Abstract:
Forecasting is an important aspect in airline industry that enables airlines to manage airport operations effectively. The enhanced competition forces airlines to decrease the price and high load factors allow charging high fares. In managing all such factors forecasting plays immense role. Air cargo is the most energy intensive transportation mode and in order to keep the prices lower accurate forecasting is important. Predicting an exact level of activity for particular future time is challenging, accurate forecasting enables airports to develop their full potential therefore different demand forecasting techniques have been developed. Ti has been encountered that due to lower oil prices and better economic conditions; air cargo industry will continue to grow and this growth will be double in rate until 2033.
Introduction:
Forecasting is an important aspect in airline industry that enables airlines to manage airport operations effectively. This is the truth that each airport is unique but some elements of every cargo are common. There are several reasons due to which forecasting of cargo is important such as budgeting and planning. Airlines that are able to forecast the future traffic accurately can better analyze the needs of their customers and therefore are in better position as compare to their competitors. Forecasting is not an easy task and some principal in order to have accurate forecasts have been defined in books.
This report aims to discuss the demand fore casting techniques used in air cargo and analyze the importance of demand forecasting. In order to gain the objective, paper has been distributed in four portions. First section of the report discusses the existing trends in air cargo industry and reasons to increase the demand. Second section is based on the importance of demand forecasting for air cargo industry. This section elaborates the demand fore casting techniques and in forth section, expected future trends and growth of air cargo industry has been elaborated.
Air cargo as a transportation mode:
Increased globalization has made the transportation choices more complex and it has been determined that in last few years the demand of air transportation has been increased and marginal fuel efficiency is decreasing. The reason to increase the demand of air cargo is the timely delivery of time sensitive goods over the large space; it is considered the most energy intensive transportation mode (Reuters, 2015). Air cargo is a multi-model mode of transportation because things are brought at airport thorough trucks and taken away by trucks from arrival airport. It has been analyzed that in future the air transportation mode will contribute in climate change more rapidly as compare to other mode of transportation. The increasing demand of air transportation demands companies to maintain the active aircraft fleet that can define at any given time an upper limit capacity in their operations. The enhanced competitiveness forces airlines to decrease the price and high load factors allow charging high fares. Here the management of supply become crucial to maintain competitiveness and charge high fares; airline control supply through demand forecasting. The basic airlines’ cargo strategy is the maximization of revenue that has been earned from freight forwarders by selling the capacity of cargo; again in order to maximize the revenue it is essential that company can gain profitable margin over the operating cost of cargo (Versnel, 2014).
Importance of Demand Forecasting For Air Cargo Industry:
Forecasting cargo demand and future passengers are the most important factors for airport planners in order to take accurate strategic and operational decisions; several researches have been conducted in this domain inn last few years. For immediate planning on operational basis, it is essential to have short run forecasts and for the sake of strategic decision-making - such as major investments in order to construct the new project or for the expansion of airport – long term forecasting is pivotal. Demand forecasting is important due to green gas emission and energy consumption reasons (Wadud, 2014). Airlines for building the strength of their services need to openly address and identify the improvement potentials in passenger business (Lufthansa, 2014). Predicting an exact level of activity for particular future time is not an easy task; in order to be competitive and cost effective, proper forecast preparation is essential. Forecasting of traffic is an important issue in order to analyze the market risk, to predict financial profitability and losses, and to understand the demand growth of airports for the development of management strategy. Accurate forecasting enables airports to develop their full potential through customers’ needs anticipation that in result enables carriers to enhance their traffic share of air cargo worldwide. Second, the major factor that costs airlines is the prices of fuel, from the year of 2004 to 2012 these prices has been increased by the ratio of thrice. The demand forecasting enables airlines to forecast the fuel due to which airlines manage to be stable for next few years in term of pricing.
Demand forecasting techniques
There are several techniques that are used by companies for demand forecasting such as judgmental forecasting technique, time series forecasting, gravity model, and hybrid forecasting (Hellingrath & Cordes, 2015; Hwang, 2014). In last few year after knowing the importance of demand forecasting some more efficient forecasting techniques have been taken place in market (Claveria, Monte & Torra, 2014); on the basis of research it has been analyzed that most common demand forecasting techniques that have been used in air cargo demand forecasting include time series modeling, market share forecasting, econometric modeling, simulation modeling, and simple growth rate modeling.
Time series modeling: According to time series technique, historical trend of time are used to forecast the demand of air cargo. This is the most frequently used method in airlines for demand forecasting. Generally, the time series based data can be described by cyclical effects, seasonal, and trends effects. In such methods, time series of data that is historical is analyzed based on specific market or airport to determine the growth trend. The growth is expressed in term of compound average growth rate; multiple computer software programs for example excel and other are used to develop the historical line of trend (Onder & Kuzu, 2014).
Market Share Forecasting: Market share forecasting is a technique through which demand forecasting can be done; through this approach airport, activity is projected as percentage of more readily available and larger aggregate forecast. According to this approach recent forecasted results are based on annual growth rate are reviews and best applications are determined. The market share forecasting method is based on the compiling of growth rate of national forecasts such as current outlook of Boeing, global market forecast of airbus, and aerospace forecast of FAA. After preparing the reports, the input of stakeholders is taken to include factors that were missing in prior forecasts.
Econometric Modeling: Econometric modeling is useful in determining the overall significance of original economic factors such as gross domestic products. This method serves with forecasts that are associated to the expectations of economic factors. Moreover, this is the method that is frequently used to determine the long term and short-term demand of regional markets. Through this analysis, the relationship between cargo traffic and economic factors is analyzed; such forecasting techniques` are used to show the effect of economic factors on cargo traffic. In order to conduct such forecasting it is essential that independent variables are specified, data is collected properly, statistical model is selected , model’s ability is determined accurately, model is used to derive forecast, results are evaluated in the context of traffic pattern that is historical, and comparison is done with benchmarks such as FAA and TFA forecasts (Euro Control, 2015).
Simulation Modeling: Is a technique or model that is used to forecast the demand of air cargo; through this technique forecast, modeling is done by utilizing the airline expansion capacity. This is the model that provides airlines with reliable forecasts and enables them to set scenarios to test alternative decision and assumptions. This method helps air cargo industry in balancing the demand and capacity through forecasting the demand of future that is based on pessimistic and optimistic projection to make a decision that how and when the capacity expansion of airport should take place (Suryani, Chou & Chen, 2012).
Simple Growth Rate Model: This model does not rely on the historical data analysis; the growth rate of demand of cargo is externally produced. For example, the growth rate of goods being transported through air cargo makes sure that the utilization of air cargo will increase; as it has been told that airline industry is highly associated with economic growth. The growth of air cargo industry can be analyzed through the growth rate of economy; oil prices are constantly declining and due to decline in oil prices, the growth rate of air cargo industry has been increased 4.3 to 4.5 percent in 2015 as compared to prior year (Zacks Equity Research, 2015).
Future Potential of Air Cargo
In order to be competitive and for the supply of effective and efficient service accurate forecasting is important and forecasting methods allow organizations to analyze the future demand and utilize their full potential in order to capture the market share. After making an analysis of importance and defining the forecasting technique is has become pivotal to analyze the future demand of air cargo traffic. It has been determined that after the two year of slight and negative growth in air traffic, demand of air cargo transport increased in 2013 and this growth continued to strengthen (Boeing, 2014).
(Boeing, 2014)
Economic growth is highly associated with the demand of cargo industry. The economic downturn reduced the revenue of cargo industry and the air traffic dropped by 13 percent through 2009, but in 2013 the industry gained growth that has growth rate of 4.4 percent in 2014 (Burndon, 2014). Due to recovery from economic downturn, it has been determined that short term growth rates have been exceeded the long-term forecast rate of GDP, which indicates that the average annual growth rate of world’s economy through 2033 will be up to 3.2 percent that elaborates the growth of air cargo (Boeing, 2014).
(Boeing, 2014)
It has been expected that the air cargo will be more than twice over the upcoming 18 years and world traffic will increase up to 512.8 billion RTKs until the end of forecasting period; forecasted data revealed that the air cargo traffic will grow by 4.7 percent on annual basis through 2033 (Boeing, 2014). Asian market will be a leader and will lead to all other markets; in Asia, the demand of air cargo initially started to grow throughout the second quarter of 2013 as improvement occurred in the economy of the world; an increase in demand was encountered and demand of cargo keeps on growing in 2014; the growth rate increased from 6.8 percent in 2013 to 16 percent in august 2014 and according to forecasts it will grow constantly and will turn into long term trend (Boeing, 2014)
It has been determined that international airfreight will cause to force the world’s air cargo growth throughout 2033.the growth of airline varies by service type and airline domicile and growth in market share of middle east and Asia has been witnessed as compare to other regional markets. More than 80 percent share of the air cargo traffic of the world is catered by North America, Asia, and Europe. However, overall analysis represents that the air cargo industry will continue to grow at rapid pace due to decline in oil prices and improved economic condition and enhanced globalization. Airlines in order to utilize their full potential and have sustainability require having accurate demand forecasts that will enable them to balance the supply and demand and serve them with competitive advantage.
Conclusion:
Analysis revealed that the reason to increase the demand of air cargo is increased globalization and it is a multi model mode of transportation. It has been analyzed that in future air transportation mode will contribute in climate change more rapidly as compare to other mode of transportation. Forecasting is important for air cargo industry due to several reasons such as in order to be competitive and utilize the full potential airlines must have ideas of demand. For operational planning short term forecast is pivotal and in order to be effective in strategic decision-making airline have to have long-term forecasts. Accurate forecasting enables airports to develop their full potential and forecast the fuel efficiency that has impact over the pricing of airline; pricing is the major factor that drives the competitiveness. There are several demand forecasting techniques that are used by organizations, but the most common that are used by airlines include market share forecasting, econometric modeling, simple growth rate modeling time series modeling, and simulation modeling. Economic growth and demand of cargo industry are highly associated; in 2008, the decline in demand of cargo industry occurred due to economic downturn, but in 2013, this decline started increasing speed and now it has been expected that the air cargo will be more than twice over the upcoming 20 years.
References
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