Seminar: Air Cargo Supply Chain

Management and Challenges

Raja Kasilingam transporting

Vice President
Air Cargo Solutions air cargo
Sabre Inc.
into the future

Center for Intelligent Supply Networks (C4ISN)

2003 © UTD
Agenda

„ Sabre, Inc. Overview

„ Air Cargo Industry
„ Air Cargo Landscape
„ Cargo Revenue Management Concepts
„ Cargo Revenue Management Solution

C4ISN 2003 © UTD Slide 2 Center for Intelligent Supply Networks

Sabre at a Glance

Revenues of about $2 Billion

A S&P 500 company

NYSE symbol: TSG

Headquarters in Dallas/Fort Worth,

Texas

Approximately 6,000 employees in

45 countries worldwide

C4ISN 2003 © UTD Slide 3 Center for Intelligent Supply Networks

Sabre Businesses

Travel
Marketing and
Distribution

Airline
Solutions

C4ISN 2003 © UTD Slide 4 Center for Intelligent Supply Networks

Airline Solutions

70 software products

160 products & services clients

70 reservations clients

42 consulting clients

Diversified client list

C4ISN 2003 © UTD Slide 5 Center for Intelligent Supply Networks

The World of Sabre

North America Europe

4SK 4SU 4BY
4US 4AC 4YV4ZV 4QK 4AZ 4YW 4BA
4CO 4FL 4F9 4EV 4FH 4IB 4TP 4EW
4HP 4DH 4YX4ED 47F 4AF 4OS 4LO
4NW 4OH 4PA4ZK 4LI 4SR 4IW 4BD
4UA 4QX 4Q24AE 4ED Asia / Pacific
4CZ
4SN 4LH 4KL
4AA 4AS 45J 4BW 4QK 4GF 4EK
4MK 4SO 4CY
4DL 4HA 4XY47G 42K 4CX 4MH
4DI 4AY 4LT
4NJ 4SY 4OO4XJ 4YX 4NZ 4PR
4OA 47U 4K8
4UP 4TZ 4JZ 4NJ 49X 4CA 4TG
4TK 4TU
4ZX 4JI 4NK4WO 42Y 4MU 4NH
4DA 4ZW 49N 4EO 4JB 4TC 4KE
4WN 4ED 49X 4VX 4YJ Middle 4SQ 4QF
Central America
4HQ 4AW 42S 4VT
4AM East 4OZ
South America 4KU 4CI 4BR
4MX 4AV Africa 4KA
4CM 4PK
4AR 4SA 4JL
4LR 4TK
4KK 4AT
4TA 49W
4LB 4ET
4VH 4AI
4LV 4UY
4JR 4MS
4PL
4RG 4RG
4TR

C4ISN 2003 © UTD Slide 6 Center for Intelligent Supply Networks

Airline Products and Services

Crew
Cargo
Pricing / Management Flight Operations
CargoMax Sales &
Yield Management AirCrews FOS
CargoRev BLGO Marketing
AirMax Cargo Claims AirOps
CPOS Traverse
AirPrice CargoNet CrewPlan AirPath
CRSView
AirPrice Contract SabreCargo CrewQual ProVision SteadyState M & E
Composer FliteTrac Maxi-Merlin
CargoPlan CrewTrac LiteVision RAPS
Availability Processor Eagle
WiseVision
Group Management
System

Planning /
Airport Scheduling Dining & Cabin Customer Service
Finance Systems FliteSource Services Qik-Access
AirFlite
Gate Plan Oasis AirServ
Quasar GSE Plan ARM
TravelCard Pro StaffAdmin FAM
StaffManager TAM
StaffPlan CRSSim
GateManager DPM
APM
Slot Manager
C4ISN 2003 © UTD PC AirFlite
Slide 7 Center for Intelligent Supply Networks
Air Cargo Industry

transporting
air cargo
into the future

2003 © UTD
Air Cargo Industry

„ The international air cargo market is $40 billion a year

and it is still the combination carriers that dominate.
„ Growth in air cargo anticipated to exceed passenger
traffic growth in every major regional market
„ Forecasts anticipate the addition of more than 2,600
freighter airplanes by 2019, as nearly 1,100 current
freighters retire
„ Customers around the globe are demanding better and
faster products
„ The air cargo industry has realized that information
technology is key to meet their challenges

C4ISN 2003 © UTD Slide 9 Center for Intelligent Supply Networks

Growth is projected at 6.4%

„ World airborne cargo will grow at 6.4% per year during the next 20
years.

C4ISN 2003 © UTD Slide 10 Center for Intelligent Supply Networks

Asian cargo markets lead…

C4ISN 2003 © UTD Slide 11 Center for Intelligent Supply Networks

Major Traffic Flows

„ A snap shot of international freight flows as a

percentage of IATA international scheduled freight

C4ISN 2003 © UTD Slide 12 Center for Intelligent Supply Networks

Top 25 Freight Airlines

C4ISN 2003 © UTD Slide 13 Center for Intelligent Supply Networks

Air Cargo Landscape

transporting
air cargo
into the future

2003 © UTD
At a very high level…

Shipper/Forwarder Airport/Airline Operations Consignee

Shipper
Aircraft
Customers
Customers

Forwarder Terminal Terminal

Customers

Interline Interline

C4ISN 2003 © UTD Slide 15 Center for Intelligent Supply Networks

A bit more detailed…

Shipper

Forwarder
Integrators
Regional
Hub

Packaging Airline Trucking/

Off-Airport Trucking
Own
Termnial
Operations

Terminal Operations

Warehousin
Customs
g Inventory
Own
Ground
Handling Ground Handling

N Distribution

Own Aircraft Airlines

W E

Receiving
S
Airport

C4ISN 2003 © UTD Slide 16 Center for Intelligent Supply Networks

The key players are...

Shipper Need a commodity sent anywhere in

the world for the lowest cost and meet
the required service level
Forwarder Act as the “middle man” between the
shipper and the airline.
Integrator Operate in business-to-business
markets and specialize in door-to-
door transport solutions
Airline Operations Receive, store, transfer, track, load
and unload cargo; assign and manage
capacity; bill customers.
Consignee Recipient of the shipment.

C4ISN 2003 © UTD Slide 17 Center for Intelligent Supply Networks

Business challenges

Shipper Forwarder
Make bookings Make bookings Booking acceptance
Negotiate best rates Negotiate best rates Bid for space –allotments
Preparation of Preparation of Distribution
Documents - Customs, Documents - Customs,
Insurance Insurance Warehousing

Track shipments Track shipments Invoice shipper

Accept billings and make Accept billings and Interact with multi-
payments make payments modal carriers

Place claims and repair Place claims and repair Messaging and
charges charges Transaction Ability

Speed (time sensitive) Speed (time sensitive) Consolidation of

Shipments
Reliability Reliability

C4ISN 2003 © UTD Slide 18 Center for Intelligent Supply Networks

Business challenges

Airlines / Operations

Schedule cargo flights Accept /Reject shipments Shipment prioritization

Plan cargo routes Maximize Revenue Shipment re-accommodation
Initialize and open Improve load factors Plan Loading of cargo - build,
flights for booking containerize etc.
Track shipments
Negotiate rates Unload Cargo
Accept Bids from
Publish prices/rates customers Load balancing
Provide distribution Allocate Block Space - Warehousing
channels Allotments
Obtain/Send Flight Manifest
Forecast cargo capacity Resource Management
ULD Management - Track,
of Terminal Staff
Segment and forecast Inventory, Repairs etc.
cargo demand Accept Shipments
Service Reliability
Tendered
Plan for no-shows,
Plan for CAD
cancellations and Dangerous Goods
Overbook Control Track and re-route Refusals
Set-up Bid Prices Package Validation

C4ISN 2003 © UTD Slide 19 Center for Intelligent Supply Networks

Business challenges

Airlines / Operations Airports / Operations Consignee

Offer Product Services Warehousing - Track shipments

- Express, Next Day Storage
Accept billings and
Track shipments, Customs make payments
containers
Security Clearance Place claims and
Invoicing/Billing repair charges
Dangerous Goods
Prorating Control
Interline billing Package Validation
Revenue Accounting Notify Captain
Sales Accounting Facilitate smooth
Claims Management cargo operations
Receive/Send updates
on arrival
Receive/Send updates
on delivery
Message Interactions

C4ISN 2003 © UTD Slide 20 Center for Intelligent Supply Networks

Mapping of Business Challenges

Reliability Maximize Revenue

Negotiate Best Rates Improve load factors
Bid for Space – Allotments Accept Bids from customers
Schedule cargo flights Allocate Block Space -
Allotments
Plan cargo routes
Initialize and open flights for
booking
Negotiate rates
Publish prices/rates
Forecast cargo capacity
Revenue Management
Segment and forecast cargo
demand
Plan for no-shows,
cancellations and Overbook
Set-up Bid Prices
Accept /Reject shipments

C4ISN 2003 © UTD Slide 21 Center for Intelligent Supply Networks

Mapping of Business Challenges

Invoicing/Billing
Prorating
Revenue Accounting
Interline billing
Revenue Accounting
Sales Accounting
Accept billings and make
payments

Make bookings
Message Interactions
Reservations and inventory control
Shipment Tracking
Warehousing
ULD Management - Track,
Inventory, Repairs etc.

C4ISN 2003 © UTD Slide 22 Center for Intelligent Supply Networks

Mapping of Business Challenges

Resource Management of
Terminal Staff
Load / Unload Cargo Terminal Operations
Staff Schedules
Union Contracts
Shipment Prioritization
Receive Shipments

ULD Tracking
Container Management
ULD Control
Distribution & Warehousing

C4ISN 2003 © UTD Slide 23 Center for Intelligent Supply Networks

Mapping of Business Challenges

Filing claims and repair

charges Claims Management
Claims processing
Claims tracking

Security Clearance
Embargo / Quarantine
Customs
Dangerous Goods control
Paperwork

C4ISN 2003 © UTD Slide 24 Center for Intelligent Supply Networks

Sabre Cargo Portfolio

Airline Business Area Sabre Product

Revenue Management Y CargoMax
Revenue Accounting Y CargoRev
Reservations & Inventory Control Y Sabre Cargo, QIK Cargo
Claims Management Y Claims Management
Terminal Operations Y CargoPlan, CargoNet
Customs X
Container Management X
Warehousing X
Other Potential Business Areas
Solutions for Forwarders X
Solutions for multi-modal carriers X
Auctions X
Solutions for Airline alliances (like WOW) X
Solutions for Airline Forwarder alliances X
Solutions for Integrators X

C4ISN 2003 © UTD Slide 25 Center for Intelligent Supply Networks

Cargo Revenue Management Concepts

transporting
air cargo
into the future

2003 © UTD
Revenue management is ..

„ Integrated management of pricing and inventory

„ To maximize total revenue
„ By selling the right product (right price) to the right customer at the
right time

„ Key components are

„ Reduction of spoilage by selling more than available capacity
„ Match demand and supply (capacity) at network level
„ Considers routing possibilities

„ Long-haul displacing short-haul

„ Key Requirements
„ Product/price differentiation exists
„ Demand exceeds supply

C4ISN 2003 © UTD Slide 27 Center for Intelligent Supply Networks

Revenue without and with price differentiation

2.00

1.80 Price-Demand Function

1.60

1.40 „ Revenue - $96,000

Rate ($/kg)

1.20
80 tons @ $1.20
1.00

0.80

0.60

0.40

0.20

0.00
0 25 50 75 100 125 150 175 200

Demand (tons)
2.00

1.80 Price-Demand Function

1.60 35 tons @ $1.65

1.40
Rate ($/kg)
1.20
45 tons @ $1.20

1.00

0.80

0.60

ƒ Revenue - $141,750
0.40 75 tons @ $0.40

0.20

0.00
0 25 50 75 100 125 150 175 200

Demand (tons)

C4ISN 2003 © UTD Slide 28 Center for Intelligent Supply Networks

Passenger vs. Cargo Revenue Management

„ Capacity is not known and not fixed

„ Capacity is 2-dimensional
„ Cargo can be over or under-tendered
„ Limited number of customers
„ Relationship based business
„ Routing in most cases is flexible
„ Demand is lumpy
„ Sparse data and poor quality of data

„ Less sophisticated users

„ Reluctance to new methods
C4ISN 2003 © UTD Slide 29 Center for Intelligent Supply Networks
Revenue Management – Value proposition

„ Improves revenue and profits (generally 2 to 7%)

„ Accuracy in capacity forecasts (consistent under forecasting) -
translates to more space to carry cargo
„ Better overbooking decisions - more cargo booked to offset no-
shows and cancellations
„ Optimal station/customer allotments - low value customers do
not block valuable space
„ Better rate and density mix - maximize the use of all dimensions
of capacity and protect space for high value cargo
„ Reduces offloads and service failures
„ Accuracy in capacity forecasts (consistent over forecasting) -
translates to less refusals
„ Better overbooking decisions - improved service reliability when
showup is high
„ Ensuring operational feasibility through router module

C4ISN 2003 © UTD Slide 30 Center for Intelligent Supply Networks

Critical success factors

„ Process fit - current processes and process

gaps
„ Organizational alignment – departments aligned
to processes
„ Technology fit - integrating revenue
management system with existing systems
„ Data availability - the major data requirements
include post departure data, air waybill data,
passenger bookings, and flight schedule
„ User acceptance - acceptance and willingness
from the user community

C4ISN 2003 © UTD Slide 31 Center for Intelligent Supply Networks

Cargo Revenue Management Solution

transporting
air cargo
into the future

2003 © UTD
Cargo revenue management - Functional
Overview
„ Medium to long-term allotment management
„ Optimal assignment of space to station/customers
„ Short-term capacity and demand management
„ Capacity forecasting
„ Showup rate forecasting
„ Overbooking
„ Demand forecasting
„ Route generator
„ Bid pricing
„ Reporting and proactive flight management tools
„ Management reports
„ Flight workbench (critical flights analyzer)
„ Performance monitoring
„ Customer valuation
C4ISN 2003 © UTD Slide 33 Center for Intelligent Supply Networks
Interaction among revenue management
components

Flight Performance
Manager Monitoring

Common Functionality

Overbooking
Capacity Allotment
Forecasting Management

Demand
Bid Pricing
Show-up Forecasting
Rate
Forecasting
Value
Determination
Route
Generator

Cargo Capacities
Bid Prices
Space Allocations
Values
Management Reports

C4ISN 2003 © UTD Slide 34 Center for Intelligent Supply Networks

Modeling and Functionality

„ Focuses on profitability as opposed to load factor

„ Manages network capacity instead of leg capacity
„ Focuses on freight mix based on density and revenue
„ Controls are based on commercial feasibility and
operational feasibility
„ Capacity segmentation is in terms of time horizon and
products
„ Allows the capability use ‘bonus’ or ‘value’ based on
O&D and customer.

C4ISN 2003 © UTD Slide 35 Center for Intelligent Supply Networks

System Setup

„ Control values are set several days before

departure and then updated nightly until
departure
„ Control values are in terms of weight, volume,
and positions
„ Users have the ability to set default values and
overrides
„ Monitors performance of forecasts and user
overrides

C4ISN 2003 © UTD Slide 36 Center for Intelligent Supply Networks

Approach to Forecasting

transporting
air cargo
into the future

2003 © UTD
Approach to Forecasting

„ Capacity, showup rate, and demand forecasts

are key inputs
„ Forecasting is based on historical and current
data
„ Forecasts are monitored on a regular basis

C4ISN 2003 © UTD Slide 38 Center for Intelligent Supply Networks

Cargo Capacity

Psgr Weight
PAX Weight

PAX Bag Weight

Mail Weight

Other Weight
PAX Bag Volume
Extra Fuel Weight Payload

Mail Volume

Allotments Other Volume

Belly Volume
Total Cargo
Capacity Allotments
Total Cargo
Freesale Capacity
Freesale

C4ISN 2003 © UTD Slide 39 Center for Intelligent Supply Networks

Capacity Forecasting

„ A tool for forecasting the capacity available for

cargo by flight leg and departure date
„ Forecasts flight capacities in terms of weight,
volume, and positions
„ Interfaces with Passenger Revenue
Management system to obtain expected
passengers on board

C4ISN 2003 © UTD Slide 40 Center for Intelligent Supply Networks

Capacity Forecasting

Bag
Standards
Payload
Positions
Forecast
Stacking
Loss
Capacity
Capacity forecasts
Mail Forecasting by flight leg
Forecast Model and
departure date

Passenger
Forecast Belly
Volume

Fuel
Weight

C4ISN 2003 © UTD Slide 41 Center for Intelligent Supply Networks

Showup Rate Forecasting

„ A tool for forecasting the booking behavior of

flights by flight leg and departure date
„ Considers no-shows, cancellations, and
over/under tendering.
„ Forecasts showup rates in terms of weight,
volume, and positions

C4ISN 2003 © UTD Slide 42 Center for Intelligent Supply Networks

Showup Rate Forecasting

Historical
Tender
Showup
Showup forecasts
Historical Forecasting by flight leg
Booking Model and
departure date

C4ISN 2003 © UTD Slide 43 Center for Intelligent Supply Networks

Demand Forecasting

„ To properly manage cargo profitability,

forecasting needs to be done by demand groups
or ‘rate classes’
„ A rate class should have shipments that are
very similar in density and revenue - to address
density mix and rate mix
„ Key data requirements include historical
bookings and current bookings

C4ISN 2003 © UTD Slide 44 Center for Intelligent Supply Networks

Rate/Density Clustering (Rate Class)

2.5

1.5
Revenue

0.5

Revenue Class
0
0 2 4 6 8 10 12 14 16 18 20

Density

C4ISN 2003 © UTD Slide 45 Center for Intelligent Supply Networks

Rate/Density Clustering (Rate Class)

Remaining demand by Rate-Density class

2.00
10 11 12

5 tons 5 tons 0 tons

1.50
7 8 9

10 tons 10 tons 4 tons

Rate($/Kg)

1.00
4 5 6

10 tons 15 tons 3 tons

0.50
1 2 3

5 tons 4 tons 2 tons

0.00
0 20 40 60 80 100 120 140 160 180 200 220 240

Density (kg/Cu.M)

C4ISN 2003 © UTD Slide 46 Center for Intelligent Supply Networks

Demand Forecasting

Demand Forecasting
Group Model
Definition Parameters
Historical
Booking

Demand Demand
Grouping Forecasting
Current
Booking

Demand Forecasts

C4ISN 2003 © UTD Slide 47 Center for Intelligent Supply Networks

Methodology for Optimization

transporting
air cargo
into the future

2003 © UTD
Methodology for Optimization

„ Capacity segmentation by time - allotment

optimization for medium term customer/station
allotments
„ Overbooking of remaining space to account for
booking behavior
„ Generate routing options to carry cargo
„ Match O&D demand to leg capacities
considering routing options and rate/density
classes
„ Compute bid prices
„ Determine capacity allocations

C4ISN 2003 © UTD Slide 49 Center for Intelligent Supply Networks

Allotment Management

„ A tool for managing medium term station or customer

agreements
„ Contains a network based optimization model that
evaluates competing requests based on:
„ Promised revenue
„ Historical utilization
„ Flight schedule
„ Available capacity for allotments
„ A pre-defined set of business rules
„ The model generates a business-practical solution that
maximizes the revenue for the airline

C4ISN 2003 © UTD Slide 50 Center for Intelligent Supply Networks

Allotment Management

Allotment
Requests
Schedule

Available
Capacity
Allotment Allotment
Management Usage
Container Model Model
Data

Allocation
Rules Recommended
Allotments

C4ISN 2003 © UTD Slide 51 Center for Intelligent Supply Networks

Overbooking

„ Overbooking offsets the effect of cancellations,

no-shows, and over/under-tendering
„ Based on booking behavior, economic aspects
(maximize net revenue or minimize sum of
offload and spoilage costs), and acceptable
level of service failure
„ Users can set the maximum acceptable service
failures at flight, entity, or system level
„ Users have the ability to override the authorized
capacities for specific flight departures

C4ISN 2003 © UTD Slide 52 Center for Intelligent Supply Networks

Spoilage and Offload Costs

Spoilage Costs

Overbooking Level
Cost

Total Cost

Offload Costs

0 20 40 60 80 100 120 140 160

Overbooking Level

C4ISN 2003 © UTD Slide 53 Center for Intelligent Supply Networks

Overbooking

Flown Costs and Acceptable

Air waybills Overrides Service
Failure

Show-up Rate Overbooking Authorized

Model Model Capacity

Booking Capacity
Records Forecasts

C4ISN 2003 © UTD Slide 54 Center for Intelligent Supply Networks

Routing

„ Generates routes for the bid price model within

the Revenue Management Module
„ Determines feasible routes at the time of
processing a booking request
„ Takes into account operational requirements
„ Accounts for shipment characteristics
„ Ensures that the selected routes meet the service
level
„ Considers cost, time, and distance
„ Handles the complexity of multi-hub network

C4ISN 2003 © UTD Slide 55 Center for Intelligent Supply Networks

Routing

Schedule

Via/
Not Via Route Costs
and Times

Connect Shortest Path

Times Model
Routes
Service
Level

Shipment
Characteristics
C4ISN 2003 © UTD Slide 56 Center for Intelligent Supply Networks
Bid Pricing / Allocation

„ Is an O/D based network optimization model

that maximizes network profitability
„ Matches demand to capacity over multiple
routes by redirecting cargo from high to low-load
factor flights
„ Leg bid price for a flight leg is (wt BP + Vol
BP/density)
„ O and D bid price is the sum of the bid prices of
flight legs along the route of the shipment
„ Bid price gradients enable bid prices to be
adjusted to reflect capacity changes

C4ISN 2003 © UTD Slide 57 Center for Intelligent Supply Networks

Bid Price Example

2.50

2.00 Capacity = 15 tons

3 Bid Price = $1.00/kg
tons
@
$2.00
Rate ($/kg)

1.50
6 tons @ $1.50

Capacity = 25 tons
1.00 Bid Price = $0.50/kg
10 tons @ $1.00

0.50
20 tons @ $0.50

0.00
0 5 10 15 20 25 30 35 40

Demand (tons)

C4ISN 2003 © UTD Slide 58 Center for Intelligent Supply Networks

Bid Price

Schedule

Authorized Space
Capacity allocation
to Demand
Group
Demand Network Based
Forecasts Bid Price Model
Bid
Prices
Connection
Matrix

Revenue
and Cost
C4ISN 2003 © UTD Slide 59 Center for Intelligent Supply Networks
Customer Valuation

„ A tool for assigning relative importance to major

customers
„ Customer value is used to scale up or scale
down the offered rate when making booking
acceptance decisions
„ Customer value may vary by segment and
season
„ Customer value can be based on several
variables: total revenue, space utilization,
commodity shipped, claims history, etc.

C4ISN 2003 © UTD Slide 60 Center for Intelligent Supply Networks

Customer Valuation

User Preferences

Sales

Operations
Value
Determination
Revenue Model
Management

Finance
Customer values

C4ISN 2003 © UTD Slide 61 Center for Intelligent Supply Networks

Major categories of data

„ Flight Schedule
„ Booked and tendered cargo information
„ Advance and live air waybills
„ Pre and post departure flight information
„ Mail, bags, passengers, cargo, payload, fuel, etc.
„ Expected passengers on board
„ Reference data
„ Aircraft, container, station, customer, commodity,
products, etc.
„ Historical data
C4ISN 2003 © UTD Slide 62 Center for Intelligent Supply Networks
Key interfaces

Cargo Reservation
System
Cargo
Flown Air Waybills
Revenue Bid Price/Allocations
Accounting Booked Booking Requests and
Air Waybills other updates

Flight Post-departure

Cargo RMS
Operations/ data

Departure Control Schedule

Reference Data
Passenger
Revenue DB Tables/
Passenger Booking
Management User Inputs Legend:
Real-
Real-time link

Batch Process

Batch/real-
Batch/real-time
C4ISN 2003 © UTD Slide 63 Center for Intelligent Supply Networks
Further research is needed …

„ Overbooking model
„ Show up rate distribution
„ 2-dimensionality
„ Shipment level overbooking
„ Demand forecasting
„ Stability/accuracy of forecasts - Lumpy demand,
multiple rate classes, fewer booking requests
„ Predicting when to use and when not to use forecasts
„ Estimating true demand: demand reduction/un-
truncation
„ Integrated overbooking and bid pricing

C4ISN 2003 © UTD Slide 64 Center for Intelligent Supply Networks