A Conversation about Air Cargo, the Next Frontier, Season 3, Episode 1

Travel podcast: A Conversation about Air Cargo, the Next Frontier, Season 3, Episode 1

Welcome to Season 3 of PROS Travel Podcast, The View from 30,000ft. In this first episode of Season 3, we explore the ins and outs of air cargo with PROS own Ricardo Pilon. What does the future hold for the industry as we aim for recovery from the pandemic, and will cargo become a sustainable, alternative revenue source for airlines?

You can listen to The View from 30,000 ft. on Apple Podcasts and Spotify. Or listen to the full audio version below.

Full Transcript

Aditi Mehta: Hello, and welcome to the third season of the PROS Travel podcast, the View From 30,000 Feet. I highly recommend you check out the first two seasons if you haven't already, this podcast is about digital transformation within the airline industry. This season, we're focused on the recovery of the industry from the pandemic and sharing how key strategies around digital transformation are still as important today. Now, sit back, relax and enjoy the flight. Hi, everyone. Welcome back to another season of The View From 30,000 Feet. My name is a Aditi Mehta, and I'm the host of this show....

Aditi Mehta: Last season, we focus on big and small structural technology related changes that airlines are undertaking to drive digital transformation. A lot of it has fundamentally shifted in the airline industry in the past few months. So the next few episodes we will look to focus on what this change means for airlines, what they should focus on and how digital transformation is still a key pillar for driving recovery. Today I have with me, Ricardo Pilon, senior executive for air cargo here at PROS. Ricardo has a rich history in the airline industry, and I'm very excited to have him here to talk about the relationship between air cargo, and passenger air, and how airlines can be strategic and sustainable in their recovery. Welcome Ricardo.

Ricardo Pilon:  Hi Aditi. And thanks for having me.

Aditi Mehta: Great. So let's jump in with, what's your background? How did you end up in the airline industry?

Ricardo Pilon:  Yeah, that's always a good question. Well, I was born in Curaçao in Netherlands Antilles and I was actually very often close to planes. And the reason why is my father ran a road construction company in the Dutch Caribbean, and that company also paved most of the runways at the various airports, including the one in Sint Maarten. So I was often allowed close to aircraft, and I think with a bit of international blood, I was inspired by aviation but also the mobility it represent. So after high school, I went to specialize in air transport economics and airline management. And I got a number of postgraduate degrees in various countries culminating in a PhD in strategic airline management.

Ricardo Pilon:  And then I went on to work for airlines. I was part of an airline startup in Canada. I worked for airlines. I later worked with airlines, assisted them as an independent advisor. And initially I spent a lot of time in revenue optimization, but over the years I moved into business model transformation, also restructuring transactions and business valuation, and then also became a chartered business evaluator and later professional and personal certified coach. So yes, I've been very active in this industry.

Aditi Mehta: Wow. That's a really amazing deep history within the airline industry. So what are your learnings from past crisis that have negatively impacted airlines? I know there's a lot of conversation that this is unprecedented. This is something new, which it is. But is there anything from your past that you've learned that can be applied to the situation today?

Ricardo Pilon:  Yeah, so I have been in the business for just short of 25 years, and that clearly is part of my education. And then from the people I learned in the industry, I also know historically what happened during crises in the past. But first and foremost, I'd like to always make the point that even though the industry represents mobility, the business is actually not that mobile, if you will. Now, what I mean is it's a very capital intensive industry, which has a lot of high fixed cost, also labor intensive. And is not as flexible to shifts in demand as one may think. So other than drastic moves such as grounding aircraft capacity that's not easily adjusted is actually very difficult. So also starting new markets overnight is not realistic, not only because there are startup costs to launching new markets, routes, stations and building routes. Simply if you look at them as business units, it takes time.

Ricardo Pilon:  Then on top of that, given the highly regulatory nature of civil aviation air services agreements, and traffic lights, these are not readily available and often airports are a constraint. So what we've learned is that we need more flexibility, and we actually need more leeway to cooperate when bad things happen overnight. Perhaps we need more leeway to consolidate in order to facilitate a faster and also a better balance between supply and demand. So apart from capacity, different business models are also impacted by and can respond differently to industry shocks, whether they are of recessionary nature or because terrorist attacks or pandemics like SARS and COVID-19 that we've seen. So global airlines with large networks, relying on hubs and feed traffic to build traffic density, they are more sensitive to crises that reduce the density. Particularly when, for example, the business travel completely drops, leisure and low cost carriers that rely more on point to point traffic are somewhat more shielded from these shocks depending on how they occur.

Ricardo Pilon: So if you look at the global financial crisis in 2007 and 2008 and beyond, low cost carriers actually capitalized on the opportunity to expand. They deployed modern aircraft, new aircraft, more efficient aircraft. They launched new routes that also drove away passengers from main lines with their heavily discounted fares. So what we actually witnessed during that crisis is that their average route length, so the distance flown increased and they also saw an increase in the total spend that their customers did per passenger due to attractive fares and salary revenue such as personal choices, seat, selection, baggage fees, et cetera. Now with COVID-19, the situation is completely different. When the industry essentially comes to a standstill, all the airlines are affected. All passenger and all forward bookings are effected. So now all of a sudden the priorities are fairly similar for all of them.

Ricardo Pilon: Number one, they have to stem the bleeding. They have to rationalize their cost where possible or ground aircraft, where they have to. Two, they have to resize the system. For example, by retiring less efficient aircraft to renegotiating leases or temporarily reducing the workforce. Three, they're looking at restructuring the financial structure by finding a better balance between equity and debt, but also raise funds for continuity. And finally, number four, they're all have to draft a blueprint for recovery and the associated business model that will support this recovery. So on that last point, most in the industry agree that not all travel segments will rebound at the same pace, which further depends on how also the underlying economy and its locomotive behaves. But there is an opportunity for the business at an industry level to collaborate more, more than when we saw coming out in previous crises. When aggressive overexpansion and almost guerrilla style fare discounts to steal market share really undermined profitable recovery. So at a reduced scale, the industry is expected to keep a tighter lid on the capacity.

Aditi Mehta: Right. You make some really interesting points. And I think some of it drives towards traditionally in this industry, there's been a lot of excitement around how can this industry transform? How can we be faster, more agile, more flexible are concepts like digital transformation, innovation investment, a thing of the past when especially leaders in the airline industry have to think about cost cutting measures?

Ricardo Pilon: That may appear so, but actually the innovation including digitization will continue to be of pivotal importance, especially for a successful and sustainable recovery also because they help reduce cost and generate basically new types of revenue. So as we are increasingly adding value also through the use of artificial intelligence, for example, to customize offers and meet new customer needs or new types of needs. The expectations are also that we need to manage them with regard to the fact that the offers need to be more relevant. They need to be more efficient, and it needs to be more custom made as to what people are expected when they shop online. So in fact, we're going to see more personalization and more customization and going to see new types of services that people are now looking to get with regard to, for example, safety.

Ricardo Pilon: So when we look at some of those priorities, first, and it may sound very basic, but it also relates to innovation and digitization. We need real time information about travel advisories that need to be incorporated into planning travel tools, booking engines, governments, and airports, but also airlines can work together to have the most updated information embedded online, but also through mobile platforms. And people expect to get more peace of mind and require this information to be available and up to speed. So second, it is clear also that the latest crisis has made many businesses and people even more agile, and more willing to adopt to digital ways of working. Planning, but also the purchasing of goods and services and communicating as we all do at work right now. So that means we can actually expect an acceleration in the integration of new services and goods that we previously did not buy online, even when it relates to travel and travel planning into those new travel planning tools.

Ricardo Pilon: So even the bundling of, for instance, travel and destination, not transport related, but destination related products. Personalization becomes not only part of the customer's desired product, but also the expected product. And it will become very a fair amount important. Now how all this is experienced also depends in part on how the planning part of that feels online. So again, the digitization part. Now to illustrate what people do doing the trips as part of an overall digital experience is important as well. So instead of, for example, looking at flights, hotels, and so forth separately. Lifestyle platforms that allow the planning of experiential trips and activities such as activities and museums, operas, wine tours, or any type of special interest in highly niche type activities become feasible as the suppliers get to know individual customers better, but it still has to be aggregated. So if you apply this to business travel, for example, it can be specific preferences for efficient stays, and meetings, and organization of meetings.

Ricardo Pilon: But this is typically quite outside the scope of airline marketing today, but it won't be anymore. An airline should prepare for new types of airline marketing services as an extension of this purely transport related product for when the economies rebound and people are able to travel again. So all this means the content aggregation, personalization, and loyalty will have to be packaged. And it has to be very easy to interact with from a customer's perspective. And those who will master this digitally, those will be the ones to set new standards. Finally, and that's the third point. The COVID-19 pandemic has also revealed something we thought to be unrealistic and actually became realistic. And it's virtual travel. So through, for example, virtual and augmented reality, we can have people experience foreign trips or destinations without traveling by air.

Ricardo Pilon: And I'm not talking about a sneak preview. So this means that by building special studios or who knows even in stationary or part aircraft, we could create new value propositions. Now this could never be deployed on a wide scale and it will never replace air travel, but a segment or a small part of the market would consider this as an alternative. And that could become in part a small new market as well. In fact, it may even be a response to some climate concerns, to some extent. So for example, some people today are enjoying virtual safaris in Africa through virtual technology. And there's no reason why airline marketing could not extend beyond to what it has done in the past into what I would call all inclusive offer management and optimization. But anyway Aditi, first things first.

Aditi Mehta: Right. It sounds like a lot of different areas that an airline could focus on. And some of the stuff, like you mentioned is items that they've talked about for a while now, is there any recommendation you would make in terms of what to prioritize, what to focus on first?

Ricardo Pilon: Yes. There is. What I see and also what we see in the business going forward is that the priorities are around basically three pillars. The first is customers, second is offer management and third business operations. Now I recommend airlines to follow five fundamental pillars of initiatives in those three areas. I abbreviated that as SADAH, which actually happens to stand for most fortunate. And this is a coincidence when I found out. So SADAH and it's stabilize, automate, digitize, aggregate, and harmonize. Now, number one, stabilize. So what I mean is the priorities really in these areas are first to stabilize and improve the accuracy of informational tools, the tools to communicate to and connect with the market and the customers by aggregating all content in all channels. Second is to automate these processes and processes to reduce heavy and labor intensive or slow tasks to completion, to reduce costs, number one, but also related to passenger handling, especially if we're going to see changes at airports related to safety and health checks and so forth.

Ricardo Pilon: Third, digitizing existing, but also to add new value added processes. So digitize existing processes and new processes focused on increasing the value for customers. But also stimulating the incremental spend on relevant items, such as safety, security, insurance, personal space, personal health hygiene, and then maintain all these and many numerous digital touchpoints that we have with our customers as airlines I would say, almost like a concierge. Fourth of the SADAH is aggregate, which is invest in new digital platforms that aggregate these various business functions and how they operate within the overall business model. That allows airlines to interact with customers not only to improve the relationship, but to better align their expectations, and also relate to the purpose of travel and the travel related support and purchase options combined with loyalty because we need to understand each individual customer. And he or she will have a different behavior at different points of the trip, but also the kinds of trip.

Ricardo Pilon: So that is the support that passengers need at destinations, may be very different than the types of support we expect when it's related to purely transport. So we can look at aggregating content that includes everything that is not transport, or it's not related to hotel stay. So this opens up all sorts of new opportunities. Then finally is the H of SADAH. So harmonize. And what I'm referring to here is to harmonize the practices of costs in airlines marketing, and airlines relationships as well. So that the offers that are being made or being marketed are also marketed consistently across the airline alliance so the cooperative airlines relationships, but also, and more importantly experienced consistently.

Aditi Mehta: Right. So I'm going to pivot a little bit, we've been talking a little bit more around passenger air, but your background, a lot of it is an air cargo. Can we talk about the balance that airlines right now have to strike between passenger air in cargo?

Ricardo Pilon: Yeah, so indeed. My career actually has been almost evenly split between air cargo and the passenger business, but in both cases, it involved business model related work. Well, speaking of the business models of the various airlines that operate in the air cargo market differ. So they differ in the extent to which they are considered more of a secondary, or byproduct that generates incremental revenue to fully fledged separate legal entities that have their own bottom line. Now this has an impact on how it's treated, but also which costs have to be covered and how the capacity is priced. So, whereas the let's say the global average of revenues produced by air cargo for those airlines that operate both on the passenger side, as well as cargo is around, let's say it's about 6%.

Ricardo Pilon: There are clear exceptions for some airlines it's a lot more like Lufthansa Cargo or Korean Air Cargo, in which case it's closer to 45% of total revenues produced by cargo. Now, a lot of this is related to the passenger network, the use of wide bodies, but also more so to the geographical location. And the home market they are in, for example, whether there's a lot of high value manufacturing activity or the density in those markets in terms of export. But the shipping community so those factories, they look at most of this capacity, the cargo space as commoditized capacity. So this makes pricing and sustainability in air cargo a bit, I would say wobbly.

Aditi Mehta: Right. And so you mentioned sustainability, so let's talk a little bit more about that. Can cargo be a sustainable alternative revenue opportunity for airlines going forward?

Ricardo Pilon: So absolutely yes. Specifically also because it's often the fastest way of moving something of value either in terms of, well, dollar terms or because it will otherwise perish. But this is why market segmentation. So dividing up the market by looking at specific needs and adding special services for cargo, such as climatized containers for temperature sensitive freight is very important. But this differentiation also requires investment, which ultimately will produce a healthier mix of revenue, but it has to make sense and requires a certain level of a minimum scale in order to have density where you can do this. So for most airlines that are fortunate enough to be based in larger economic catchment areas, yes, there is definitely a more opportunity to differentiate the market. But air cargo itself will always continue to be a valuable service to global community.

Aditi Mehta: So in general, how has this air cargo piece of the business been like in the past. And has it changed or what is the situation currently with the COVID-19 pandemic?

Ricardo Pilon: So in the past, through the crises, we have seen sharp drops in demand. Sometimes between 15 to 35% followed by obviously sharp drops in capacity. And then we have seen the early retirement of aircraft. We've seen bankruptcies of freighter operated... But this is the first time that a pandemic combined with economic headwinds affect the passenger business more than the cargo business. It is furthermore also pretty much shielded from all the necessary investment, and costly modifications to services that has to be put in place to allow a successful recovery. So cargo doesn't need social distance. It doesn't need mouth caps, it doesn't need the cleaning of inflight screens, armrest and so forth. But interestingly enough because of this lack of capacity that happened during the grounding or the temporary grounding of aircraft, air cargo is lacking space.

Ricardo Pilon: So airlines have been very agile and shift to deploy passenger aircraft as freighters or passenger freighters either by having cargo strapped in the seats in the cabin, or by stripping seats completely and using some passenger aircraft for cargo on the main deck. So passenger deck and on top of the cargo that is traditionally carried in the belly holds of passenger aircraft. So we've seen airlines respond very creatively, very swiftly to an opportunity, but also to ensure business continuity, to support the shipping community, not only for urgent shipments for medical requirements, but also to support the global economy and contribute it's part.

Aditi Mehta: Right. That's very true. I definitely saw over the course of last couple of months, a lot of emphasis on the great things that airline cargo has been able to do to support their communities through cargo. Going forward what are the areas that airline cargo can capitalize on, and what are areas that there is still room for improvement?

Ricardo Pilon: So most of the opportunities are actually more on the commercial side. On the operational side, airlines have invested heavily in the last 20 years in technology and warehouses and equipment. And it's a very entrepreneurial business where every cent matters. So it's a very efficient transportation business. So the significant room that exists for improvement is in more automation on the commercial side, and I mean the commercial functions. Which would allow cargo managers to spend more time on, for example, gaining realtime insights into the business rather than executing some of the day to day more operational administrative task. So the information and the intelligence today is there, but the way it's gathered is not quickly enough in terms of making speedy decisions.

Ricardo Pilon: It's also not deep enough or there's not enough time to respond. So automation using more science that can drive for example, drive, but also guide pricing capacity and network decisions that take into consideration specific customers, as well as their loyalty are crucial. And also to be ahead of the competition. It's one of those items that makes a difference. In fact, as they say, the crumbs are left for those that still need to depart.

Aditi Mehta: That's really interesting. And I think this leads to some of the concepts that I've heard you talk about previously around commercial optimization. Can you talk a little bit about what you mean by commercial optimization and how it could help cargo companies?

Ricardo Pilon: Absolutely with pleasure. So in the past, we've often used terms as pricing, pricing optimization and revenue management as functions that support some decision making that lead to a more optimal mix of the shipments or passengers we carry on board. So it looks at the profitability per passenger, and basically segments capacity and allows us to do some decision making with regards to what we except at which point of time in a booking cycle. But commercial optimization is a term that I used to refer to the fact that all aspects in the business need to be much better aligned by harmonizing the overall system. And when I say overall system, I mean with a big S. So by looking at all the different functions that operate with all the commercial functions within the overall business model and then supported by optimization technology. So essentially it is the point at which all departments like network planning, aircraft assignment, marketing, pricing, capacity management, customer management, and loyalty they are all using a platform where the overall logic combined results in maximized profit at a maximized equilibrium of loyalty.

Ricardo Pilon: Meaning you can, for example, instead of operating in silos where you could look at optimized pricing, if you look at a transactional level, irrespective of individual customers and how profitable they are for you in all the markets, and it's never the same for in one market compared to another. Then you have a very different perspective than if you look at the pricing optimization function in combination with the individual customers themselves, and then find a new optimized mix. It gives a much higher level of optimization, but also leads to consistency it leads to higher customer service and appreciation, and ultimately to a healthier mix of the bottom line. So this can only be done with new type of technology supported by science, or you have such deep insights that this will be done not being able to do manually anyways. So essentially it's aggregating or integrating all of those business functions into or onto a common platform.

Aditi Mehta: Right. And this is the part where PROS comes in as a company. And we definitely will have additional conversations and opportunities to talk about this with you, but what I also want to just leave some time to talk about is some of the current research that you're working on. I know you've published a book before and you're working on something in the near future, correct?

Ricardo Pilon:No, that is correct. But actually if you referring to the previous work, well, let's maybe talk about current work. The current work really involves the commercial optimization. So at PROS, we are investing in a modern platform for what I call commercial optimization, and it includes some of the elements we discussed. So pricing and commercial optimization, and we're in the process of adding modules onto that common platform that drive the digital commerce, but also allow this more aligned approach to all business functions. So that's currently what I've been looking at. So in addition to that in the last eight to 10 years, I've been heavily involved in helping customers and companies transform their business. And what I mean, my interpretation of that is we're not talking about necessarily change management, which is really about helping people and teams to complete tasks differently and create a new modus operandi.

Ricardo Pilon: But I'm really talking about change in leadership, which is about inspiring people to think differently and to see new ways of working that will benefit not only themselves, but also the company and the people they work with. So this is an area where I'm spending more time, not because I've been involved in this, but also based on the different things I have studied and been able to apply. And based on those different projects with customers, I've actually also been able to gather my comments and the lessons learned to draft some of the methodologies that work, and also describe in which situations they work. So we can help companies adopt ways that will facilitate the transformation that they need to go through before even just going through a technological transformation because they kind of go hand in hand. So we find this as a very important topic in what we do in these days.

Aditi Mehta: Yeah. That's really fascinating. I think we could have an entire podcast episode about change leadership with you if that's fine.

Ricardo Pilon: That would be very interesting, indeed. Yeah.

Aditi Mehta: Well, we like to end every episode of our travel podcasts with a travel question. Many of us are missing the days of when we were flying all the time or traveling and planning vacations. So in that note, would you like to tell us something about your most memorable travel experience?

Ricardo Pilon: Yes. That's a good question. There are many, but I remember I once flew from Hong Kong, but I flew to Hong Kong in 1996, just prior to the handover from the UK to China, I was completing my masters in transport management at Cranfield. And I flew from the old Kai Tak Airport to London Heathrow. And I had a friend with me and he insisted we would go to the flight deck he was one of those. Now he explained what we did to the captain and the captain actually insisted we chat for a bit and asked us to sit around. And well, we wondered why, but as he was explaining that within a few moments we would reach the snow covered caps of the Himalayas. And it was the middle of the night it was full moon and it was absolutely stunning, absolutely stunning. But he was a funny guy, he liked to boast around... And it was also the time he joked around saying this was not the time to have one or two OEIs, which stands for one engine inoperative.

Ricardo Pilon: Because he was explaining that obviously we had taken off maximum takeoff weight with lots of payload and fuel. So it was his funny way of joking around that this is not where we should be losing altitude. But I can tell you that the rooftop of the world was close enough for me to see, but it really was a memorable and a stunning image as well.

Aditi Mehta: I'm sure that was a breathtaking scene to see the top of the Himalayas.

Ricardo Pilon: Absolutely. Yeah.

Aditi Mehta: Oh great. Well, Ricardo, thank you so much for this conversation. I think it was a really great... In lots of insights all the way from passenger air, all the way to air cargo and commercial optimization. So we really appreciate you taking the time to talk to us. Thanks for listening to the PROS Travel podcast, The View From 30,000 Feet. Special thanks to our guest and our producer, Genevieve Todd. We hope you enjoyed this episode. If you have feedback, a burning idea or know of an industry expert we should feature shoot us an email at amehta@pros.com. That's A-M=E-H-T-A@pros.com. You are now free to move about the cabin.

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