Over the last 18 months, air cargo has enjoyed something of a revolution. As Covid-19 grounded passenger flights, cargo shot up the list of strategic business priorities as airlines pushed for every revenue opportunity possible. Not only has air freight helped keep the global supply chain functioning, it’s also no exaggeration to say it played a pivotal role in securing the future of airlines around the world, holds Ashok Rajan, SVP & Head of Cargo & Logistics, IBS Software in his opinion article contributed to CargoForwarder Global.
However, as passenger air travel resumes in ever greater numbers, the air cargo industry faces a new challenge: how to maintain its place in the boardroom. Despite the major strides made in enhancing its perception since the pandemic hit, the reality is that air cargo has traditionally not received investments that are proportional to its value. The next battle for the sector is ensuring momentum is not lost and cargo continues to be viewed as a lucrative investment for the future.
Dynamic pricing holds the key to securing air cargo’s elevated status
Let me explain. The bottom line is the pandemic has prompted a shift in how carriers approach selling cargo. Covid-19 saw yields increase by up to five times, which triggered airline decision makers to not just reconsider cargo’s role as a long-term revenue stream, but also question how it can become a more profitable part of the business, too.
Traditionally, cargo pricing has been dominated by a static business model that hinges on factors that are beyond an airline’s control. The influence of geopolitics, fuel prices, labor market conditions, and technological maturity all impact the contracts that airlines struck with forwarders to guarantee capacity levels. Hard and soft block space agreements emerged, followed by spot rates – but cargo capacity still hasn’t been able to extract its full revenue potential.
Varying pricing according to changing market trends benefits many
However, the growing digitalization of the industry is making dynamic pricing a reality. Real-time access to data allows carriers, forwarders, and shippers to optimize pricing with contextual data. And the benefits are not just stacked up in favor of airlines – gaining the ability to vary pricing according to latest market trends and conditions is an advantage for everyone. By taking a holistic view of the relationship beyond the supplier and the buyer, dynamic pricing enhances revenue across the entire value chain, minimizing revenue leakage on products and services. Buyers receive more affordable pricing, while sellers benefit from selling at the right price point.
A common IT platform usable by all stakeholders is essential
An obvious benefit of dynamic pricing is that it helps every part of the value chain attract the right customers through contextualized pricing. However, it also plays a vital strategic role, helping every party move into insights-driven decision-making to improve their market positioning and leadership, discover new revenue opportunities, and enhance business forecasting by understanding better supply and demand patterns. Unlocking those benefits requires collaboration and a common platform between all stakeholders in the cargo value chain. And once dynamic pricing is introduced, stakeholders receive even richer operational data to better understand market behavior, products, and services uptake, and customer reaction to different pricing parameters.
The industry should focus on more nimble pricing models
The evolution of third-party booking platforms has been a significant development in the digitization of air freight processes and is definitely a step in the right direction. This has the potential to reduce wasted manual effort in getting air freight offers and quotes to consumers as well as to reduce delays and elapsed time to secure cargo capacity. However, this also represents a challenge for air carriers in the form of commoditization of services. The ability to get and compare quotes will drive opportunistic buying and all else being perceived as equal can lead to wrong outcomes – either selling too cheap or worse, losing business due to higher rates. The way to address this will be to create differentiated products and services, which will add the additional dimension to buying behavior than just cost, as well as focus on more nimble pricing mechanisms that can respond quickly to evolving market scenarios.
No change without technological readiness
Dynamic pricing has already revolutionized other industries. Online retailers, for example, have lived by dynamic pricing for some time to continuously adjust pricing to reflect up-to-the-minute market trends, capitalize on revenue opportunities and operate with personalization as a priority. But driving change requires technological readiness. Inevitably, airlines relying on legacy systems have found it the hardest to translate operational cargo data into dynamic market intelligence that factors in business trends, customer behavior, and demand seasonality. Airlines that have moved beyond legacy technology into the digitalization of their cargo systems, will find themselves significantly further down the road to implementing dynamic pricing, and better equipped to carve themselves out a lucrative and competitive advantage.
Creating differentiated products and services
Data quality in freight is improving and will continue to do so given increasing regulatory compliance. When the conversation on how we price cargo dynamically hits the boardroom table, it should do so in tandem with the need for more personalization using the right data, and the need to categorize customers to present a basic offer that fits their purchasing history. It is then an opportunity to present an expedited shipping upsell option or a cross-sell option for documentation processing or door pickup. Pitching these in the relevant flow to the appropriate customers will be key to increasing look-to-book ratios, while dynamic pricing works to ensure optimized yields.
New dynamic needed
Fixed rate lists and blocked space agreements will not immediately be confined to the past, but a more dynamic approach means airlines and forwarders alike have the flexibility to capitalize on changing market conditions and ensure they are not leaving revenue on the table. As global consulting firm Boston Consulting Group (BCG) put it, a “lack of opportunistic operating models that allow freight carriers to take any last-minute bookings or shift shipping from flight to flight, for example, have often been a barrier to the application of pricing and freight-mix optimization.” The growing status of cargo means carriers now have the opportunity, the impetus, and the cachet in the board room to change the status quo. And if they can do that, they have a positive future ahead of them.
Ashok Rajan, SVP & Head of Cargo & Logistics, IBS Software, has more than 20 years of experience in conceptualizing and building digital platforms for the air cargo industry, and has his finger on the pulse of digital developments.
Note: CargoForwarder Global likes to thank the author for this intriguing opinion article.
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