DELTA AIRLINES

The Costs and Benefits of Delta Airlines Operating a Dedicated Air Cargo Fleet

The Costs and Benefits of Delta Airlines Operating a Dedicated Air Cargo Fleet

Chapter II: Literature Review

Introduction

Air cargo plays an important role in global trade. For example, about 30% of internationally traded merchandise, in ad-valorem, is transported by air for the US and Japan, the largest two economies in the world (Yamaguchi, 2008). In particular, due to trade liberalization and global logistics, the air cargo industry has been booming for the past decade, and recent forecasts are projecting for this to continue in the future. For example, one aircraft manufacturer estimates the average yearly growth rate in terms of RTK (Revenue Tonne-Kilometer) to be as high as 5.8% for the next twenty years, considering that the growth rate of the worldwide GDP (Growth Domestic Product) is only about 3.2% (Boeing, 2008).

Air cargo is an operation-intensive industry, involving complex procedures and many players, and airfreight forwarders play an important role in the whole process. They act as an agent for shippers to book the cargo space from airlines and may provide diversified services, from customs clearance to integrated international logistics. From the viewpoint of airlines, they are the major customers as well as the source of demand. Unlike the air passenger business with well-developed computer reservation systems (CRS), the process for selling air cargo space to freight forwarders is non-standardized and complicated. Human intervention is usually required for most of cases, and decisions are usually made based on experience, without much decision support provided by optimization techniques and information technology.

One critical operational issue faced by airlines for air cargo is the implementation of revenue management (RM). In 1978, the Airline Deregulation Act in the US greatly changed the environment of the air market. The pre-existing airlines understood that they had to segment the market and carefully control the seat inventory shared by multiple segments. Otherwise, they would lose in the price war against the new entrants with low operating cost. For example, it has been estimated that American Airlines (the first airline to systematically implement RM) made an additional revenue of 1.4 billion USD for over a 3-year period around 1988 (Smith et al., 1992). In today's market it is very difficult for any major airline to operate profitably without RM, since according to most estimates the revenue gain from applying RM is about 4-5% (Talluri and van Ryzin, 2004). However, how to realize the basic concept of RM, selling the right seat to the right customer at the right price, remains a challenge.

Problem Statement

Is it feasible for Delta Airlines to operate a dedicated air cargo fleet?

Background and prior research

Basics of RM research development

The adoption of overbooking, an industry practice for decades, can be thought of as the beginning of applying the RM technique in the airline industry. Early research works in this area can be found in Rothstein (1985). However, since the characteristics of the potential customers are diverse, market segmentation becomes feasible and necessary in the post-deregulation ...