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Air Cargo Revenue Managementmarch 2015 INNOVATION OUTLOOK – TRANSPORT SERIES Air cargo revenue managementMarch 2015 March 2015 Co-funded by Page 1 of 19 The authors would like to thank the partners of the T-TRANS Project Consortium for their collaboration during the project. Eva Boo Ignacio Bautista Muttoni LGI Consulting 13, rue de Marivaux 75002 Paris, France +33 (0)1 8416 3073 [email protected] www.lgi-consulting.com © 2015 LGI Consulting Founded in 2005, LGI Consulting is a European innovation-driven business consultancy focused on value creation along four business lines: Innovation Strategy, Management Consulting, Communication & Design and Digital Solutions. Funding for this work was provided by the European Commission. Co-funded by Page 2 of 19 Table of Contents Executive Summary ................................................................................................................................. 4 Air cargo revenue management .............................................................................................................. 5 Market potential for 2020 ..................................................................................................................... 10 Stakeholders analysis ............................................................................................................................ 11 Financial scheme ................................................................................................................................... 12 General conclusions .............................................................................................................................. 13 Annex: basic notions ............................................................................................................................. 14 References ............................................................................................................................................. 17 Acronyms, tables & figures.................................................................................................................... 18 Keywords: air cargo, air freight transport, revenue management, intelligent transport systems, ITS Co-funded by Page 3 of 19 Executive Summary The integration of innovative systems in different transport modes is a key factor in order to improve efficiency, save costs and energy, and decrease cargo transport time. Demand is pulling the integration of revenue management (RM) in the air cargo industry. Intelligent Transport Systems (ITS) are marketed differently depending on the transport mode and sector specificities. The potential of ITS in the integration of revenue management (RM) in air freight transport seems to be strong. Currently, revenue management techniques are applied to air passenger transport. Nevertheless, the adoption of such systems is at an early stage in the air cargo sector. Market trends show an active environment in which new partnerships are being set up, such as those between IT providers, freight forwarders and air cargo carriers. ITS have a strong potential in the sector, especially for the integration of revenue management, already implemented for passenger transport. There are some important technical and organisational barriers, such as the complexity of RM algorithms and the lack of information transparency, which have to be overcome to succeed in integrating information technologies (IT) in air cargo. However, the potential of optimisation of air cargo operations is very important. Carriers are developing their own RM software, but current practices in the sector and the high negotiation power of freight forwarders are restricting the deployment of these ITS. In conclusion, the air cargo market represents a high potential of opportunities for the application of revenue management. Alliances with traditional transport sector stakeholders are a viable strategy for improving the deployment of such systems but this integration is only possible if the technological, legal, and organisational environments are prepared prior to the general adoption of innovative ITS in the market. Co-funded by Page 4 of 19 Air cargo revenue management Market information Since the beginning of the 20th century, with turn, is dependent on the world Gross the arrival of powered planes, cargo has been Domestic Product (GDP) (International Air transported by air. The very first air vehicle that Transportation Association IATA, 2011). transported mail was a hot air balloon in 1785, but it was not until 1911 that an airplane was In Europe the use of air vehicles to transport first used for carrying mail. Throughout history cargo has been adopted since the early days of the aeronautics industry and continues to be at many types of air vehicles were used to transport mail and cargo, starting with hot the heart of the freight and mail transport balloons, then dirigibles and finally airplanes industry. In the last decade, the amount of cargo transported by air has not changed due to the evolution of the aeronautics industry. significantly, as shown in Figure 2. During the 1980s and 1990s, air cargo traffic Air freight and mail transported in had an annual growth rate of approximately 6 UE-27 to 7%. During the last decade, air cargo traffic International extra-EU air transport: Total has shown an annual average growth rate of freight & mail on board (Tonnes) 3.7%, reaching today 200 thousand million International intra-EU air transport: Total freight & mail on board (Tonnes) Revenue Tonne Kilometre (RTKs) (Figure 1). National air transport: Total freight & mail on board (Tonnes) Evolution of world air cargo traffic 16 250 14 12 200 10 150 8 6 100 4 Air cargo (in million tonnes) 50 2 Air cargo traffic (billion RTKs) 0 0 Figure 1: History of air cargo traffic, including freight and Figure 2: Air freight and mail transportation in European mail. The traffic is measured in RTK which is a ton of goods Union 27. (Eurostat, 2013) transported one kilometre. Adapted from (Boeing, 2013) Today air transport is an essential element in the cargo industry and its evolution is directly dependent on world trade evolution, which in Co-funded by Page 5 of 19 This section aims at characterising the air cargo considerably more than in any other EU market in order to assess the feasibility of country (see Figure 3). The UK comes in second integrating revenue management techniques. for the last decade. Italy, France and some For this, two requirements have to be fulfilled smaller countries of the EU-27 have become from the air cargo company standpoint and specialised in air freight (such as Benelux from the customer point of view. countries) and have reached the top rankings in terms of transported freight. Concerning the air cargo carrier, RM applications have to be justified by an improvement of the company’s revenue or competitiveness. From the customer point of view, it has to fit its needs. It is essential to take into account different market segments and associated needs such as their willingness to pay, product specifications, etc. Air cargo evolution by country 5 4 Millions 3 2 1 Figure 4: Total air freight and mail loaded and unloaded in 2011, in tonnes. (Eurostat, 2013) 0 Air freight Air freight andmail (in tonnes) All of these goods (freight and mail) France Germany transported by air represent the current size of Greece Italy Latvia Netherlands the market for this study. However, the Portugal Spain application of RM to air cargo is strongly UK affected by significant market barriers. These Figure 3: Evolution of cargo transported by air in the barriers are presented and explained in the studied countries in the last 10 years. Information following section. adapted from (Eurostat, 2013) Cargo airlines In Europe, about 14.5 million tonnes of freight were transported by air via airports within the Figure 5 and Figure 6 present the world’s most EU-27 in 2011 (national and international important air cargo companies, classified by transport). Approximately 4.3 million tonnes of fleet size and transported cargo, regardless of air freight were handled in German airports, their origin. Co-funded by Page 6 of 19 World's biggest air cargo fleets Top 10 air cargo companies 700 18 600 16 14 500 12 400 10 300 8 6 200 4 100 km annualof frieght - 2 0 0 Nº of aircraft in the fleet DHL Tonnes Cargolux Cargolux UPS Airlines UPS Airlines UPS TNT Express TNT EVA Air CargoEVA Air FedEx ExpressFedEx ExpressFedEx Lufthansa Cargo Lufthansa Cargo Korean Air Cargo Korean Air Cargo Korean Singapore Airlines… Singapore Airlines… Emirates SkyCargo China Airlines Cargo Airlines China Cargo Airlines China Cathay Pacific Cargo Pacific Cathay Cathay Pacific Cathay Cargo Figure 5: World top ten air cargo carrier fleets. Figure 6: World top ten air cargo companies. Information adapted from (International Air Transport (International Air Transport Association IATA, 2013). Association IATA, 2013), (FedEx, 2013), (Singapore Airlines Cargo SIA Cargo, 2013) Market trends Experts agree on the following trends for the air cargo sector: During the last decade, air cargo traffic has shown an annual average growth rate of 3.7%. The world full cargo fleet is growing, as a consequence of the air cargo traffic growth. Maritime transport has become a very important competitor on the market, as its price is competitive. The EU air cargo market seems very contestable as there are approximately 450 different carriers operating. Language seems to be a barrier for concentration of airlines from different countries. A concentration
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