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Introduction:
This is the master thesis for the topic has been selected considering scientific ways to choose
topic for master thesis. It is part of several assignments to be delivered in the master course of
Engineering Research Skills (IE 694).

Problem Statement:
This study was conducted due to requirements of management in Saudia Cargo company to
prepare budget for 2023 as the company intended to improve the budget process as this one of the
initiatives to be achieved during this year and also to reflect high fluctuation in air cargo demand in
the world which was extremely affected by COVID-19 and reduction of capacity of most airlines;
but today they are coming back to business with high frequencies of flights which might increase
or decrease the demand. Current Russia-Ukraine war is currently affecting the whole business in
air cargo and supply chain industry, and this is another reason to prepare reasonable budget for the
next year.

Goals:
To forecast monthly demand in terms of weight kg per region for 2023 taking into account
the limitation of available capacity. The other goal is to discover a suitable model that predicts
accurately and easy to implement with MS Excel as well as having an automated module for
further adjustments in the input.

Literature review:
There are many forecasting models to be used in the airline industry for short-term and
others for long-term forecasts. Long-term forecasts are basically used for the creation of new
routes or acquisitions of new aircraft. There was a study conducted for short-term forecasts with
limitation to seven weeks using simple time series, linear regression, and booking pickup models
which categorized into: classical model and an advanced model. Pick up models outperformed
time series and linear regression for forecast horizon of more than four weeks while if it is less
than four, pickup models were literally indistinguishable (Wickham, 1995).
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Forecasting demand by taking into consideration the present international air cargo market
and its possible changes in the future trend will assist in the construction for civil aviation policy
and the planning of international airports. Fuzzy regression was applied as forecast model to
predict air cargo volume to reduce residuals resulted from uncertain factors. Certain factors were
included in the study such as Economic Growth Rate and Foreign Exchange Rate and Gross
Volume of national production (GDP). The results showed that the major factor was GDP which
had impacted significantly on Taiwan air cargo export and import volume (Choe, et al., 2007).

By value, 40% of global trade transactions are delivered by using aircraft. Air freight is
required for time-sensitive (high-value) commodities such as computers and cell phones which
have a short marketing life and perishable products (fresh flowers, fruit, and live animals) because
it offers speed, security and reliability. Air cargo, trade, and GDP have a direct relationship and
interdependent. The demand of air cargo will increase as the trade volume and economic activity
increase. The development of e-commerce will affect the growth in online retail sales that is also
one of the key drivers that stimulate the air cargo growth. The study was conducted by Suryani et
al., to forecast air cargo demand in relation to capacity increase to find out the influence of Gross
domestic product (GDP) and Foreign direct investment (FDI) on air cargo volume. By performing
some experiments of 2k factorial design it was found that GDP had a very strong affect to air cargo
demand comparing to FDI and transit growths (Suryani, et al., 2012).

In order to evaluate the development of Sri Lankan exports, a study was conducted trying
to highlight a relationship between exports and shipping services, which can be used for
forecasting future by applying time-
series analysis. During the study, the regression analysis was also used to find relationships
between cargo loaded and value of exports and the results of statistical hypothesis confirmed that
the existence of this relationship (Nadeesha & Silva, 2013).

The air cargo transportation system is a large and complex service system, in which
demand forecasting is a key element in the master planning process. Demand forecasting is
essential for analyzing existing cargo flight schedules and identifying future facility requirements
of air cargo companies. A simulation was carried out by Totamane, et al. on multiple airlines using
Potluck Problem theoretical model to predict cargo demand on specific routes given load factor of
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that route. The study showed that the model predicted cargo demand with reasonably high
accuracy considering factors such as GDP, holidays, and weekends (Totamane, et al., 2014).

One of the most commonly used forecast models is time series analysis but the
disadvantage of this model that it does not reflect the volatility which can be significant from one
year to another and shows that there is a steady growth rate. Regression analysis is widely used for
prediction and forecasting. It is also used to understand which independent variables are related to
the dependent variable and to explore the forms of these relationships. In restricted circumstances,
regression analysis can be used to infer causal relationships between the independent and
dependent variables, with the critical caveat that correlation does not by itself prove causation. The
dependent variable of air cargo growth may be associated with such independent variables as jet
fuel prices, GDP, composite leading indicators (CLIs), and population customarily using a
combination of time-series and growth curves (Maynard, 2015).

Accuracy of forecasting plays a role in mitigating the effect of overbooking and offloading
in hub stations and two models were performed which Holt-Winters theory and ARIMA model
during forecasting. The results showed that Holt-Winters method outperformed in terms of
accuracy by the ARIMA model utilizing chargeable weight time series. (Klindokmai, et al.,2015).

To investigate the suitable forecasting model for air cargo demand, research was conducted
by Liu et al. to find out the optimum forecasting models comparing between multiple linear
regression (MLR), autoregression integrated moving average (ARIMA), support vector regression
(SVR), neural network (NN) and gradient boosting regression tree (GBRT). All previous models
were used to forecast current observations using actual historical resulting that air cargo volume
considered to be nonlinear time series as it is not constant. SVR outperform other forecasting
models and ARIMA has better results too and it is preferred option as well (Liu, et al., 2020).

Methodology:
There are many forecast techniques and mathematical models to be used such as time series
analysis (TSA), multiple linear regression (MLR), autoregression integrated moving average
(ARIMA), support vector regression (SVR), neural network (NN) and gradient boosting regression
tree (GBRT). In our study, we used time-series analysis because it is simpler and consumes less
time and it could be automated. Time horizon for this forecast is 12 months of next year.
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Components of Time Series Analysis:

1. Trend:
In which there is no fixed interval and any divergence within the given dataset is a
continuous timeline. The trend would be Negative or Positive or Null Trend
2. Seasonality:
In which regular or fixed interval shifts within the dataset in a continuous timeline. Would
be bell curve or saw tooth
3. Cyclical:
In which there is no fixed interval, uncertainty in movement and its pattern
4. Irregularity:
Unexpected situations/events/scenarios and spikes in a short time span.
Results:
Actual flown tonnages in terms of chargeable weight kg for past two years and this year are
shown in table (1) with forecasting demand of November and December for the current year by
applying exponential smoothing which is weighted-moving-average forecast method using below
formula with equal to 0.10 as weight or smoothing constant so that the forecast places little
weight on recent demand and takes many periods of historical values into account.

It also can be written as below:

Where: Ft = new forecast

Ft-1 =

= smoothing (or weighting) constant (0 1)

At-1
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Monthly demand is affected by seasonal variations from month to another. Here are the steps to
include seasonality effect on the demand:

1. Find the average historical demand each month by summing the demand for that month in
each year and dividing it by the number of years.

2. Compute the average demand over all months by dividing the total average annual demand
by the number of months of a year.

3.
demand (from Step 1) by the average demand over all months (from Step 2)

4. demand:

a) Getting the average per month and compute linear regression model as in Figure (1):

y = 267,258 x + 30,000,000

b) Compute fitted linear regression model for each month using above formula

c) Sum up all months which will be as as shown in table (2)

5. Divide this estimate of total annual demand by the number of months, then multiply it by
the seasonal index for each month.

Table (1): Flown weight kg during 2020, 2021 and 2022

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Figure (1): Average weight kg for past three years

Table (2): Monthly demand by fitted linear regression

Table (3) shows the forecasted demand monthly and quarterly for 2023 considering the effect of
seasonal index. The load factor is the forecasted demand weight divided by total available capacity
of all flights per month and it is a percentage of utilization available capacity for specific month.
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Table (3): Forecasted weight kg, Capacity, and load factor for 2023

Discussion:
Actual sold capacity or flown tonnage during past two years have different patterns among
years due to COVID-19 was affecting 2020 by increasing the demand since there was less
available capacity and high reduction in passenger flights due to lockdown started in the mid of
March 2020. Therefore, the demand was high at that time on freighter flights and most airlines
took seats out in passenger aircraft and used them for loading more shipments resulting in a high
contribution in 2020 especially during March until May. Moderate to low demand was in 2021 as
business was still affected but still there was less available capacity and a reduction in the number
of passenger flights.

During the current year of 2022, it was totally different as the market almost opened so
most of closed airlines were back to operational after having enough time for recovery from
COVID-19. There were some months with very high demand, as in March and April and reduction
in the following month. This reduction is due to the number of freighter aircraft was declined as
one of them was out of operation for maintenance purpose even thought the demand was high
enough to reach March demand.

There are uncontrollable factors that have impacted on the demand, and they could be
classified into external and internal factors while internal relates to company directly and external
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factors relate indirectly. External factors such as COVID-19 and reduction in some markets due to
war e.g., Ukraine-Russia war. Internal factors could be aircraft on ground (AOG) or urgent
maintenance as well as increasing in fuel prices in some countries lead us to reject most of
shipment requests due to high prices required to cover extra fuel cost therefore it will be rejected

build up BUB and this differs from one market to another depending on the type of product the
country is producing. Due to fluctuation in passenger markets, it sometimes forces airlines to
reduce the frequency of flights for some destinations therefore air cargo companies will be losing
the business from that destination as no capacity is available.

Seasonality is affecting air cargo demand as this is international trade. As illustrated in

table (), it clearly shows the forecasted demand for quarter four has higher demand comparing to
other quarters while the first and third quarter contributes to low demand but not too much far
away from second quarter. It was noticed February is usually the month with lowest sales in every
year during all three years because of Chinese New Year within this month causing reduction in
planned and operational freighter flights and therefore resulting in a high decline in sales from Far
East region but they come back with high load business in the following month. Forecasted
weights in January and mid-year (June, July, and August) are usually low except if Ramadan and
Eid fall on these months as sales of Muslim countries and export and import of Kingdom of Saudi
Arabia increased which required extra flights and therefore higher demand contributed but this is
not fixed period in Gregorian calendar and its effect on seasonality is included in the seasonal
index. Last three months have higher demand as the peak is always during end of year therefore
freighter flights were usually planned on high frequencies to match the demand in the market.

Total yearly demand of 380M kg of weight is expected to be sold during 2023 with
increasing by 8% compared to 2022 with 353M flown weight kg. Almost same incremental was in
2022 by 9% compared to 2021. The forecast is reasonable as capacity for 2023 has no issue
comparing it with forecasted weight resulting in feasible load factor for each month without
exceeding 50% and this indicates there is still more available capacity to be filled out, but the
market demand is limited, and the company will have to manage to increase market share.
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Conclusion:
To forecast monthly demand for 2023, the method of time series analysis was chosen
among many forecast methods as it is easier to apply, could be automated, and provided reasonable
results which are not far away from historical demand and including month to month seasonality.
The regression model was applied to get total demand of the whole year of 2023 which was an
input for time series on monthly basis. The results are basically workable to be budgeted for every
month taking into account that daily demand requires dynamic forecasting methods and IT systems
to read actual input of data and provide back with forecasted demand for the next days or weeks.
Budget is flexible and should be reviewed every quarter to check actual figures and external or
internal factors that might affect extremely on the following months. Recommendation is made for
further study to be conducted in terms of revenue and selling prices, which are also affecting the
demand as well and it changes based on product type and different countries.
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REFERENCES