Transport Costs

Factors and Issues

Components of Transport Cost

Transaction Costs

Friction of Space
A B

Shipment
Distance, Modal Choice and Transport
Costs

C1 C2
Road
Transport costs per unit

C3

Rail Maritime

D1 D2 Distance
 Shape of Transport Cost Curves
Many simple models, such as Von Thunen and Weber
view transport costs as:
1. Proportional to distance
2. Each additional unit of distance adds an equal
increment of cost
In reality transport costs are less than proportional to
distancewhy?
Existence of fixed costs of transport facilities incurred
regardless of length of journey
Fixed or terminal costs (interest on capital, costs of
maintaining plant and equipment, depreciation) dilute
the unit cost as distance increases
Therefore costs per mile tend to decline with
increasing distance
 Fixed and Operating Transport Costs
Mode Fixed/Capital Costs Operating Costs

Rail or Land, Construction, Maintenance, Labor,

Highway Rolling Stock Fuel
Pipeline Land, Construction Maintenance,
Energy
Air Land, Field & Terminal Maintenance, Fuel,
Construction, Aircraft Labor
Maritime Land for Port Terminals, Maintenance, Labor,
Cargo Handling Fuel
Equipment, Ships
 Fixed and Running Costs

Highway and trucking costs are only slightly less

than proportional to distance
This is due to very low terminal charges (fixed
costs are only 10 % of total)
Rail and Water- relatively high terminal charges
but lower line haul costs
Rail and Water networks are coarser than
highway- fewer terminal facilities but larger in
scale
Containerization has helped reduced costs and
port costs are becoming more and more efficient
 Structure of Airline Costs
Fixed/Overhead- carriers capital especially
aircraft 17 %
Operating-Direct-dependent on type of
aircraft: flight crew, fuel, maintenance,
depreciation, landing fees, leasing 60 %
Operating-Indirect- passenger related:
passenger services, ticketing, station and
ground costs, administrative 23%
 Fixed and Variable Costs and Service in the
Transportation System
Characteristic Fixed Infrastructure Variable Costs

Examples Highways, rail tracks, Trucks, railcars, planes,

airports, ports ships
Ownership Mostly public Mostly private

Lifespan Very long (decades) Short to average (5 to 20

years)
Rate of change Slow Rapid redeployment
Impact on service Shapes accessibility Shapes level of service

Competition Level the playing field Source of comparative

advantages
 Cost Variations in Transport
Postage Stamp Rates- simplest possible structure
uniform rate irrespective of distance
Blanket Rate- similar rates for broad zones
Example: Freight rates for lumber
Origin zone: Washington/Oregon to:
Montana- .76-100/ 100lbs
Colorado-Wyoming- 1.11
Texas-Louisiana- 1.36
Minnesota-Nebraska, Kansas- 1.26
Tennessee, Alabama Georgia- 1.50
Indiana>>>>New England 1.48
Distance Zones
 Zonal Freight Rates

Real transport cost

D1
Flat zonal rate
Costs

D2

I II III IV
Distance
 Cost Variations in Transport

Differences in Cost of Services:

Loading characteristics- light, bulky goods demand
higher charges than heavy, compact articles
Size of Shipment- large, single consignments
permit economies in administration and terminal
costs
Susceptibility to Loss and Damage and Risk
Liability- a. fragile and/or perishable goods- b.
refrigerated, insulation and special packaging

 Cost Variations in Transport

Elasticity of Demand- goods of high unit value are
better able to bear costs of transport than low value
goods- charge what traffic will bear
Competition between Transport Modes
Example: Rail wishes to compete with trucks on
short haul must keep rates down
Example: Rail Movement of Phosphate Rock from
Tampa
Norfolk .62 rate per ton/mile
Lynchburg .95 Knoxville 1.10
Greensboro 1.11 Montgomery 1.37
Pensacola .97
Other examples: Wine ship Angelo Petri
 Wine Ship and Transport Costs
Wine grapes- 80% come from California
Tanker ships can penetrate the Central Valley-
converted oil tanker 26 stainless tanks 2.5 mil gals
Shipped in bulk from California to East Coast
Logistics problem of small region producing large
amount of wine to distribute nationwide
Shipping wine in bottles or bulk means large cost
difference
Rail only bulk shipment from the West Coast to
East and Midwest then bottled and shipped at
higher rates
Wine ship operation impacts- lowers rate by sea to
bottling plants
Wine ship competes with rail operations
 Conditions Affecting Transport Costs
Condition Factors Example
Geography Distance and Long distance
accessibility rates
Type of product Packaging, weight, Seafood; time
perishable sensitive goods
Economies of scale Shipment size Container vs
less than
container
Trade imbalance Empty travel- back Wine ship
haul rates
Infrastructure Quality of Surface Natural disasters
Mode Capacity, Air cargo; rail
limitations, bulk; distance
operational
conditions
limits?
 Conditions Affecting Transport Costs
Condition Factors Example

Elasticity of High value versus Grain vs.

Demand Low value goods

Fabrication in Uniform rate to Grain to cereal

transit capture business

Infrastrucure Quality of surface Natural

disasters; IHS

Competition and Cost reductions to Rail vs. highway

regulation capture traffic
 Transport and Market Areas
Market areas are carved out of space by
interactions between supply and demand
If product is standardized each market point will
buy from production center that can supply it most
cheaply
Market areas are shaped by cheap or limited
access routes which might expand market
boundary
Example: Inter-coastal trade via Panama Canal-
producers located on either coast can ship to the
other coast more cheaply than rivals inland
This route more and more important given jams in
port facilities
 Market Boundary Overlap
Boundaries between market areas are often blurred
Implies absorption of distribution costs by buyer, seller or
shipper
Geographical Price Discrimination- extra costs of long distance
distribution not reflected in price of commodity
Seller will profit by adjusting or taking control of delivered
prices not in accord with transfer rates
Push down price where competition is high and demand is
elastic
Push price upwards where competition is low and demand is
inelastic
Freight Absorption- another form of geog price discrim
Discriminate against near buyers so sellers assume transport
costs to distant markets
Sellers often has more intense competition in remote market
than at home
Freight absorption usually takes form of uniform price over
large areas: toothpaste
 Modal Competition
Mode Infrastructure / Route Market Area

B B B B B

1
2 4 5
3

A A A A A
 Average Length of Haul by Major Commodity
Group, 2002
Gravel and crushed stone

Gasoline and aviation turbine fuel

Fuel oils

Waste and scrap

Alcoholic beverages

Fertilizers

Basic chemicals

Wood products

Coal

Cereal grains

Pharmaceutical products

Machinery

Plastics and rubber

Electronic, electrical, and office equipment

Textiles, leather, and products

0 100 200 300 400 500 600 700

 Shipment Size and Transport Costs

10000000
Shipment Size (lbs)
1000000
Transport Charges ($/ton)
100000

10000

1000

100

10

1
Parcel LTL Truck Truckload Railcar Multi- Unit train Barge load
load railcar
 Top 10 Commodity Groups Ranked by Value Per Ton,
United States, 2002
Pharmaceutical products

Electronic, electrical, and office equipment

Transportation equipment, n.e.c.

Precision instruments and apparatus

Tobacco products

Textiles, leather, and products

Machinery

Motorized and other vehicles and parts

Miscellaneous manufactured products

Furniture, mattresses and lighting products

CFS total

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

Transport Costs by Industry Type, 1999

Finance, Insurance & Real Estate

Services

Wholesale & Retail

Communications & Utilities

Manufacturing

Construction

Mining

Agriculture, Forestry & Fishing

0 1 2 3 4 5 6 7 8 9
Transport costs per output (%)
 FOB and CIF Transport Costs

Freight-on-Board
Costs

Cost-Insurance-Freight

} Production Costs

Distance
 CIF and FOB
CIF- trade term requiring the seller to arrange for
the carriage of goods by sea to a port of
destination, and provide the buyer with the
documents necessary to obtain the goods from the
carrier.
FOB- A trade term requiring the seller to deliver
goods on board a vessel designated by the buyer.
The seller fulfills his obligations to deliver when the
goods have passed over the ship's rail.
When used in trade terms, the word "free" means
the seller has an obligation to deliver goods to a
named place for transfer to a carrier