Case: Lufthansa Cargo Ag – Capacity Reservation

Question 1 ? How does air cargo differ from the passenger business in terms of revenue management? Which areas are more complex, which areas can be managed more easily? There are noted differences between air cargo and the passenger business. For example, unlike passengers, cargo shippers did not book round trips and therefore cargo flows were unpaired. Furthermore, cargo was classified according to multiple dimensions like volume and weight resulting in different pallet space requirements, while passengers were each assigned a single seat.

Concerning manageability it was identified that with regard to network planning and capacity allocation, cargo carriers had more degrees of freedom and hence faced additional challenges compared to passenger airlines. However, while passengers purchased tickets for specific flights and routes, cargo airlines could transport goods flexibly with regard to time and route through their network, the only constraint being the promised time of availability at the destination. Moreover, the load could be balanced and optimized by mixing shipments with different specific weights i. e. volume-to-weight relations. In this regard, space could be sold twice, e. g. to one customer with voluminous and another with heavy-weight high-density goods. Question 2 ? What is the purpose of selling long-term capacity contracts? The purposes of selling long-term capacity contracts was to model demand and maximize the airlines yield by ensuring that a fixed amount of capacity was purchased, thus optimizing the aircraft’s cargo capacity utilization while at the same time reducing the risk of deviation from customers because of the fixed commitment and non-refundable policy.

It also helped to determine how much capacity the airline maintained as a safeguard for demand for general cargo. Question 4 ? Does Lufthansa Cargo effectively reach its business and risk-sharing objectives? Lufthansa does not effectively reach its business and risk sharing objectives as they were unable to strictly enforce some of their cancellation fee policies due to the market power of some forwarding companies.

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Moreover, forwarders freedom to cancel contracted capacity up to 72 hours before departure was not adequately reflected by the rates the airline charged for the GCA freight. In addition, if cancellation was received three days before departure, there was no guarantee that LCAG will find other buyers to make up for the forgone revenue. LCAG also had problems with no shows. Question 5 ? How could current reservation and pricing practices at Lufthansa Group be improved? Compensating for cancellations and no-shows by overbooking, •Limiting sales to low-revenue forwarders to preserve space for higher-revenue forwarders, •Accepting low-revenue forwarders when higher revenue demand is less than aircraft cargo capacity, •Redirecting low-revenue customers to flights with lower load factors, thereby minimizing spilled cargo Question 6 ? How does the introduction of dynamic pricing affect capacity byers, i. e. freight forwarders?

The introduction of dynamic pricing can generally shrink the size of capacity buyers on the one hand but can also enable forwarders to have considerable influence with airlines. Since forwarders make their money on the difference between the price they receive from the consignee and the cost of cargo space paid to airlines, they might play one airline against the other for the lowest price. Thus dynamic pricing can actually give forwarders the edge in extracting low price rates from airlines.

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