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A generic framework for context-sensitive pricing

in air freight industry
Pushpendu Sarkar and Pranav Saxena
Introduction
With the emergence of global supply chain, air freight industry has become increasingly critical for
maintaining supply chain responsiveness. Air freight can handle almost any type of goods from
valuable items to hazardous material. High value goods like pharmaceuticals, precision
instruments, perishable items (like frozen fish in dry ice) etc. are typically shipped using air freight.
This is the most value intensive mode of transport hardly 2% of global tonnage is handled by air
freight but the combined value of the transported goods exceeds 30% of international trade.

Air freight is inherently expensive shipping high-value cargo in a fast, safe and time-bound
manner comes at a high cost. Capacity comes at a premium. Specific handling requirements,
packaging instructions, expedited delivery etc. further hike the bill. Air freight is also heavily
impacted by aviation fuel price fluctuations. Given the high cost of air transportation, the survival
of a LSP depends upon its ability to strike a favorable rate agreement with the carrier and to
identify the best rate for a shipment.

Freight charging in air cargo

To understand freight charging, it is necessary to have an idea of how the air freight industry
works. On one end of the spectrum are customers (shippers) who need to send consignments to
other customers (consignees). On the other spectrum are carriers who provide air delivery from
airport of origin to airport of destination using own or subcontracted fleet (e.g. Lufthansa cargo)
for shipment. The LSP or the freight forwarder is the intermediary who co-ordinates the entire
shipment. So the LSP may pick up the consignment from the shippers warehouse, provide
temporary storage in a CFS, consolidate it at a gateway, load onto an airplane and repeat the
entire process at destination. The LSP may charge the shipper for the shipment as per the
customer rate contract or on the basis of actual execution cost. The LSP would pay the carrier for
the air shipment as per the freight rate contract.

Air shipments are moved either as loose cargo or as containerized cargo. The container in air
parlance is known as ULD. These are relatively small containers (compared to ocean shipments)
with pre-defined volume, weight and tare weight specifications. A ULD can be loaded either in the
upper deck or lower deck and this lends additional complexity to the loading. The specifications
depend upon this classification as well. The freight charge is calculated for the loose cargos and
ULDs in the booking and this is where the cookie crumbles

Freight charging in air freight industry follows complex rules for context-driven cost calculation.
The rates come in multiple variants ULD rates, rates for general cargo, commodity specific rates
etc. with multiple weight breaks. There may be rate dependent rates (e.g. class rates).
Furthermore, the applicability of a particular type of rate may be contingent to the cargo type and
shipment conditions in the shipment order. So a containerized cargo (or ULD in air parlance) may
be charged using ULD rate or loose cargo rate (GCR) depending upon the shipment conditions and
contractual agreements.

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

Air Freight rates: Some insight

As mentioned in the previous section, a ULD can be charged either with ULD rates or with loose
cargo rates. Lets explore these individually.
Loose Cargo Rate:
The loose cargo rate is normally a weight-based rate with weight breaks. A typical example would
be:

So any cargo over 100 kg would be charged 3 USD/ KG whereas a cargo exceeding 300 kg would
enjoy a lower rate of 2 USD/ kg. So this rate structure offers lower rate at higher weight and thus
promotes consolidation. But theres another aspect to it which is known as break-weight. This
determines whether it is more economical to charge the consignment on the actual chargeable
weight or the next weight break. So for example, if the consignment weight is 280 kg then it is
better to declare the weight as 300 kg as this would fetch a lower rate and subsequently a much
lesser charge.

The following table shows some representative loose cargo charge over a busy air route for a wide
range of weights. The numbers in bold show the effect of weight break. So freight charge works
out to be 2934.58 HKD for 125.94 KG if weight break is applied; which is considerably lower than
3351.31 HKD (the linear charge on 125.94 kg).

The accompanying graph brings this out more clearly. The peaks in the graph indicate potential
trade-off zones. For example, the linear freight charge beyond ~ 60 kg is costlier than the next
weight-break charge and that offers an opportunity for break-weight calculation

Fig1
ULD rate
ULD rating is more complex than loose cargo rating. The weight capacity of a ULD is rated in a
step-wise manner, i.e., ULD rating is a step function. Lets assume that a particular ULD has a net
capacity of 800 KG. The carrier offers a flat charge of 9000 HKD for any weight up to 460 kg loaded
in it. Any incremental weight after 460 kg is charged at 14.9 HKD per kg till the chargeable weight
reaches 727 kg. A flat charge of 11834 HKD is levied at 727 kg. A quick computation would show
that the flat charge at 727 kg is less than the linear charge and here lies the opportunity for
optimization. The following table and the accompanying graph validate this assumption. For

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

example, the chargeable weight of ~580 kg is the inflection point where the next weight-break
charge becomes more attractive than the linear charge.

Fig3
ULD vs. Loose cargo rating : optimization opportunity
Having examined loose cargo and ULD rating individually, lets now explore how they compare
over a relatively large weight distribution. A comparative charge snapshot is shown in the table
below. The accompanying graph indicates that loose cargo rating is more cost-effective for
relatively low cargo weights but ULD rates win by miles when it comes to high cargo tonnage. Not
surprisingly, consolidated cargo is generally charged with ULD rates.

580
60

Fig4
The inflection point where ULD rating becomes more economical than loose cargo rating comes at
about 400 KG. Lets now crystallize the key insights:
1. Weight breaks in loose cargo rating provide charge minimization opportunity locally
2. Weight breaks (Pivot Weights) in ULD rating also provide local charge minimization
opportunity locally
3. ULD rating becomes more economical than loose cargo rating beyond a cargo weight. Lets
call it the inflection point

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

A standard approach to arriving at the minimum freight charge for a ULD could be to compute
both loose cargo and ULD rates and take the minimum. But this is a wasteful approach,
considering that one of the calculations would be discarded. Furthermore, it does not make use of
the intuition that an inflection point exists.
An alternate approach would be to train the system in solving a classification problem given
certain characteristics, should a cargo be charged with loose cargo or ULD rate. The following
section discusses about a possible framework that builds upon this approach

Airfreight charge calculation problem:

As mentioned, in the previous section, there are 2 categories of problem for airfreight rating1)
long range rating yielding into contract. In this carrier negotiates rate with forwarder, often this
rates are less that TACT rate proposed by IATA for OD pair. 2) Operational rating is the mechanism
where forwarder is trying to find the best rate out of an execution document (also called air
booking).
Rating become interesting as forwarder has booked capacity with carrier over a period of time ,
while carrier has offered him context specific contract rates ;e.g. ULD ,GCR and SCR. At the point
of the contract negotiation, actual demand is not known to carrier as well as forwarder. Demand
information is private to forwarder and he uses this to get best operational rating within the
contract framework for the sake of example: in loose cargo booking, 2 items are 60Kgs of item (
commodity1), and 40 Kgs of general cargo. Total weight of booking is 90Kg.
<=45 <=100Kgs
GCR 1 1.5
SCR 0.8 2
Forwarder will use the private information and would like to relax some of the rating constraint to
get the minimum rate. He will rate SCR for first 45Kgs and GCR for next 45 Kgs.
45*.8+45*1.5=103.5$, compared to 45*.8+ 5*2+40*1.5=106$.
Forwarder and carrier can negotiate contract in case of one of the party using private information
using sensing game (4). Also, forwarder can minimize cost during execution by intelligently
building the booking given random demand with random attributes with multistage flight schedule
(5) .
Focus of the current paper is operational rating, while booking is already given. We have provided
3 frameworks, which can help forwarders to optimize the cost in a booking. First framework is
based on machine learning and trying to give insight to rating agent on weight range and relevant
rate tables to use for rate calculation. Second framework models the whole problem as recursive
dynamic program and come up with heuristic to calculate near optimal cost in a booking. Third
framework is fast greedy heuristic to find near optimal solution on a booking.
Air freight charge calculation framework1: An adaptive learning approach
In this section, we outline an adaptive learning approach. For this purpose, we will first generate a
learning set of input features. These input features are cargo characteristics like source,
destination, carrier, weight etc. that impact the decision of charging the cargo with either loose
cargo or ULD rate. There are potentially multiple such features but we would only consider the
following for the sake of simplicity and brevity airport of origin, airport of destination, carrier,
ULD rating type and weight.

The learning set is a collection of actual output based upon actual input values. The actual inputs
are feature values that can be extracted from a rate table. The actual output is the type of rating
(Loose cargo or ULD) that minimizes the calculated freight charge. So the learning set gives exact
values.

The training set is fed to the adaptive algorithm. The job of the algorithm is to generate a function
that would map the input features to an output value. Ideally this function would help us to
predict whether loose cargo or ULD rating would be more economical for new input sets.

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

Fig5

Lets say m = No. of input features

Xi = Input features of the ith learning example
Xij = jth feature value in the ith learning example (Lets assume X i0 = 0)
Yi = Output of the ith learning example (Loose cargo/ ULD rating, henceforth identified by 0/1)
= Set of parameters (weights for the corresponding input feature)
N = number of training examples
So X is a (m+1)x1 vector and similarly is also a (m+1) x1 vector. So we would use the transpose of
for parameterising X.Since this is a classification problem, we can potentially use logistic
regression method. We need to identify a function that would map feature inputs to an output Y
where 0 <= Y <= 1. One such function is a sigmoid function. The sigmoid function is of the form

g(z) 1 when z and g(z) 0 when z negative . At z = 0, g(z) = 0.5

Lets now define

So our mapping function becomes

We define the behavior of f(x) as the probability of y= 1 (Rating = ULD rating) for x parameterized
on
To find out the parameter value, we bring in a cost function. The cost is defined as the penalty in
making a wrong prediction of output value (Y) for some given values of X. So minimization of the
cost function would potentially lead us to the optimum parameter values.
Lets define our primary cost function as:

So if f(x) = 1 when y = 1 then cost = 0. But if f(x) 0 when y = 1 then cost . So this indicates
that if f(x) = 0 (which implies P(y=1) = 0) but y = 1 then the algorithm is penalized with a very high
cost
Finally, we define the logistic regression cost function as

Once we minimize the cost function using some advanced optimization technique line gradient
descent, the parameter values () would be calculated. These parameters can then be used to
classify new input sets. Based upon the classification, the freight calculation logic would directly
calculate the charges.

Air freight charge calculation framework2: Dynamic Pricing

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

Dynamic programming is an optimization approach that transforms a complex problem into a

sequence of simpler problems; its essential characteristic is the multistage nature of the
optimization procedure. Air freight rating problem fits aptly in DP paradigm. System has to find
the optimal price (minimum cost), given various states ( type of rates available), while there is
flexibility available to select or deselect an attribute to price. Also, DP helps in reinforced learning,
which can be used for pricing in a complex environment. Using DP, we tried to find the optimal
solution for original stage state network of rate tables and then save the results as value table.
We
Assumption:
We assume single stage, single flight in the booking.
We assume linear or step function rates for aircargo,
All the rates are 2 dimensional,
We assume uniform unit of measure for rate ($)and chargeable weight ( Kgs)
Cost function is increasing function in weight
Breakweight is out of scope for the strategy
Notations:
ODij =source and destination pair or arc in location network. I={1n},j={1..m}
Dijb=Total demand booked in the booking for OD pair with service level b
b={priority, regular}. Attributes I,j and b comes from standard booking.
dijc= is the demand at line item level in the booking. C represents various characteristic of the
items.
c={C1, C2,C1+b,C} e.g. C-denotes commodity code, while b denotes the service level
Dijb= , total demand for booking is sum of item demand.
ijT,R(W) =is the cost function
Where T =Type of Rate {Tact, Contract}, and R={ GCR,C1,C2,C2-Priority..}
W=1..M is the weight range
Nx =Node {x=1X}
ijT,R =Inflection Points, where rate changes or there is intersection of cost curves
ijTR= Distance between to cost function at a point.
Problem is to find the minimum cost selecting attributes which contribute to minimum cost.
Assume that there is flexibility to relax few of the attributes. e.g. by not including particular
commodity code or not respecting contract rate but by charging only tact rate, given these
relaxation provides minimum cost.
Problem is formed as shortest path problem and solved using backward recursion in dynamic
programming setting. Then heuristic is providing to find the near optimal solution based on the
random demand with random attribute in a booking.
Step1: Find the stages in the problem
For Weight range (w=1.W)
Stage S {1s} can be found by some simple analytics. This process also helps in finding the
node Nx in a stage.
Step1.1: Find the weight breaks in Cost ijT,R for T,R. These are by default the stages.
Step1.2: Find the intersection points of the cost curves ijT,R for T,R. These are the break even
points present in more than one curve
Step1.3: Find the starting and terminal values. Terminal weight is the highest weight possible in
the real business( based on the historical demand).
Step1.4 There are s stages starting with weight=1Kgs and terminal weight of W.
Step 1.5: Node generation : generate imaginary starting and terminal node N0, flows from this
node to nodes of first stages is 0, similarly terminal node Ny, for which flows from s-1 nodes will
be 0.
Step1.6: For every stage S={1.1}, find the cost Cij TR ijT,R

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

2.5
2 Tact Rate GCR
1.5
Tact Rate GCR
1
0.5
Contract GCR
0
0
10
20
30
45
60
80
100
120
140
Fig6
Step2: Backward Recursive method to find the lowest cost option. Basic issue is that at any stage,
user would like to find the lowest possible cost for the booking. This is the cost which can be the
combination of various rates for different weight ranges, see fig7

Fig7
Problem can be formulated as network flow problem where each node (state) is the location and
distance is the cost to move to the next location (next node) as in Fig8.

Fig8
Formulation:
Stage: as defined above stage are the key inflection points in the rate combinations
State: is the node in a stage represented by Ny;
Decision variable: XN is the node where to go for lowest cost
Objective function: Minimize total Cost
Fn(S,Xn)=Cs,Xn +F*n-1(Xn)
F*n(S)=Min Fn(S,Xn) and Xn* is the corresponding node ( or Vector Ny or ijTR N (Ws))
Step3: Save all the possible moves from the node in the value table.
Step4: Order comes with different chargeable weight and attributes. Different value of Dijb and
dijc.
Step 4.1: Only relevant cost functions are activated ( ijTR ) based on available attributes in the
order. All the relevant nodes Ny-will and stage will be selected for evaluation.
Step4.2: assign the current Dijc to stage S-1, find the nearest stage S-1 from already available set
such that WS-2 <Dijc. Regenerate the nodes for stage S-1.
Step4.3: Find the lowest cost demand mix. Check if the best value (minimum cost values are still in
the set of each stage) then do forward recursion from Stage S-2 to S. Otherwise go to
Step4.4: This requires already generated DP run. We call this a sub run as few of the values will not
be available as those attributes are not applicable for this run. This will give quick minimum cost
for the booking.

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.
 CONFIDENTIAL. Limited circulation. For review only.

Conclusion:
Operational air freight cargo rating depends on many attributes (e.g. service levels, commodity
code and handling code), rating also depends on whether cargo is packed in ULD or it is treated
loose. Above strategies impacts planning as well rating in a booking.
As mentioned in the paper, forwarder can optimize the cost in booking by using various strategies
e.g. inclusion and exclusion on various attributes, consolidation etc.
Paper provides the depth and breadth of the problem and gives practical insights which can be
used by forwarders.
Forwarders can use either simple analytical tool or advance solution to find the optimal cost.
We have also experimented with machine learning models and dynamic programming which can
come handy for multi-attribute and context sensitive pricing.

References:

1. Reinforcement Learning: An Introduction (Adaptive Computation and Machine

Learning) by Richard S. Sutton and Andrew G. Barto (Mar 1, 1998)
2. http://cs229.stanford.edu/materials.html
3. Operations Research: Applications and Algorithms (with CD-ROM and
InfoTrac) by Wayne L. Winston
4. Pranav Saxena: Sensing game during capacity negotiation in air cargo industry.
Working paper
5. Pranav Saxena, Pushpendu Sarkar: Building optimal booking in multi attribute
price and capacity constraint environment in air cargo. Working paper.

Preprint submitted to 2013 IFAC Conference on Manufacturing Modelling,

Management, and Control. Received November 30, 2012.