The air cargo market is at a turning point as yields begin to fall from the peaks of the past three years — now is the time for cargo airlines to re-think revenue management, says a report from McKinsey.

Over the past three years, the cargo market has been capacity driven and airlines with significant capacity pulled ahead of competitors, says Soufiane Daher, Ludwig Hausmann and Mark Williams in the report. "Recently, there seems to be a transition back to a demand-driven market: yields have declined, demand has slowed, and belly capacity continues to recover. Moving forward, rates are expected to decline further, although they will likely remain above 2019 levels."

Credit: McKinsey

What this means is that new ways of working may be required for individual cargo airlines to remain competitive "and as belly capacity returns, the market will likely become increasingly competitive, and airlines that don’t have a robust commercial and revenue management strategy in place might lose out and see their yields diminish faster than the average."

Digital paying off
Many cargo airlines have invested considerably in their digital strategies since the pandemic began, the report said. "In particular, online sales have boomed, and consequently, cargo airlines have access to much more data than was possible three years ago. A recent Freightos WebCargo report found that digitised air capacity across the industry reached 57 percent in Q1 2023 compared to 38 percent in Q1 2022 and only three percent in Q1 2019."

Due to the increase in online sales, cargo airlines have more data available about their customers’ behaviour. "This is particularly the case for airlines that have their own sales portals. Through digitalisation, the air cargo industry has an opportunity to build a 360-degree view of demand across the entire customer journey which includes data that is above the sales funnel such as which flights customers search for, lead times, how the cargo request was made, how long it took to fulfil, and if there was a cancellation or modification.

"Airlines can also look at step-based conversion rates showing how the airline performs at each stage of the sales funnel (discovery, flight selection, product selection, price offer, etcetera). Having all of this data in one place means that cargo airlines can improve their customer experience: better understand what customers want, and when they are likely to want it."

Cargo airlines are well positioned to increase forecasting accuracy through AI. "For example, AI could make sense of the thousand or more commodities, as well as their inter-dependencies, within the supply chain. For instance, AI could determine how trends in raw materials and semi manufactured products in one country could lead to a growth or decline in specific finished products in another — and how this would influence cargo demand."

Managing supply and demand
Booking curves have changed post-pandemic and the changes are likely to accelerate, given that the market is at a turning point. "This is why it is now more important than ever for airlines to continuously monitor capacity booking, and be even more proactive when it comes to simulating demand—and do it more frequently."

In 2021 and 2022, the pace of booking accelerated and exceeded 2019 levels at the two-week before departure point, the report said. "At one week before departure, the share of weight booked was considerably higher compared to pre-pandemic levels, resulting in less urgency to fill the flight at the last minute

Credit: McKinsey

"Any last-minute price reductions would probably have been less effective than in previous years as most of the airline’s customers were already booking closer to the flight date. This example also illustrates the last-minute nature of the industry, where more than half of a flight’s capacity is often booked in the last week."

Airlines could, for instance, use dashboards to monitor how flights are being filled, and where the biggest opportunities lie, based on what capacity has been booked and what is expected at any point in time, says the report. "Forecasts, or estimates of what is expected, could be based on lagging indicators (historical data) and also on the leading indicators made possible by the trove of new data that comes with digitising capacity."

Time to act - now
In a volatile and uncertain market where yields are likely to decline, each cargo airline will have to act to protect its position, writes Daher, Hausmann and Williams. "This requires airlines to be agile, make decisions quickly, and to implement new ways of working."

Cargo airlines looking to re-think revenue management could consider the following three priorities:

*Harness the power of data

*Assess the value of advanced analytics; and

*Re-design internal processes.

"Despite the challenges that cargo airlines could be facing in the coming months, there are opportunities to improve revenue management to remain competitive and profitable. This depends on a new approach to digital, and on ensuring that the customer remains centre stage when making revenue-management decisions."

African cargo market: untapped, huge potential
With over 1.4 billion people, expected to increase by 170 million by 2026, Africa still accounts for only two percent of air cargo trade.

"Yet that share belies its enormous-yet-seemingly-elusive promise. By the early 2030s, Africa’s working age population will exceed that of China, and by the late 2030s, that of India," says a report by Trade and Transport Group.

"A combination of things need to change for the African market to go beyond the two percent market share," says Sanjeev Gadhia, CEO, Astral Aviation. "African airlines need to invest in freighters to increase the capacity for air-cargo to, from and within Africa. African airlines need to expand their networks to Asia, Middle East and USA besides the existing focus on Europe. Liberalisation and open skies in addition to reducing taxes will result in growth."

Africa's air cargo traffic with China and India is expected to grow annually by 5.4- 5.7 percent, respectively, air cargo traffic with its biggest trading partner, Europe, will grow more slowly at 3-3.2 percent per year, the report said. "Turkiye and the UAE also offer strong growth potential for Africa air trade, given the commanding Africa market presence of the airlines from those two countries."

African flower exports have underperformed compared to Latin American flower exporters, says the report by Trade and Transport Group. If national and regional export promotional efforts could be bolstered, it is conceivable that African producers could gain significant share compared to their competitors."

E-commerce penetration is only around one percent but if players could emulate the practices of other markets (e.g. Latin America), the growth opportunity could be vast, the report added.

African airlines need to expand their networks to Asia, Middle East and USA besides the existing focus on Europe: Sanjeev Gadhia, CEO, Astral Aviation

Gadhia feels e-commerce can be a big driver of air cargo in Africa "but there needs to be the right infrastructure to be in place to support the growth of e-commerce such as dedicated e-commerce fulfilment warehouses around key airports and ports in Africa. Currently, e-commerce is treated as general cargo, hence the need for an alignment with customs to ensure e-commerce is fast-tracked."

Given the global scenario, it may be 2024 or even 2025 before full freighter aircraft capacity (pre-Covid levels) is restored to the Africa market. "That being said, given the current slowdown in air trade between Asia, Europe and North America, some freighter operators may deploy their “excess” freighter capacity on “north-south” markets like Africa to/from Europe and/or Asia."

The Africa-domiciled freighter fleet is small, and the major aircraft manufacturers see demand for 80-100 freighters, mostly in the narrowbody gauge. The upside, due to the nascent expansion of e-commerce networks, may be considerable, the report said.

"Astral will continue to expand to new markets such as Israel, Saudi Arabia and Turkey in addition to planned expansion into China over the next one year. With the arrival of the B767-300F in 2023/4, Astral will be able to offer new solutions to clients," concludes Gadhia.

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