Transport CostsTransport Costs

Factors and IssuesFactors and Issues

Components of Transport CostComponents of Transport Cost

A BFriction of Space

Transaction Costs

Shipment

Distance

Tran

spor

t cos

ts p

er u

nit Road

Rail Maritime

D1 D2

C1 C2

C3

Distance, Modal Choice and Distance, Modal Choice and

Transport CostsTransport Costs

Shape of Transport Cost CurvesShape of Transport Cost Curves Many simple models, such as Von Thunen and Many simple models, such as Von Thunen and

Weber view transport costs as:Weber view transport costs as: 1. Proportional to distance1. Proportional to distance 2. Each additional unit of distance adds an 2. Each additional unit of distance adds an

equal increment of costequal increment of cost In reality transport costs are less than In reality transport costs are less than

proportional to distance—why?proportional to distance—why? Existence of fixed costs of transport facilities Existence of fixed costs of transport facilities

incurred regardless of length of journeyincurred regardless of length of journey Fixed or terminal costs (interest on capital, Fixed or terminal costs (interest on capital,

costs of maintaining plant and equipment, costs of maintaining plant and equipment, depreciation) dilute the unit cost as distance depreciation) dilute the unit cost as distance increasesincreases

Therefore costs per mile tend to decline with Therefore costs per mile tend to decline with increasing distanceincreasing distance

Fixed and Operating Transport CostsFixed and Operating Transport Costs

ModeMode Fixed/Capital Fixed/Capital CostsCosts

Operating CostsOperating Costs

Rail or Rail or HighwayHighway

Land, Construction, Land, Construction, Rolling StockRolling Stock

Maintenance, Maintenance, Labor, FuelLabor, Fuel

PipelinePipeline Land, ConstructionLand, Construction Maintenance, Maintenance, EnergyEnergy

AirAir Land, Field & Land, Field & Terminal Terminal Construction, Construction, AircraftAircraft

Maintenance, Maintenance, Fuel, LaborFuel, Labor

MaritimeMaritime Land for Port Land for Port Terminals,Terminals,Cargo Handling Cargo Handling Equipment, ShipsEquipment, Ships

Maintenance, Maintenance, Labor, FuelLabor, Fuel

Fixed and Running CostsFixed and Running Costs

Highway and trucking costs are only Highway and trucking costs are only slightly less than proportional to distanceslightly less than proportional to distance

This is due to very low terminal charges This is due to very low terminal charges (fixed costs are only 10 % of total)(fixed costs are only 10 % of total)

Rail and Water- relatively high terminal Rail and Water- relatively high terminal charges but lower line haul costscharges but lower line haul costs

Rail and Water networks are coarser than Rail and Water networks are coarser than highway- fewer terminal facilities but larger highway- fewer terminal facilities but larger in scalein scale

Containerization has helped reduced costs Containerization has helped reduced costs and port costs are becoming more and and port costs are becoming more and more efficientmore efficient

Structure of Airline CostsStructure of Airline Costs Fixed/Overhead- carrier’s capital Fixed/Overhead- carrier’s capital

especially aircraft especially aircraft 17 %17 % Operating-Direct-dependent on type of Operating-Direct-dependent on type of

aircraft: flight crew, fuel, maintenance, aircraft: flight crew, fuel, maintenance, depreciation, landing fees, leasing depreciation, landing fees, leasing 60 %60 %

Operating-Indirect- passenger related: Operating-Indirect- passenger related: passenger services, ticketing, station passenger services, ticketing, station and ground costs, administrative and ground costs, administrative 23%23%

Fixed and Variable Costs and Service Fixed and Variable Costs and Service in the Transportation Systemin the Transportation System

CharacteristicCharacteristic Fixed Fixed InfrastructureInfrastructure

Variable CostsVariable Costs

ExamplesExamples Highways, rail tracks, Highways, rail tracks, airports, portsairports, ports

Trucks, railcars, planes, Trucks, railcars, planes, shipsships

OwnershipOwnership Mostly publicMostly public Mostly privateMostly private

LifespanLifespan Very long (decades)Very long (decades) Short to average (5 to Short to average (5 to 20 years)20 years)

Rate of changeRate of change SlowSlow Rapid redeploymentRapid redeployment

Impact on Impact on serviceservice

Shapes accessibilityShapes accessibility Shapes level of serviceShapes level of service

CompetitionCompetition Level the playing Level the playing fieldfield

Source of comparative Source of comparative advantagesadvantages

Cost Variations in TransportCost Variations in Transport Postage Stamp Rates-Postage Stamp Rates- simplest possible simplest possible

structure – uniform rate irrespective of distancestructure – uniform rate irrespective of distance Blanket Rate-Blanket Rate- similar rates for broad zones similar rates for broad zones Example: Freight rates for lumberExample: Freight rates for lumber Origin zone: Washington/Oregon to:Origin zone: Washington/Oregon to: Montana- .76-100/ 100lbsMontana- .76-100/ 100lbs Colorado-Wyoming- 1.11Colorado-Wyoming- 1.11 Texas-Louisiana- 1.36Texas-Louisiana- 1.36 Minnesota-Nebraska, Kansas- 1.26Minnesota-Nebraska, Kansas- 1.26 Tennessee, Alabama Georgia- 1.50Tennessee, Alabama Georgia- 1.50 Indiana>>>>New England – 1.48 Indiana>>>>New England – 1.48 Distance ZonesDistance Zones

Zonal Freight RatesZonal Freight Rates

Distance

Cos

ts

I II III IV

Flat zonal rate

Real transport cost

D1

D2

Cost Variations in TransportCost Variations in Transport

Differences in Cost of Services: Differences in Cost of Services: Loading characteristics-Loading characteristics- light, bulky goods light, bulky goods

demand higher charges than heavy, compact demand higher charges than heavy, compact articlesarticles

Size of Shipment-Size of Shipment- large, single consignments large, single consignments permit economies in administration and permit economies in administration and terminal coststerminal costs

Susceptibility to Loss and Damage and Risk Susceptibility to Loss and Damage and Risk Liability-Liability- a. fragile and/or perishable goods- b. a. fragile and/or perishable goods- b. refrigerated, insulation and special packaging refrigerated, insulation and special packaging

Cost Variations in TransportCost Variations in Transport Elasticity of Demand-Elasticity of Demand- goods of high unit value goods of high unit value

are better able to bear costs of transport than are better able to bear costs of transport than low value goods- low value goods- “charge what traffic will “charge what traffic will bear”bear”

Competition between Transport ModesCompetition between Transport Modes Example: Rail wishes to compete with trucks Example: Rail wishes to compete with trucks

on short haul must keep rates downon short haul must keep rates down Example: Rail Movement of Phosphate Rock Example: Rail Movement of Phosphate Rock

from Tampafrom Tampa Norfolk .62 rate per ton/mileNorfolk .62 rate per ton/mile Lynchburg .95 Knoxville 1.10 Lynchburg .95 Knoxville 1.10 Greensboro 1.11 Montgomery 1.37 Greensboro 1.11 Montgomery 1.37 Pensacola .97Pensacola .97 Other examples: Other examples: Wine ship Angelo PetriWine ship Angelo Petri

Wine Ship and Transport CostsWine Ship and Transport Costs

Wine grapes- 80% come from CaliforniaWine grapes- 80% come from California Tanker ships can penetrate the Central Valley- Tanker ships can penetrate the Central Valley-

converted oil tanker 26 stainless tanks 2.5 mil converted oil tanker 26 stainless tanks 2.5 mil galsgals

Shipped in bulk from California to East CoastShipped in bulk from California to East Coast Logistics problem of small region producing Logistics problem of small region producing

large amount of wine to distribute nationwidelarge amount of wine to distribute nationwide Shipping wine in bottles or bulk means large Shipping wine in bottles or bulk means large

cost differencecost difference Rail only – bulk shipment from the West Coast Rail only – bulk shipment from the West Coast

to East and Midwest then bottled and shipped to East and Midwest then bottled and shipped at higher ratesat higher rates

Wine ship operation impacts- lowers rate by Wine ship operation impacts- lowers rate by sea to bottling plantssea to bottling plants

Wine ship competes with rail operationsWine ship competes with rail operations

Conditions Affecting Transport CostsConditions Affecting Transport Costs

ConditionCondition FactorsFactors ExampleExampleGeographyGeography Distance and Distance and

accessibilityaccessibilityLong distance Long distance ratesrates

Type of productType of product Packaging, Packaging, weight, weight, perishableperishable

Seafood; time Seafood; time sensitive sensitive goodsgoods

Economies of Economies of scalescale

Shipment sizeShipment size Container vs Container vs less than less than containercontainer

Trade imbalanceTrade imbalance Empty travel- Empty travel- “back haul rates”“back haul rates”

Wine shipWine ship

InfrastructureInfrastructure Quality of Quality of SurfaceSurface

Natural Natural disastersdisasters

ModeMode Capacity, Capacity, limitations, limitations, operational operational conditionsconditions

Air cargo; rail Air cargo; rail bulk; distance bulk; distance limits?limits?

ConditionCondition FactorsFactors ExampleExample

Elasticity of Elasticity of DemandDemand

High value High value versus versus

Low value goodsLow value goods

Grain vs. Grain vs.

Fabrication in Fabrication in transittransit

Uniform rate to Uniform rate to capture businesscapture business

Grain to Grain to cerealcereal

InfrastrucureInfrastrucure Quality of surfaceQuality of surface Natural Natural disasters; IHSdisasters; IHS

Competition and Competition and regulationregulation

Cost reductions Cost reductions to capture trafficto capture traffic

Rail vs. Rail vs. highwayhighway

Conditions Affecting Transport CostsConditions Affecting Transport Costs

Transport and Market AreasTransport and Market Areas

Market areas are carved out of space by Market areas are carved out of space by interactions between supply and demandinteractions between supply and demand

If product is standardized each market point If product is standardized each market point will buy from production center that can will buy from production center that can supply it most cheaplysupply it most cheaply

Market areas are shaped by cheap or limited Market areas are shaped by cheap or limited access routes which might expand market access routes which might expand market boundaryboundary

Example: Inter-coastal trade via Panama Example: Inter-coastal trade via Panama Canal- producers located on either coast can Canal- producers located on either coast can ship to the other coast more cheaply than ship to the other coast more cheaply than rivals inlandrivals inland

This route more and more important given This route more and more important given jams in port facilitiesjams in port facilities

Market Boundary OverlapMarket Boundary Overlap Boundaries between market areas are often blurredBoundaries between market areas are often blurred Implies absorption of distribution costs by buyer, seller Implies absorption of distribution costs by buyer, seller

or shipperor shipper Geographical Price Discrimination-Geographical Price Discrimination- extra costs of long extra costs of long

distance distribution not reflected in price of commoditydistance distribution not reflected in price of commodity Seller will profit by adjusting or taking control of Seller will profit by adjusting or taking control of

delivered prices not in accord with transfer ratesdelivered prices not in accord with transfer rates Push down price where competition is high and demand Push down price where competition is high and demand

is elasticis elastic Push price upwards where competition is low and Push price upwards where competition is low and

demand is inelasticdemand is inelastic Freight Absorption-Freight Absorption- another form of geog price discrim another form of geog price discrim Discriminate against near buyers so sellers assume Discriminate against near buyers so sellers assume

transport costs to distant marketstransport costs to distant markets Sellers often has more intense competition in remote Sellers often has more intense competition in remote

market than at homemarket than at home Freight absorption usually takes form of uniform price Freight absorption usually takes form of uniform price

over large areas: toothpasteover large areas: toothpaste

Modal CompetitionModal Competition

A

B

Mode

1 23

A

B

Infrastructure / Route

A

B

A

B

4 5

6

A

B

Market Area

Average Length of Haul by Major Commodity Average Length of Haul by Major Commodity Group, 2002Group, 2002

0 100 200 300 400 500 600 700

Textiles, leather, and products

Electronic, electrical, and office equipment

Plastics and rubber

Machinery

Pharmaceutical products

Cereal grains

Coal

Wood products

Basic chemicals

Fertilizers

Alcoholic beverages

Waste and scrap

Fuel oils

Gasoline and aviation turbine fuel

Gravel and crushed stone

Shipment Size and Transport CostsShipment Size and Transport Costs

1

10

100

1000

10000

100000

1000000

10000000

Parcel LTL Truck Truckload Railcarload

Multi-railcar

Unit train Barge load

Shipment Size (lbs)Transport Charges ($/ton)

Top 10 Commodity Groups Ranked by Value Per Top 10 Commodity Groups Ranked by Value Per

Ton, United States, 2002Ton, United States, 2002

0 4,000 8,000 12,000 16,000 20,000

CFS total

Furniture, mattresses and lighting products

Miscellaneous manufactured products

Motorized and other vehicles and parts

Machinery

Textiles, leather, and products

Tobacco products

Precision instruments and apparatus

Transportation equipment, n.e.c.

Electronic, electrical, and office equipment

Pharmaceutical products

Transport Costs by Industry Type, Transport Costs by Industry Type, 19991999

0 1 2 3 4 5 6 7 8 9

Agriculture, Forestry & Fishing

Mining

Construction

Manufacturing

Communications & Utilities

Wholesale & Retail

Services

Finance, Insurance & Real Estate

Transport costs per output (%)

FOB and CIF Transport CostsFOB and CIF Transport Costs

} Production Costs

Distance

Cos

ts

Freight-on-Board

Cost-Insurance-Freight

CIF and FOBCIF and FOB CIF- trade term requiring the seller to arrange CIF- trade term requiring the seller to arrange

for the carriage of goods by sea to a port of for the carriage of goods by sea to a port of destination, and provide the buyer with the destination, and provide the buyer with the documents necessary to obtain the goods documents necessary to obtain the goods from the carrier. from the carrier.

FOB- A trade term requiring the seller to FOB- A trade term requiring the seller to deliver goods on board a vessel designated by deliver goods on board a vessel designated by the buyer. The seller fulfills his obligations to the buyer. The seller fulfills his obligations to deliver when the goods have passed over the deliver when the goods have passed over the ship's rail. ship's rail.

When used in trade terms, the word "free" When used in trade terms, the word "free" means the seller has an obligation to deliver means the seller has an obligation to deliver goods to a named place for transfer to a goods to a named place for transfer to a carrier carrier