Logistics managers with operations backgrounds and responsibilities typically leave finance to the accountants. Consider 3 logistics tracks of material, information, and financial. These different tracks often result in silos. When I taught International Supply Chain courses, I was very confident in the material and information flows and less so in the financial area. Fortunately, I was able to gain some knowledge and pass it along to my students through the text Global Logistics & Supply Chain Management published by John Wiley and Sons.

It has been said that accountants look back while managers must look forward. This article will identify basic financial terms and measurements relevant to logistics. The information is likely common knowledge for accountants and finance professionals.

Balance Sheet- snapshot of assets and liabilities at a particular point in time.

Income Statement- profit and loss for a defined period of time.

Cash Flow- where the money comes from and where it goes.

Obvious implications for logistics are that time is money, so shortening the supply chain or eliminating delays results in greater profit. High working capital (inventory) reduces profit. Efficient resource utilization (labor, real estate, equipment) increases profit. Cash to cash cycle is key.

Debt financing can be described as gearing. Low gearing means little or no debt. High gearing means the firm has a large proportion of debt to assets. This presents high risk for investors. It also may preclude opportunities to expand or improve operations and debt service (interest) will constrain cash flow.

International logistics involves greater risk which may include uncertain demand, unstable infrastructure and services, political instability, or currency fluctuations. Cost accounting for logistics companies is not as straightforward as for manufacturers. Services are intangible, quality can be difficult to measure, they cannot be stored (perishable), and may involve more that one provider.

More Basics

Order Cycle- Short order cycle leads to reduced inventory; Long order cycle leads to increased inventory.

Cost of Lost Sales- High inventory results in lower lost sales; Lower inventory results in higher lost sales.

Transportation costs- similar tradeoffs as lost sales. Mode shifts from slower to faster (ground to air) can reduce inventory. Shifts from faster to slower (air to ocean) will increase inventory.

Commodity dollar value- High value commodities lead to high inventory, transportation, and packaging costs.

Density- High density commodities lead to reduced transportation and inventory (warehousing) costs.

Loss/Damage- commodities with high susceptibility to loss/damage result in higher costs of transportation and warehousing.

Location decision- Plant or distribution center proximity from materials sources or markets can mean relative advantage or disadvantage vs competitors. These are C- level decisions.

Here is a link to my recent Passages post

https://www.shippingsolutions.com/blog/exporting-samples-what-you-need-to-know

Book Review published in Transportation Journal, Fall 2016

 

Rosabeth Moss Kanter, Move: Putting America’s Infrastructure Back in the Lead

W.W Norton & Co., New York NY, 2015

ISBN 978-0-393-24680-3

325 pp.

$26.95

 

In the United States we have become accustomed to traffic congestion, poor public transit, and the inability of the federal government to remedy these problems. Rosabeth Moss Kanter takes on these issues from the perspective of the general public in her new book “Move: Putting America’s Infrastructure Back in the Lead”. It will come as no surprise that the many nations outperforming the US in infrastructure development are able to do so, in part, because of their national priorities and policies. A recurring theme in the book is what the author calls “the quintuple wins” of greater safety, less congestion, higher efficiency and productivity, less pollution and carbon emissions, and greater economic opportunity.

The opening chapters describe the current deficiencies in our infrastructure and the statistics are stunning. While I found the book to be quite interesting, it is a bit heavy on data. Nevertheless, the point is well made that we have a massive problem which is getting worse by the day and our economic opportunities and quality of life are being limited. Kanter traces the root cause of our problems to the Interstate Highway System and the outmoded Highway Trust Fund. She goes on to examine all modes of transportation and notes that solutions need to be multi-modal and, most importantly, build connections.

While the public is generally aware of our 3^rd world passenger rail system, not many know how efficient and profitable US freight rail has become. Indeed, 21^st century freight railroads can be characterized by financial responsibility and reinvestment of profits in infrastructure. This is in contrast to other modes which have deferred investment turning hubs into bottlenecks.  Commuter rail is examined as an important part of getting America moving again. It is acknowledged that public transit systems cannot cover operating expenses with fares but that they are essential for economic development and mobility. Beyond operating expenses transit systems, other than busses, require huge capital investments. The US has disinvested in rail infrastructure, allocating 4.9% of federal transportation dollars in 1976 and only 1.2% in 2014.

Chapter 3, “Up In the Air”, describes what all travelers know about the ordeal of airline travel today. Technological innovations that can improve the system are highlighted but perhaps the biggest need is for a national strategy. Airports are managed by municipalities and regional authorities while air traffic is managed by the FAA. Airlines want to get passengers out of town while airports view delays as a way to keep them spending money locally. Interestingly, while airport land is very valuable, private companies have been unwilling to own and operate airports. Multiple stakeholders with different interests result in a complex system.

Chapter 4, “Smart Roads Meet the Smart Phone”, is both inspiring and exciting. Kanter introduces the concepts of dynamic pricing as an alternative or supplement to the fuel tax. The reader learns how software can enable many improvements allowing smarter use of existing assets. “Re Thinking Cities,” the subject of Chapter 5, examines how streets can be used as assets for people as well as cars. The author shows the direct correlation between efficient public transit and social mobility. Achieving full interoperability across systems, modes, and geographic regions will require bold policy and political will.

The discussion comes around again to the role of policy makers in the next chapter, “The Will and the Wallet”. In the US we may have more wallet than will. Our 2.4% of GDP investment in infrastructure pales in comparison to 5% in the EU and 9% in China. Kanter does not believe that privatization of infrastructure is a good idea and makes the case that it will cost more in the long run. She is a proponent of PPP’s, Public Private Partnerships. Along with Infrastructure Banks, PPP’s can be an alternative to government bonds or privatization. Unfortunately this section of the book is dominated by a much too detailed and difficult to follow story about the Miami Access Tunnel.

The final chapter, “How to Move”, emphasizes that we need to look to mayors, governors, and regional authorities to do what the federal government cannot do. Kanter believes that coalitions including the private sector are the way to implement infrastructure improvements. This may be the only way in the absence of a national strategy but seems a little idealistic. However, this is an informative book with an optimistic outlook and well worth reading.

 

Mitch Kostoulakos, CTL

Adjunct Faculty

Southern New Hampshire University

m.kostoulakos@snhu.edu

 

Book Review published in Transportation Journal, Winter 2015.

The Next Crash: How Short-Term Profit Seeking Trumps Airline Safety

Amy L. Fraher

Cornell University Press

512 East State St

Ithaca, NY 14850

2014, 224 pp.

ISBN 978-0-8014-5285-7

$27.95

 

Conventional wisdom holds that travel on passenger airlines has never been safer than it is today. Amy L. Fraher, author of “The Next Crash: How Short Term Profit Seeking Trumps Airline Safety”, disagrees. Fraher is a former US Navy and United Airlines pilot who lectures in Organizational Studies. Her book takes a critical theory approach to the accepted wisdom of airline safety and, especially, the failures of management in the industry post 9/11.

The author begins by comparing current airline financial and risk management practices with those of the financial industry prior to the crisis of 2008. The book consists of seven concisely written chapters, supported by ample statistics and graphs.

The readers’ attention is captured in the first chapter with examples of how the industry is being systematically dismantled and airlines taken into bankruptcy in order to shed labor contracts. Indeed, according to Fraher, bankruptcy is the preferred strategy of CEO’s who are handsomely rewarded following Chapter 11. She believes that the industry used the downturn after 9/11 as an excuse to revamp the entire air transportation system in the US.

The next three chapters provide a good history of the airline industry both before and after de-regulation. The current regulatory environment is examined and found wanting. The author contends that the government has been reluctant to impose regulations until disaster strikes. The preference of policy makers has been to let the market sort out economics, safety, training, and economic development. Since de-regulation the FAA has been charged with both promoting and regulating airlines. Fraher provides evidence that the FAA is more active in promoting air travel than in regulating safety. We now know that de-regulation did reduce fares and increase the ability of average people to fly. Over time, however, the industry has consolidated and is now made up of a few legacy carriers, several low cost carriers, and regional “feeder” lines. Airline de-regulation was followed by the same in trucking, finance, and communications.

Chapter 5 is an interesting study of risk management, finance, and cost cutting. As airlines consolidated they have attempted to build market share through hub and spoke operations, frequent flyer programs, and by starting commuter airlines to feed the hubs. Regional airlines provide the “spoke” flights with little FAA oversight and much lower operating costs. The description of low paid, inexperienced, and sleep deprived commuter pilots is chilling, especially because regional airlines carry approximately 50% of US air passengers. Fraher is highly critical of managers who are rewarded for employee layoffs and for managing risk as a cost of doing business.

Chapter 6, “Strapped In for the Ride”, summarizes post 9/11 airline economics and the low cost model. One result has been a pilot shortage due to low pay, greater military retention, and outsourcing of airline operations. Several recent fatal accidents are described in detail. In each case the National Transportation Safety Board cited lack of pilot and/or mechanics professionalism and failure to adhere to established procedures. In fact, the NTSB criticizes the FAA for lax oversight and inadequate regulations.

In Chapter 7, “Airlines Today”, Fraher continues her strong indictment of management by describing divide and conquer policies which pit groups of employees against each other. The key to fostering friction between employees is the structure of airline labor contracts in which different unions represent various professional groups.

The Epilogue is an excellent summary of the issues along with the author’s recommendations to improve the industry. These common sense solutions include increased government investment in infrastructure, more effective regulation, restricting the ability to declare Chapter 11, and more emphasis on airline safety before accidents occur. Adopting these measures would mean a small surcharge on every ticket sold, taxing airline ancillary fees, and eliminating subsidized flights through the outdated Essential Air Service program. Finally, Fraher says that the FAA’s dual mandate to promote and regulate aviation should be divided into separate agencies.

Though clearly biased in favor of pilots and airline employees vs. management, Amy Fraher has written an informative and thought provoking book.

 

Mitch Kostoulakos, CTL

Adjunct Faculty

Southern New Hampshire University

 

 

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University of North Florida’s 22nd CTL Cohort Graduation This cohort was very diverse. In the beginning, they weren’t so sure about giving up their Friday nights and Saturdays. But as we proceeded, we heard time and again from these students how they wished they’d taken the course years ago! This was the first cohort to include remote attendees, with two people from Tampa participating in live feed classes. The students ranged from young people just entering the workforce to experienced practitioners close to retirement. Job titles spanned responsibilities from “Coordinator” to “Colonel.” Those of us who teach and oversee the program felt like we were the lucky ones to have learned so much from this group. We look forward to hearing about their successes! The 25th Cohort begins January 15, 2015. Register today! Lori Fredrick, Program Director IN THIS ISSUE The Value of Professional Certification | Transportation Journal | Upcoming events and professional development hours QUICK LINKS Calendar of events | LinkedIn page | Facebook page | Twitter page | Update your profile | Renew your membership | Job board | Want to be published? Contact us IN THIS ISSUE The Value of Professional Certification I recently completed recertification of my CTL (Certified Transportation and Logistics) through AST&L (American Society of Transportation and Logistics). I believe that professional certifications are a valuable credential. Professionals prefer to do business with other professionals. Chances are if you’re looking to hire an accountant, financial planner or engineer, their credentials are important to you. Preference goes to the accountant who is a CPA, the financial planner who holds the CFP designation and the engineer who has earned PE status. Why should the field of transportation and logistics be any different? Read more. Mitch Kostoulakos, CTL, Ad Hoc Logistics LLC

Book Review Published in Transportation Journal, Spring 2014.

 

Full Upright and Locked Position: Not So Comfortable Truths about Air Travel Today

Mark Gerchick

W.W. Norton & Company, Inc.

500 Fifth Avenue

New York, NY 10110

2013, 331 pp.

ISBN 978-0-393-08110-7

$24.95

 

 

 

As any air traveler knows, flying today bears no resemblance to the relatively luxurious experience of the 1960’s and 1970’s. In fact, air travel in the 21^st century is deeply unpopular from the passenger viewpoint. The reasons why are explained by Mark Gerchick, aviation consultant and former FAA and DOT executive, in “Full Upright and Locked Position: Not So Comfortable Truths about Air Travel Today”.

The book consists of ten chapters and an extensive bibliography. The first three chapters provide an overview of the current state of the airline industry. The reader is reminded that pre-deregulation air travel was not unpleasant, if not as glamorous as sometimes portrayed. While acknowledging the major upheavals in aviation between 1978 and 2001, the author points out that even bigger changes have occurred post 2001. Examples are the commoditization or air travel, the reduction of supply to meet demand instead of competing to offer more flights, and the unbundling of services adding fees to the basic fare. The contradictions are striking. Air travel has never been safer nor more dehumanizing. The technology is amazing yet airlines are now mass transit bound by strict rules and rigid processes. The goals are tight schedules, operating efficiency, and revenue maximization to the detriment of customer service.

The airlines’ safety record is thoroughly examined with ample supporting statistics. According to Gerchick, more than three billion people flew on US airlines from 2007 through 2011 with 50 fatalities, all in a single regional airline crash. In spite of this record, 30 million Americans admit that they are anxious flyers. Chapter 4 describes the aura of airline pilots, the “disembodied voice behind the steel door”. The pilot’s reassuring messages from the cockpit about “a little turbulence” are designed to calm passengers while giving minimal information. An inside the cockpit view portrays the boredom of flying, struggles against sleep, and constant complaining about schedules. Indeed, pilots are sometimes seen by their employers as angry whiners.

Chapter 5, “Fares, Fees, and Other Games”, probably the least readable chapter in the book, attempts to explain the myriad pricing schemes faced by passengers shopping for fares on the internet. After dropping from 1995-2011, air fares are now rising 4-8% per year and the FAA predicts continued rising fares for the next 20 years. In addition, baggage fees and other charges have created new revenue streams for airlines. This chapter does shed light on fare codes and “fare buckets” which allow airlines to maximize revenue and load factor.

Some of the most disturbing aspects of air travel are included in Chapters 6 and 7. There is no question that being a passenger for hours in a flying tube can be unhealthy. The hazards include respiratory issues from stale air, bacteria in close quarters, and blood clots resulting from inactivity. This list is followed by horror stories about planes sitting for hours on the tarmac and the effect on passengers and crews. In most cases there is no real DOT investigation of these incidents. DOT simply collects data about these delays and passes it along to the airlines. There is much opportunity to improve regulations and enforcement of consumer rights in our air travel system. Regulators have historically been charged with both promoting civil aviation and regulating safety with no real oversight of customer service. Further consolidation means less competition so a little more regulation may be in order.

The last three chapters of the book cover the pleasures of 1^st Class and Business Class and a look into the future. The author describes Business Class as “the absence of pain” with the seat as the biggest differentiator. In other words we are not going back to the glamorous days of air travel unless you can afford a private flight or a ticket on Emirates Airline. Thanks to 9/11 and the TSA there are no more “daddy moments” for weary arriving travelers. Surges in jet fuel will continue to lead to new fees, reduced capacity and full flights. The rise of low cost carriers such as Southwest threatening the existence of legacy carriers leads to consolidations and mergers.

Analysts predict an industry on the brink of stability if not big profits. It may be said that we are approaching a 3+3+3 air system. Three huge network carriers, three nationwide low cost carriers, and three global alliances.

According to Mark Gerchick, these changes can be good for both the airlines and their passengers. Airlines are managing their businesses smarter when they control costs and match supply with demand. Revenue management and fees are important tools but unpopular with consumers. However, if airlines can achieve stability and sustained profitability the hope is that they will begin to compete on customer service as well as price.

This is a highly informative and entertaining book.

 

Mitch Kostoulakos, CTL

Ad Hoc Logistics, LLC

26 Heath Road

Merrimac MA 01860

 

 

Book Review Published in Transportation Journal Summer 2011

 

Blood, Iron, and Gold

How the Railroads Transformed the World

By Christian Wolmar

Perseus Book Group

New York, NY

2010

ISBN 978-1-58648-834-5

376 pp.   $28.95

 

 

 

 

Christian Wolmar is a writer who specializes in the social history of railroads and other modes of transport. This unique perspective provides the reader with information about railroad history not usually found in other works.  The narrative takes a global approach, including anecdotes about the construction and operations of most of the major railroads in the world. The book consists of 13 chapters and is well researched with 17 pages of notes.

The first three chapters describe the construction and early operations of railroads in Britain and on the European continent. British technology and capital led development of railroads in Europe and later, through the influence of the Empire, India and Latin America.  Railroads in all countries began as a force for economic development. Less obvious was their military utility. European monarchs certainly recognized the efficiencies in moving troops and supplies by rail. This new form of military transportation also allowed rulers to keep a firm hand on their subjects. In the short term railroads served to consolidate royal power. In the long term, as the author notes, railroads were a democratizing force.  Wolmar provides many interesting anecdotes and facts about the effect of faster transportation on the human race. Isolation and privation gradually give way to urbanization and improved standards of living.

As railways developed gage standards became an issue for debate. Wider gages increased costs of construction and land but resulted in a more comfortable ride for passengers. Narrower gages lowered the cost of construction but resulted in lower speed operations and reduced capacity.  By the mid 19^th Century the Stephenson Gage of 4’ 8 ½”, named after the British engineer George Stephenson became the standard. Another topic of much discussion was the “loading gage” which is the size of the envelope needed to accommodate trains, tunnels, platforms, and equipment.

The role of government in establishing railroads differed between Britain and continental Europe.  Nations such as Italy and Germany were fragmented and not completely unified in the 19^th Century. As a result railroad planning was controlled by the monarchies in an authoritarian manner.  In Britain and later the US, railroads grew more organically as drivers of economic development aided by public policy.

Chapter 4, The American Way, is lengthy, describing in detail the history of US railroads, especially the transcontinental. As Wolmar explains, the size of the US continent and challenging terrain made railroad construction, especially the transcontinental road, a monumental task. Size and scope alone require devoting a large portion of his book to the US experience. The author contrasts the building of US railroads with earlier projects in Europe. He provides a thorough examination of the new mode of transportation including finance, government involvement, construction, technology, land costs, and military utility. The great champion of the transcontinental railroad was Abraham Lincoln. Even during the Civil War he insisted that planning go forward.  Government involvement in the US was mostly limited to finance and land grants for right of way. Operations of railroads were left to big corporations. As expected, the huge financial sums involved in building the infrastructure resulted in corruption and insider deals. According to Wolmar another distinction between US and Europe was that in Europe the railroads were servants of big business while in a younger US the railroads were creators of business.

While construction in the US was challenging due to distances and terrain, land costs were much cheaper than in Europe.  Crews were able to choose direct routes and avoid obstacles resulting in lower costs per mile and fewer tunnels and bridges than in other countries. This was crucial since less capital was available.

Emerging telegraph technology provided a major improvement in railroad scheduling and operations. As we have already seen in Europe, railroads became a strategic military asset. During the US Civil War trains were used to move troops and supplies. This was a bigger advantage to the union forces because they controlled more miles of track and equipment.

By the late 19^th Century railroads in the US had gained an unhealthy amount of power over business and the public. Discriminatory and arbitrary practices led to the establishment of the Interstate Commerce Commission in 1887. An interesting anecdote about this era describes tactics used by American farmers against the railroads. One such tactic was to feed their cows alongside tracks in order to slow or stop trains. Railroads retaliated by installing “cow catchers” on the front of the engines.

By itself, this chapter is a complete and interesting history of railroad development in the US. It is no exaggeration to say that the transcontinental railroad transformed the US from a North/South oriented nation to an East/West nation.

The following three chapters describe epic projects on other parts of the world such the Trans Siberian Railroad. Motivation for such tasks was both economic and political. The more remote the geography the more political will and public financing was necessary. The economic lure was often resource extraction which would not have been possible without railways.

Railroads continued their global expansion with no competition from other modes. Economies transformed from agricultural to industrial. The lives of people all over the world changed dramatically. Diets improved due to greater availability of fruit and vegetables. Before the existence of railroads most people never traveled more than a few miles from home but would soon be able to expand their horizons. All of this had a democratizing effect as the middle class grew worldwide. The negative effects of railroads included near monopolistic power over prices, land values, and routes.

In the final chapters, Wolmar catalogs the post WWII decline of passenger traffic and the financial problems of railroads. Mergers and consolidations lead to big railroad systems in the US and around the world. Intermodal transportation becomes essential to replacing lost passenger revenue enabling railways to survive and prosper in the late 20^th Century.

The author’s goal as stated in the Preface was to draw together the history of railways and demonstrate their social impact across the world. Having met this goal in a relatively short book is an impressive piece of writing. The result, however, is a narrative so densely packed with detail that the reader is tempted to skip over large sections in order to maintain interest.  The book is, however, greatly informative and a good addition to any transportation library.

 

Mitchell G. Kostoulakos, CTL

 

 

 

 

 

 

Book Review Published in Transportation Journal Fall 2009

 

Flying Across America: The Airline Passenger Experience

By Daniel L. Rust.

University of Oklahoma Press

Norman OK

ISBN 978-0-8-61-3870-I

260 pages

$45

 

Americans have always had a fascination with air travel. The present day frustrations experienced by airline passengers make it easy to forget the one time excitement and mystique of flying. Daniel Rust traces the evolution of the airlines from the early days to the post 9/11 environment from the passenger viewpoint. The book is non technical, focusing on anecdotes about passenger travel.

 

The narrative begins with air mail contracts awarded by the government which enabled the infant airline industry to get started and develop. This example of government policy regarding transportation is similar to land grants given to railroads and the interstate highway system that facilitates trucking in the US. As expected, there are stories about Will Rogers and the barnstorming era. Interesting facts include early pilots navigating by following transcontinental railroad tracks called the “iron compass”. Night flying was aided by beacons every 10-25 miles across the center of the continent. The beacons were introduced by the Commerce Department and maintained by the Lighthouse Bureau.

 

As airlines struggled to become established, Lindbergh’s famous flight across the Atlantic helped attract new investors. Along with the new medium of radio, aviation became the darling of Wall Street. During this period transcontinental routes were established in intermodal fashion along with the railroads. With pilots following the rail lines for navigation, passengers slept and dined in Pullman cars between air legs of the journey. Transportation between rail depots and air fields was by specially designed “aero cars”. Details of TAT’s first passenger flights include descriptions of the Ford Tri Motor cabin interior, uniformed attendant service, and early airport terminal facilities. The $350 fare for Top Class, coast to coast, service on TAT in the 1920’s equates to about $4000 today.

 

The patchwork system of air-rail travel proved unprofitable leading to mergers and bigger mail contracts. Through these contracts, Postmaster General Walter Brown reshaped the nation’s airway map, limited competition, and set the pattern for the establishment of trunk lines.

 

The 1930’s was a period of growing pains for the industry. New and bigger aircraft led to a series of crashes and the new science of air accident investigation. The CAB was established to address loss of confidence in air travel by the public. At the same time radio technology improved navigation especially during night flying.

 

The middle chapters of the book describe difficulties encountered by passengers during WWII. Airline terms such as “standby”, “no show”, and “bumping” were added to the lexicon.  After the war, the glut of military aircraft and abundance of trained pilots resulted in excess capacity and reduced load factor. This led to the emergence of non scheduled airlines known as “non scheds”. These charter airlines began flying air cargo as well as passengers and are the ancestors of today’s air freight carriers.

 

The chapter entitled Economy and Elegance tells the story of the glamour period of air travel in the 1950’s and 1960’s. United Airlines led the way with faster coast to coast service with fewer stops. This reduced operating costs per flight but the new larger aircraft required more passengers. Of course this is an example of the age old transportation dilemma of yield vs. load factor. A reluctant CAB approved the new Coach and Family Fare plans to allow carriers to attract more passengers. Other forms of competition included the introduction of non stop coast to coast flights known as the “red eye”, champagne flights, credit card payment, and flight insurance.

 

Descriptions of the modern era begin with a rather uninteresting chapter about the development of the jet engine. The technical details seem out of place with the passenger experience theme of the book. Jet engines led to larger aircraft and the need for bigger airports further from city centers. In-flight movies were introduced to offset passenger boredom and feelings of isolation at higher altitudes.

 

The last chapter The Era of Airline Deregulation and 9/11 covers the industry as it exists today. The oil shocks of the 1970’s resulted in removal of CAB price restrictions and, ultimately, full deregulation. Legacy carriers struggled to compete with new entrants such as People Express and Southwest. These lower cost airlines forced the older airlines to revamp their networks, with most adopting hub and spoke systems. The intense competition that followed led to lower fares, frequent flyer programs, and paperless ticketing, among many innovations. As we all know, airlines and airports have become overcrowded. The security lines and delays after 9/11 are well known to anyone who flies today.  Passenger satisfaction in the 21^st Century is low in spite of competitive fares and increased safety. Certainly the glamour of air travel has been lost forever.

 

While some chapters contain too much information, this book will be of interest to airline aficionados as well as readers interested in the history of transportation. It is designed in a coffee table format and beautifully illustrated. Collectors of airline memorabilia will like the charts and early marketing materials that are depicted throughout the book. All in all an enjoyable read.

 

 

Mitch Kostoulakos, CTL

Adjunct Instructor

Northern Essex Community College

 

 

 

 

 

 

 

 

 

Book Review Published in Transportation Journal Winter 2008

 

The Future of Pricing

How Airline Ticket Pricing Has Inspired a Revolution

By E.Andrew Boyd

Palgrave MacMillan

New York, NY

November 2007, pp 192, $45.00

ISBN-13: 978-0-230-60019-5

ISBN-10: 0-230-60019-0

 

 

 

Written by a leading authority on pricing, The Future of Pricing presents a view of airline pricing practices from the inside. The author’s stated goal is to teach using interviews, examples, history, and personal experience. This approach helps to make his book readable and Dr. Boyd does accomplish his goal of teaching the basics of the science of pricing to the average reader. The stories used as examples range from Socrates to Las Vegas casinos. While interesting, these anecdotes often do not seem relevant to the subject matter.

 

After providing background about airline pricing in Chapter 1, the author clearly explains yield management and introduces the concept of perishability of airline seats in Chapter 2. This is followed by clear descriptions of the long haul, hub and spoke systems of the legacy carriers and the shorter haul, point to point operations of the low cost carriers.

 

Chapter 3 is one of the most interesting and informative in the book. It examines the evolution of airline reservations systems from manual booking to card and chalkboard systems, followed by mechanical systems and present day computerization. As reservations systems evolved, airlines learned to use them as a competitive advantage. Travel agents and airlines also began the practice of co-hosting, or shared displays on reservations systems. Anecdotes in this chapter show how management practices and airline inefficiencies have often led to dilution of revenue. This created the need, after deregulation, for passive reservations booking groups to morph into sales teams.

 

Chapters 4 and 5 are dense and mathematical but do illustrate the big challenges faced by airlines. The main points are that it is difficult to convert reservations systems from inventory management; filling seats, to revenue management; maximizing yield. This is further complicated by uncertainty of demand and high costs of airline infrastructure. Some examples of pricing terminology in this section include nested fares, pseudo fares, and fare class buckets.

 

Chapter 6, “Hold Me, Darlin”, continues the discussion of demand forecasting by using lengthy examples of card playing strategies. The author is enthusiastic about poker and blackjack but the connection to scientific pricing is not made clear. The chapter describes four forecasting concepts: Unconstraining, Buy-down, Competitive Price Data, and Consumer Choice.

 

The applications of revenue management in the hotel, car rental, and cruise ship industries are explored in Chapter 7. The examples used here do reflect the travel experiences of the average reader, making this chapter especially effective in communicating the effect of scientific pricing on revenue management. The business problems of these travel companies are similar to those of airlines. All face the pressures of perishable inventory. Competition for market share demands that revenue management not necessarily result in price increases.

 

In Chapter 8, the author invokes Aristotle and Socrates to introduce the concept of “just pricing”. Oil company profits, along with rapidly changing fuel prices, are widely seen as unjust. Airline fares are associated with miles flown by the average consumer. Actual costs, however, are the result of both high fixed costs and uncertainty of demand. This makes it difficult to establish what a fair and reasonable price should be for any particular flight. Accounting based pricing attempts to recover costs plus some profit, while science based pricing charges according to demand and willingness to pay. A big issue for companies using science based pricing is that they run the risk of offending the sense of justice of their customers. Frequently changing prices takes away our idea of a just or reasonable fare.

 

Chapter 9, “The Scientists”, consists of a rather uninteresting story about some of the major players in the world of scientific pricing. Dr. Boyd emphasizes that the point of operations research in business is to increase profits. This may be anathema to those “pure” scientists who wish to do research for its own sake. This view, according to Boyd, hinders the growth of scientific pricing due to the researchers’ unwillingness or inability to communicate the science in business terms. Chapter 10 provides examples of pricing done by the seat of the pants in some industries.

 

Chapter 11 is intended to illustrate how pricing is slowly evolving through the use of science. It includes a lengthy anecdote about contract pricing in health care and is supported by graphs. I found this chapter confusing and difficult to connect to the topic of airline pricing. The book concludes with Chapter 12, making a strong case for customer centric pricing as the way of the future.

 

This book will certainly be of value to pricing professionals in airlines and other industries. However, I would be reluctant to recommend it to the average reader or airline passenger.

 

 

 

 

Mitch Kostoulakos, CTL

Adjunct Instructor- Supply Chain

Northern EssexCommunity College

Haverhill, MA01835

 

 

Book Review Published in Transportation Journal Summer 2005

Wedding of the Waters, by Peter L. Bernstein.

W.W. Norton and Co, 2005

ISBN 0-393-05233-8

Most readers understand why economics is known as the “dismal science” and few would be drawn to a story about a 19^th Century canal. Peter L. Bernstein is an economist who has written a book about the Erie Canal which is both informative and interesting.

Wedding of the Waters examines the genesis, construction, financing, and operation of the waterway which would change the nature of commerce in the United States. Most importantly, the author establishes clear links for today’s policy makers between the Canal project and 21^st Century infrastructure issues. Money, politics, and technology are the themes used by Bernstein in telling the story. In fact, by changing names and dates, this could be a contemporary story.

The book is divided into five parts, each consisting of four or five chapters.  Part I, “The Visionaries” traces the background of the canal era. The MidiCanal in France and the Bridgewater in Britain are described as marvels of technology for their time. For example, while Britain was blessed with deep water ports for ocean trade, inland transportation was primitive. The BridgewaterCanal enabled faster, easier transport of coal from the mining regions to Manchester resulting in a 50% drop in the price of the fuel. Part I  also provides a fascinating view of George Washington as shrewd businessman using leadership and surveying skills to promote his beloved Potomac River as the major east-west artery in America. Washington feared that the formidable Appalachian mountain range would disrupt national unity without a good transportation link between the Atlantic seaboard and the then western colonies. The political climate and form of government of the time required that the Potomac project be a private enterprise and it ultimately failed.

Politics and war are the subjects of Part II, “The Action Begins”. A $3 Million surplus in 1804 provided the opportunity for improvements in infrastructure, specifically roads and canals. Secretary of the Treasury Albert Gallatin promoted the idea of improved transportation as an instrument of economic development. He predicted to Congress that increasing the volume of goods able to be traded between the states would result in greater national wealth at a time when the U.S. was just starting to become a nation. Gallatin’s report established early justification for public financing of infrastructure projects, opening the way for the Erie Canal. These chapters provide clear parallels with the U.S. of today. Then, as now, foreign policy intervened to reduce domestic spending. The surplus became a deficit as the military budget increased due to the impending War of 1812.  President Thomas Jefferson appeared indifferent to the Erie Canal project and his political opponents charged him with favoring the Potomac route. East- west unity of the former colonies was deemed critical to the survival of the new nation. Finally, Part II includes a good description of the scope of the Erie Canal project.  The plan was for a 363 mile canal over difficult topography, in a country with no other canals longer than 50 miles, and where civil engineering was not yet a profession. The contrast between bickering politicians and competent engineers is striking.

Part III, “The Creation”, describes the construction of the Erie Canal. Technological advances included workers’ inventions for clearing stumps and moving earth. Waterproof limestone was developed outside of Syracuse and an important new American industry was born. During construction the nation undergoes an economic cycle which compares with the internet boom of the 1990’s, followed by a predictable bust.  The boom and bust cycle would complicate the financing of the Erie Canal requiring New YorkState politicians to take action.   The driving forces of the project were NY politicians DeWitt Clinton and Gouveneur Morris. Their personal stories are woven throughout the book, as is the rivalry between Aaron Burr and Alexander Hamilton.

In Part IV “The Stupendous Path”, the Erie Canal is completed, setting off massive celebrations and worldwide publicity. A trip on the Erie Canal was the ultimate adventure ride in the pre- Disney United States.

The success of the Canal becomes immediately apparent in Part V, “After the Wedding”. Traffic grew to 7000 boats in 1826. Toll revenues were $500,000 which was five times the interest on Canal bonds. The entire debt was paid by 1887, and the greatly reduced freight rates made more goods available to more Americans.  Quality of life issues arose as industrialization took hold in America while greater personal mobility disrupted societal norms traditionally centered on farm and family.  These changes coincided with the 2^nd Great Awakening wave of revisionism and evangelism. There was some persecution of Catholic immigrants now coming into areas previously closed to them and led by Canal laborers. Readers may find similarities with today’s post- industrial and increasingly religious America.

It is no exaggeration to say that the Erie Canal transformed New York into the Empire State. By the mid 1800’s telegraph lines had sprung up along the path of the Canal and along railroad lines. The collapsing effect of time and distance on the 19^th Century economy was as dramatic as the effect of air freight and the internet is on contemporary commerce.  The Canal helped to change the primary U.S. axis from north-south to east-west. The economic power of cotton- producing slave states gave way to free- labor industrial states. As new mid- west cities developed, farming moved further west and became a profit making enterprise. The goal of uniting the U.S from east to west was achieved.  The 1800’s economic transformation of the U.S. had even further reaching consequences. Drastically reduced costs of transportation from the mid-west to the Port of  New York opened European markets to American grain. Sped by European crop failures and the repeal of British “Corn Laws”, the United States became the granary of the world. The Erie Canal, an ambitious technical and financial undertaking that was conceived to help unite a fragile new nation, eventually led the way to what we know as globalization.

Mitch Kostoulakos, CTL