Lufthansa Cargo Ag – Capacity Reservation and Dynamic Pricing

Lufthansa Cargo AG – Capacity Reservation and Dynamic Pricing

1. How does air cargo differ from the passenger business in terms of revenue management? Which areas are more complex, which can be managed more easily?

Comparing the practices of Air Cargo- and Passenger Revenue Management, fundamental differences can be identified (Exhibit 1). On the one hand, Air Cargo Revenue Management (ACRM) can be managed more easily in terms of booking classes and routing, since Air Cargo product managers deal with a lower number of different products (e.g. General, Express, and Special) and there is more flexibility within the route network of Air Cargo. On the other hand, ACRM is essentially more complex in regard to freight dimensions (i.e. weight and volume compared to passengers only), booking type (one way vs. round trip) and capacity uncertainty (fixed number of seats vs. variable space for cargo). Moreover, cancellation fees are hard to enforce in ACRM, due to the low number of customers and resulting strong negotiation power from a small number of key accounts. In addition, significantly higher demand volatility and long term demand in Air Cargo leaves ACRM-specialists with more complex demand- and price forecasting procedures. Simultaneously, Air Cargo is also more complex in regard of show-up behavior, since cargo can be delivered in parts only, compared to the “one or no passenger”-rule on the passenger business side.

 2. What is the purpose of selling long-term capacity contracts? Does Lufthansa Cargo effectively reach its business and risk-sharing objectives?

The primary purpose of long-term capacity contracts is mitigating the risks arising from demand uncertainty and cancellation of contracts. As a solution to highly unstable demand, long-term capacity contracts generate a base-load for cargo carriers, reducing the risk of not selling free capacity and allowing for long time planning and demand modeling. Moreover, long-term contracts also decrease...