought much about how there’s a network interaction Pax systems have accurate OA price compares B2B model encourages “spot” pricing for ad hoc shipments Lowering rates doesn’t generate “new” demand – at best it shifts share – at worst it dilutes revenue . There is always a price that will encourage a passenger to take a trip they weren’t going to take – factories don’t make more electronics just because it’s cheaper to ship them
  • So no we’re back to the cube out vs weight out discussion Passenger weight doesn’t matter – I didn’t realize how easy that made the problem. For cargo: Some shipments weigh more than others Some shipments take more space than others Some shipments pay more per space unit than others So joining cargo meant I had to change a lot of what I knew as TRUE from passenger, yet still use what does transfer
  • Forecasting Put bookings into system Improve overbooking model – build cancel/no-show data Pay more attention to seasonality – better pre-cancels on freighters Optimizer People are shocked what an optimizer will tell you when they’ve focused on filling every spot as ‘optimizing’ Focus on network - build high-level solver opts Pricing Need rules so there are choices on service Mixture of customers allows for varied product mix and better options to optimize Market was tough on the pricing front – focused on YM first
  • So now I’ve gone thru all the things we already know we SHOULD do – but maybe still aren’t – how do I get results now even if I’m not even close to having the data for a forecaster and optimizer – OR the money to pay for someone to build it for me. I have eight basic elements to share – I’m sure we could all come up with more
  • No secret here – YM is not necessary unless planes are full (absent stronger pricing fences) First thing we did was pulled all the roadblocks to selling. RM offered ideas, Sales offered ideas – we implemented all we could. We needed to remove barriers to sell. Goal was to get to the point we were choking on the freight – then figure how to back off from there. Sales needs to focus on Sales – tried to pull back more reporting, back office work to RM Used Inside Sales team for outbound calls and also sales back-office work
  • Also known at NW as the “BRUTE FORCE” method Review loads constantly and all the aspects of load – not just weight, but capacity, positional load factor and density and whether Ops is cutting freight. You have to know if you’re happy or sad – we had all new cargo folks – were we happy or sad with 75 tons, had we ever done better, what freight did we take when it was better, are charges per position making up for lighter freight. We have a great daily report for all entities – combined now with DL flights. We spend a good portion of every morning reviewing and deciding if action is needed
  • Feed Sales details – call out winners and losers. I sent an email out to Sales and RM daily at first, now every 2-3 days. I specifically did not make it a ‘formula’ email where I repeated slightly different report stats. It was much more blog-like. Sometimes short, sometimes long. Sometimes funny pictures – anything to make sure people opened it every time it came. I’d call out names with questions to be answered – to make sure they were paying attention. Share the reports – they can’t think they are doing fine, if they can’t see how well other stations are doing. Call them – set up conference calls – ask them for the market intelligence – we can’t RM in a market vacuum Threaten – in a nice way of course – Beg and Plead – we need to pull of the next 2 week of loads of X to make budget – and I don’t want to explain a missed forecast Bribery – Works quite well – I think there’s something in being the mother of 3 boys that helps me with this job We set goals and put out lucrative prizes and cash for station teams that meet goal. Some are more casual ‘contests’ I add to the blog – let’s get 6 more 90 ton freighter days by end of month. Prize for highest 757 weight load in the month.
  • For passenger flights - We had a semi-accurate capacity forecaster – Sales didn’t have any confidence in it – this stifles their ability to sell RM team had taken to just saying it was always high and put a hard-coded fudge-factor in to drop the capacity to avoid overbooking, service failures Historical densities and bag volumes taken into formula to calculate a “volume weight” Use minimum because our pax planes tended to cube out before weight out Overbooking Technically needs to be calculated off of true demand forecast/cancels and no-shows. You can still overbook. Study pre-departure capacity vs take-off cargo weight - by equipment/market; determine a confidence level and use seasonal averages. Study flights that ‘book’ full, but have remaining capacity at take-off – use that average to allow for conservative overbooking. We just started with a percentage and backed it off if we hit oversold situations – much cheaper to find a way to work with customer to move freight around than perhaps turn down a shipment when you would have had space
  • An automated forecast is a lot of work – time and money – and you really need to understand what behavior you’re forecasting – booking, tendering, shipment – depending on a carrier’s business you might choose different measures. Better to investigate ‘on the cheap’ first. Work up a spreadsheet that makes sense for the network (this is just an old freighter example). Track freight estimates vs allocations of what that station ‘should’ sell. Send out to everyone so if one origin is short, others can try to find freight to fill the hole
  • In one slide I won’t explain the LP concepts – I assume all of you are familiar anyway The trick is having an analyst skilled in developing the actual excel model Model chooses right Origin & Destination mix over a hub – optimize by dow or total week. Tradition said filling every spot generated highest revenue. We were actually turning down higher RPP to fill a lower RPP leg hole! But if O&D shipment values are different – some open holes can be revenue positive Also used to evaluate extra freighter stops during fuel crisis as well as broader schedule changes. Very small test network could use Excel Solver. Inexpensive 3 rd Party add-ins available for larger problems
  • Optimizer outputs “hurdle” rates for each evaluated leg – hurdle rates give a minimum value of contribution that shipment needs to contribute to buy-on to the leg or legs. Re-running the optimizer as the forecast changes is crucial – you don’t want a high hurdle if all the freight has canceled, and you don’t want a low hurdle if the flight is down to it’s last position Best option would be for booking system to accept/reject booking based on it beating a “hurdle” – depending on your system and technical resources – this can be a big project. But Hurdle rates from the base optimizer and tracking of last available positions can be put on shared file access – managed by inside sales, call center, and/or RM flight controllers. Sales then has constant ability to see a rising ‘floor rate’ for hot flights or a dropping floor. Goal is for shipments to beat the hurdle – plus include a few other ‘extenuating” factors of the booking/customer like year-round value, alternate market support, etc. – On the passenger side we’d call these “push” requests….they fare they want isn’t available on that flight date routing, but can YM take the booking anyway.
  • Communicate Constantly with Sales – I’ve said this already – do it again – and while you’re at it revisit all the elements again.
  • Not only does a clear, open dialogue between Sales and RM help improve the business – it’s a much more fun business environment to work in – no one likes being the “dreaded YM department”
  • In a year when demand was up 5-6% NW freighters hit 30% YoY gains in unit revenue. These results were clearly a mixture of FSC, removing unprofitable routes and base RM performance. We’ve estimated the split to be about even between the 3, maybe a weighted a bit heavier to the route removal One thing I can’t overstate is the value of upper management who knew and supported RM – We had the control to try new things, mix things up and we came back with the results
  • Didn’t have time for the marathon – dire business situations mean quick results needed now, we can’t slow down. Need to find ways to take breathers. Pull back a bit on the constant push – Remember to recognize the wins no matter how small. That forecasting of when a plane will cube out vs weight out is a real problem. Best we could do was give sales data to recognize when two lighter, lower revenue shipments are worth more than one heavier shipment that wastes a position because weight limit is hit We need to avoid garbage in/garbage out to the optimizer – especially when using for routing decisions – our human “arrows” don’t shoot that straight. Need to use sensitivities instead of considering the answers absolutes.
  • These were items on our list at NW before the merger – merger alignment is keeping us quite busy but we still have a number of RM discipline items to work on and are working on projects in parallel with the merger.
  • The going forward list has a mix of YM and more traditional Pricing elements Getting back to contracts requires flexibility Tracking and rewarding annual/global value of a customer and of a unique route Extend overbooking into wasted allocation space Freighter ‘packing’ is still very manual – there are simple things that can be done to make this easier Spot pricing is perhaps too random depending on experience of Sales – RM needs to give more guidance Figure out that position vs weight problem without risking excessive spoilage
  • Manage like and borrow from passenger where it makes sense. Leverage unique elements of Cargo business everywhere else to create new advantages Open communication and fast response are possibly more relevant to revenue growth than expensive systems You can’t stop working on RM just because it’s hard to accomplish Element #1 – Fill the planes in this freight environment. You have to be ready with the RM tools – even homegrown – for when the economy turns around.
  • Iata World Cargo Mar09

    1. 1. A Revenue Management Journey Passenger to Cargo Immediate Applications – Minimal Technology Kathleen Mallery General Manager Pacific Revenue Management and YM Development March, 2009
    2. 2. Agenda <ul><li>Passenger vs Cargo RM </li></ul><ul><li>Eight Elements to Building RM Discipline </li></ul><ul><li>What Worked – What Didn’t </li></ul><ul><li>What Would Have Been Next </li></ul><ul><li>Questions </li></ul>
    3. 3. Passenger vs Cargo RM
    4. 4. Many Similar Business Attributes Seasonal Low Price Wins Share Low Price Alternatives Hub Complexities Laws of Supply & Demand Service Counts Constrained, Perishable Assets
    5. 5. Key Attributes in Both Problems Drive Revenue So why have we not used more passenger tools?
    6. 6. <ul><li>Forecasting – Passenger models not right for Cargo </li></ul><ul><ul><li>Cargo booking sparseness </li></ul></ul><ul><ul><li>Inaccuracies between booking & tendering </li></ul></ul><ul><ul><li>Short booking curve </li></ul></ul><ul><li>Optimization – Completely standard for passenger </li></ul><ul><ul><li>Broad network view not typically considered </li></ul></ul><ul><li>Pricing – Almost no comparison </li></ul><ul><ul><li>Cargo B2B model requires private fare model </li></ul></ul><ul><ul><li>New demand stimulation next to impossible </li></ul></ul>Complications Make Technology Transfer Difficult
    7. 7. <ul><li>Maximizing passenger revenue is one-dimensional </li></ul><ul><ul><li>Each customer uses one seat </li></ul></ul><ul><li>Maximizing cargo revenue is multi-dimensional </li></ul><ul><ul><li>Density </li></ul></ul><ul><ul><li>Volume </li></ul></ul><ul><ul><li>Overhangs </li></ul></ul>Then there are Complexities on top of Complications
    8. 8. <ul><li>Forecasting </li></ul><ul><ul><li>Lengthen booking curve </li></ul></ul><ul><ul><li>Improve overbooking model </li></ul></ul><ul><ul><li>Properly “forecast” peaks and valleys </li></ul></ul><ul><li>Optimization </li></ul><ul><ul><li>Focus on network </li></ul></ul><ul><ul><li>“ Allocate” planned shipments by network value </li></ul></ul><ul><li>Pricing </li></ul><ul><ul><li>Develop structured products with defined “rules” </li></ul></ul><ul><ul><li>Diversify customer base </li></ul></ul>Apply Passenger RM Aspects that Make Sense
    9. 9. Eight Elements to Building RM Discipline
    10. 10. <ul><li>One: Fill the Planes </li></ul>Eight Elements to Building RM Discipline
    11. 11. <ul><li>Pricing team must put out a full menu of options </li></ul><ul><ul><li>Day-of-Week </li></ul></ul><ul><ul><li>Over-Pivot/Over-Tender </li></ul></ul><ul><ul><li>Incentives </li></ul></ul><ul><ul><li>Multiple Market Negotiations </li></ul></ul><ul><ul><li>Plus Low Rates – RM has to be YES team </li></ul></ul><ul><li>Sales team must hit the streets </li></ul><ul><ul><li>Inside Sales team can assist </li></ul></ul>One: Fill the Planes
    12. 12. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul>Eight Elements to Building RM Discipline
    13. 13. <ul><li>Review every morning </li></ul><ul><ul><li>Loads – Weight/Position </li></ul></ul><ul><ul><li>Density </li></ul></ul><ul><ul><li>Cut freight </li></ul></ul><ul><li>Compare YoY and Month-to-Date </li></ul><ul><li>Ideally an automated report </li></ul><ul><li>Manual is better than nothing </li></ul>Two: Pay Attention Nothing works like eyes on flights
    14. 14. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul><ul><li>Three: Communicate Constantly with Sales </li></ul>Eight Elements to Building RM Discipline
    15. 15. Three: Communicate Constantly with Sales Plead Email Threaten Share Actionable Reports Phone Goals & Prizes
    16. 16. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul><ul><li>Three: Communicate Constantly with Sales </li></ul><ul><li>Four: Set Capacity Accurately; Overbook Conservatively </li></ul>Eight Elements to Building RM Discipline
    17. 17. <ul><li>Sales needs confidence to sell </li></ul><ul><ul><li>Basic spreadsheet tracking can be effective </li></ul></ul><ul><ul><li>Study pre-departure capacity vs take-off cargo weight </li></ul></ul><ul><ul><li>“ Volume weight” must also be considered </li></ul></ul><ul><ul><li>Assign minimum of volume weight and calc’d weight </li></ul></ul><ul><li>Overbook </li></ul><ul><ul><li>Even conservative set % is better than spoilage </li></ul></ul>Four: Set Capacity Accurately; Overbook Conservatively
    18. 18. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul><ul><li>Three: Communicate Constantly with Sales </li></ul><ul><li>Four: Set Capacity Accurately; Overbook Conservatively </li></ul><ul><li>Five: Develop a Sales “Forecast” </li></ul>Eight Elements to Building RM Discipline
    19. 19. <ul><li>Very manual – so only use on focus flights </li></ul><ul><li>Sales estimates from customer calls and market knowledge </li></ul><ul><li>Send out to everyone for potential hole backfill </li></ul>Five: Develop a Sales “Forecast”
    20. 20. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul><ul><li>Three: Communicate Constantly with Sales </li></ul><ul><li>Four: Set Capacity Accurately; Overbook Conservatively </li></ul><ul><li>Five: Develop a Sales “Forecast” </li></ul><ul><li>Six: Optimize Network Revenue </li></ul>Eight Elements to Building RM Discipline
    21. 21. <ul><li>Chooses right Origin & Destination mix </li></ul><ul><ul><li>Filling every position does not always maximize revenue </li></ul></ul><ul><ul><li>Different O&D shipment values can change what you want </li></ul></ul><ul><ul><li>Use to set station allocations </li></ul></ul><ul><li>Analyze extra stops and route changes </li></ul><ul><li>Input: Sales “forecast” with some imposed “reality” </li></ul>Six: Optimize Network Revenue
    22. 22. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul><ul><li>Three: Communicate Constantly with Sales </li></ul><ul><li>Four: Set Capacity Accurately; Overbook Conservatively </li></ul><ul><li>Five: Develop a Sales “Forecast” </li></ul><ul><li>Six: Optimize Network Revenue </li></ul><ul><li>Seven: Protect “Last” Positions for High Value </li></ul>Eight Elements to Building RM Discipline
    23. 23. <ul><li>Use “hurdle” rates from Optimization </li></ul><ul><ul><li>Value to “buy on” to the leg </li></ul></ul><ul><ul><li>Decide between shipments for last few positions </li></ul></ul><ul><li>Booking system should accept/reject based on “hurdle” </li></ul><ul><ul><li>Expensive – and perhaps only needed for a few flights </li></ul></ul><ul><li>Use shared site to track hurdles and last open positions </li></ul>Seven: Protect “Last” Positions for High Value
    24. 24. <ul><li>One: Fill the Planes </li></ul><ul><li>Two: Pay Attention </li></ul><ul><li>Three: Communicate Constantly with Sales </li></ul><ul><li>Four: Set Capacity Accurately; Overbook Conservatively </li></ul><ul><li>Five: Develop a Sales “Forecast” </li></ul><ul><li>Six: Optimize Network Revenue </li></ul><ul><li>Seven: Protect “Last” Positions for High Value </li></ul><ul><li>Eight: Communicate Constantly with Sales </li></ul>Eight Elements to Building RM Discipline
    25. 25. <ul><li>Open communication = quick response & no missed opportunities </li></ul>Eight: Communicate Constantly with Sales
    26. 26. What Worked – What Didn’t
    27. 27. <ul><li>Significant YoY unit revenue improvement </li></ul><ul><li>Sales had capacity confidence </li></ul><ul><li>Sales and RM talk the same language </li></ul><ul><ul><li>Most of the time </li></ul></ul>Successes
    28. 28. <ul><li>Manual “brute force” method is exhausting </li></ul><ul><ul><li>Pace like a marathon, not a sprint </li></ul></ul><ul><li>Weight vs Volume optimization not solved </li></ul><ul><ul><li>Weight restricted flights watched more closely </li></ul></ul><ul><ul><li>Sales given data to watch for opportunity </li></ul></ul><ul><li>More timely/accurate Sales “forecast” for optimizer </li></ul><ul><ul><li>Sales can be too conservative or too optimistic </li></ul></ul>Things That Could Have Gone Better
    29. 29. What Would Have Been Next
    30. 30. <ul><li>Improve win-win contracts with forwarders </li></ul><ul><li>Annualize and Globalize customer value </li></ul><ul><li>Track No-Show for allocations to improve overbooking </li></ul><ul><li>Automate freighter flight planning </li></ul><ul><li>Build spot price “decision support” </li></ul><ul><li>Enhance optimizer for multi-dimensional problem </li></ul>Many More Low-Tech Options for Added Revenue
    31. 31. Cargo RM Can be Started without Major Investment <ul><li>Manage like passenger airline where it makes sense </li></ul><ul><ul><li>Leverage best practices, tools, techniques, technology </li></ul></ul><ul><ul><li>Don’t worry about starting small, some is better than none </li></ul></ul><ul><ul><li>Implement automated yield management system </li></ul></ul><ul><li>Leverage unique elements of Cargo everywhere else </li></ul><ul><li>Open communication and fast response more relevant than expensive systems </li></ul>
    32. 32. Questions?
    33. 33. Thank you For further details, please contact: Kathleen Mallery email: kathleen.mallery@nwa.com