A study on airlines' differentiated cargo service strategies

Abstract

This study analyzes how an airline operates differentiated cargo services to meet shipping demand for different goods so as to enhance its service level, air freight demand, and total profit. The shipping alternative choice model assumes shippers with different demand characteristics choose the alternative with the lowest transportation and inventory costs between express and standard shipping services offered by different airlines. The study then formulates airline cost functions with respect to providing standard and express services. Furthermore, the study explores demand-supply interactions and constructs a mathematical programming model to determine flight frequencies and shipping charges for standard and express services by maximizing the object airline's total profit. The results show that those shipping high-value freights tend to select express shipping services and, for the object airline, operating differentiated cargo services rather than the current standard services can raise its market share and total profit by 19.4% and 8.6%, respectively. Moreover, for perishable goods stored in lower temperature-control devices, the charges should be higher. The results also show that not only airlines, but also shippers, can markedly reduce their costs and enhance their competitive advantages with express shipping services. (C) 2012 Elsevier Ltd. All rights reserved.