Maximize Revenue and Block Revenue Leakage in Airline Cargo supply chain

Maximize Revenue and Block Revenue Leakage in Airline Cargo supply chain

Every business strives for growth year on year by maximizing sales to improve profits, and the airline cargo business is no exception. However, as in every business, this is an uncompromising objective and it has several external factors like product and service strategies of competitors, capabilities of business partners, requirements and expectations of customers, geopolitical influences, and the overall behavior of the market economy that are tough to predict. Considering the several external factors that are beyond the control of the individual business, a better strategy would be to look at internal aspects for maximizing revenue by reducing inefficiencies and minimizing cost through automation.

The air cargo business model has largely remained stagnant in the past few decades as airlines focused mostly on improving the passenger side of the business, which is their core service offering. Apart from scheduled freighter airlines, very few passenger airlines paid attention to improving their cargo business for reasons varying from budget constraints, focus by management, etc. However, with the availability of new generation technology to improve business processes, airlines are refocusing on strengthening their cargo business for steady growth in the new decade.

What are the various options for airlines?

It is very important for every airline to recognize its strengths and weaknesses with respect to its business, both from an external and internal standpoint. The key factors which are external and difficult to control include geopolitical conditions, the market where it operates, the expectation of customers, the capability of partners, and the behavior of competitors. Internal aspects that can be improvised include revamping of business processes, use of new generation technology to help boost employee productivity, etc. Based on the assessment of the internal elements which can be easily controlled, airlines need to identify all touchpoints in their air cargo supply chain which, when improved, can either increase the airlines' revenue or reduce revenue leakage. The objective is to identify and improve multiple process areas across sales, operations and accounting that indirectly contribute to overall growth.

Let us look at each of the touch points and see the options that airlines have.

Options at the booking stage

Generally, all international cargo shipments are booked in advance and ample time exists to see how each shipment helps in maximizing revenue at the flight level and thus contributing to overall profits. So what are the checks and balances at the booking stage?

Prorate at booking itself: Ensure that the cargo management system triggers proration at booking stage itself. This is to get a snapshot of net payouts and retention values, which otherwise is generally part of the cargo revenue accounting function. There is a definite disadvantage if the operations and accounting systems are disparate. Getting to know the retention amount only when the AWB reaches cargo revenue accounting system would be too late. There are chances that the host airline might not have maximized its revenue and instead incurred a potential loss flying a shipment. A fully integrated cargo management system eliminates this completely by prorating the AWB at the booking stage, as the validation of proration happened at the booking stage.

Establish the practice of applying hurdle rates: Hurdle rate can be set for different shipment types either manually or integrating with a revenue management system. Hurdle rates are like control gates and shipments that pass through this basic check are only eligible to be booked onto the flight. Having an integrated revenue management system would help assessing the best price point for a day, based on dynamic pricing, algorithms and historical trends, which otherwise might be prone to error if based on human intervention. 

Checks should be put in place to highlight revenue lesser than a threshold at the booking stage so that such shipments can be queued, or rejected in case of revenue loss. The threshold should be based on multiple factors like organizational goals, flight route, flight type, shipment type, historical data, environmental factors, dynamic pricing based on the day of operation, etc.

Innovate on pricing models: Cargo should take cues from the airline passenger business, of providing differential pricing, in terms of filling up capacity in the form of high yield, next day shipments or general cargo similar to the first-, business-, and economy class offerings. It should differentiate in terms of handling express v/s normal cargo, and preferential loading services similar to providing baggage allowances, lounge access, etc., in the passenger world. Having a tie-up with the cargo loyalty program for getting confirmed booking and upgrades like preferential treatment in the form of priority cargo etc. is not far away as airlines look for ways to boost revenue.

Options at the contracting stage

At contracting, which is the AWB data capture stage, airlines should ensure the following:

Verify captured data thoroughly: Booked and captured AWB Data needs to be verified in terms of weight, volume, handling, and shipment information. Compliance checks need to be initiated so that contract details are in sync with shipment tendered at the acceptance counter. Any deviation beyond a threshold should be corrected, and the shipment re-rated accordingly. The re-rating could be an area of potential loss, and needs to be accounted for.

Analyze operations data for trends: Booking should not be straightaway updated based on contract, as it provides room for analysis and potential follow-up if the booked and tendered did not match. In worst-case scenarios where no shipment was tendered even though booked in advance, such trends should be monitored periodically, and communicated to the agents. If such practice continues unabated, agents need to be penalized as a means of enforcing discipline. This could contribute to improving revenue.

Improve the spot rate process: Spot rates under all circumstances should be approved at the contracting stage. Cases of approval post-performance of service or manifest, compromises on the sales process. This can lead to corrections post-invoicing resulting in loss of productive time for employees which could have been avoided in the first instance itself. If checks are put in place wherein spot rated shipment in 'draft' status would not be manifested, it would enforce better control amongst sales staff. Automating these processes by enabling the sales team to approve spot rate while "on the move", through mobile apps, would go a long way in bridging this gap.

Options at the operations stage 

The priority of the operations staff should not be to merely move cargo but also help in transportation of the right cargo by transferring to the correct airline at the proper time. Some of the options that operations staff need to be cognizant about are

Negotiate and set acceptable tolerance checks: As airlines tends to focus more on the core function of transportation of cargo, some of the non-core functions like acceptance, build-up, loading, and unloading are outsourced to third-party ground handlers. In such cases, entirely disparate IT systems would be used and communication between these would be through messages. Checks and balances may not be stringent and probably would rely on tolerance of shipment characteristics for smooth operations. However, care should be taken to ensure these relaxations do not go overboard. Tolerance checks should be well within the limit and anything beyond should be highlighted or pushed to a queue for corrective action. As operations is a time-bound function and staff is more interested in transporting shipment to its final destination, such cases automatically fall on the shoulders of revenue accounting staff for corrective action. The majority of the cases are where manifested weight is greater than contracted weight. If AWB is not updated, it might lead to revenue leakage and potential loss for the airline.

Prioritize shipment to reduce revenue leakage: One of the prominent cases is where the shipment journey is fixed after going through multi-level checks at the booking stage but, due to capacity restrictions, gets off-loaded. The airline operations team or the third-party ground handler does not look at route profitability while prioritizing such shipments and would onboard the shipment in the very first instance. This becomes all the more critical when the shipment is transferred from one OAL (other airline carrier) to another as there could be cases where there was no special prorate agreements (SPAs) with the latter leading to potential revenue leakage or, in the worst case, a loss. Ideally, checks should be done when there are changes to the booked route in-order to minimize such leakages. It is better to have an alternate plan during the booking stage so that handling staff know the order of priority transfer during such circumstances, when there is a paucity of time.

Priorities of operations and revenue accounting are out of sync as operations staff is interested in moving cargo while billing and revenue realization is the work of the revenue accounting. So in a nutshell, when work of operations staff ends, it marks the commencement of task for the revenue accounting department.

Options at the revenue accounting stage

Presently, the onus of all these corrections rests on the revenue accounting staff as the priority is to bill correct, each time and every time. The problem compounds manifold because of the fact that cargo operations and revenue accounting are managed in separate systems, and accounting staff do not have access to or need to search for information. Options available to the revenue accounting team are as follows:

Intervene pro-actively: Having contracted information in revenue accounting on the fly is a means of highlighting potential revenue loss and thus alerting the team of putting the shipment on hold. High- and low-value shipments beyond tolerance should be flagged for any corrective action. All contracted shipments should be re-rated and any discrepancies related to contracted and accepted shipment should be highlighted. Such pro-active intervention would lead to better realized revenue and minimize charges of corrections later in the cycle.

Automate effectively: Automate to the extent possible based on rules that are driven by past corrective actions. This would go a long way in ensuring correct and on-time billing which otherwise would be lost through manual intervention. Such a process should be highly configurable to cater to all possible scenarios across countries, stations, customers, shipment characteristics, and be time-bound.

Comply with regulations but do monitor: Compliance with international regulations like RAM is sacrosanct. However, analysis should be done on a regular basis to ascertain negative trends, such as overbilling within tolerance as part of the interline billing process, as this could lead to potential revenue loss over the long run. If there is a definite pattern found for a given airline or type of transaction, then it needs to be flagged to the authorities. Any rate corrections in the form of charges corrections advice for the agent, and credit/charge memo for the airline should have multiple levels of approvals based on privilege, deviation amount, and it needs to be audited.

Responsibility should be for the entire team: Onus should be on the entire team as areas related to rates and spot rate approval rests with sales while discrepancy between contracted and uplifted weight/volume/type should be the sole responsibility of operations and ground handling staff. Efforts to maximize revenue should be the concern for the entire team and not just the revenue accounting department.


Conclusion 

Having checks at each stage of the shipment life cycle is just one of the means of minimizing revenue leakage and thus improving revenue realization. However, utilizing the cargo capacity without actually expanding the network could be a potential avenue for airlines to explore in order to increase revenue and not just simply focus on revenue loss/leakage.
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Airmail – Challenges to Airlines
 

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Friday, 26 February 2021

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