Lecture 5 Space and Transport Economies

Concept 2 Transport Costs Transport systems face requirements to increase their capacity and to reduce the costs of movements. Individuals, enterprises, institutions, governments and organisations have to constantly negotiate for the transfer of goods, people, information and capital because suppliers, distribution systems, tariffs, salaries, locations, marketing and fuel costs are changing constantly. Not to mention, the costs of business which is collecting information, negotiating and creating contracts and transactions with customers and suppliers, which also face rapid changes in costs. Transport Costs are a monetary (money) measure of what the transport provider (Toll) must pay to produce transportation services (shipping). They come as fixed (infrastructure; roads/highway) and variable (operating truck) costs, depending on a variety of conditions related to geography (time and distance), infrastructure, administrative barriers, energy and how passengers and freight are carried. Three major components of transport costs: 1. Friction of distance is how many units of space can be traded per unit of cost. Distance is a common attributed used to measure transport costs 2. Shipments implies the transport mode used 3. Frequency allows for lower average transport costs through achieving economies of scale Rates are the price of transportation services paid by their users. They are the negotiated monetary cost of moving a passenger or unit of freight between a specific origin and destination. Rates are often visible to consumers since transport providers must provide this information to sell services to users. The monetary difference between costs and rates results in either a loss or deficit from the service provider. For public transportation, rates are often fixed and the goal is to provide an affordable mobility to the largest possible segment of the population even if this implies a recurring deficit (public transportation systems rarely make a profit). For freight and passenger transportation (air), rates are determined based on the pressure of competition. Rates will be adjusted according to the demand of transport services, and the supply of those services.

The most significant conditions affecting transport costs and rates are: Geography: Distance and accessibility. Distance is the most basic condition affecting costs; the more difficult it is to trade space for a cost, the more important is the friction of distance. The friction of distance can be expressed in terms of length, time, economic costs or the amount of energy used. It also varies according to type of transportation mode used, and the efficiency of specific transport routes. Countries surrounded by land (instead of water) tend to have higher transport costs (2x) because they dont have access to maritime transportation. Type of product: Many products require packaging (food), special handling (hazardous goods), bulky (furniture, computers) or perishable (food). Metal is easier to transport than flowers or food because metal requires basic storage facilities and can be transhipped using basic equipment, whereas flowers need to be specially prepared so they dont lose their shape / smell / colour. Insurance costs are also considered for the type of products, with goods easily damaged having higher insurance costs. Economies of scale: The larger the quantities transported, the lower the unit cost. Bulk commodities like coal, oil and grains are highly suitable to obtain lower unit transport costs if theyre shipped in bulk. Energy: Transport activities are large consumers of energy, especially oil and fuel. (Dont need to know, but interesting) 60% of all global oil consumption is due to transport activities. Transport typically accounts for 25% of all energy consumption of an economy. Cost of energy intensive modes like air, are particularly easily influenced by cost of energy. Infrastructure: Efficiency and capacity of transport modes and terminals has a direct impact on costs. Poor infrastructure means higher transport costs (because of traffic delays, longer routes, congestion). More transport infrastructure means lower transport costs, since more infrastructure means its more reliable (no delays), and can handle more movements (more cars, trucks, etc.) Mode: Different modes have different transport costs. Each mode has its own capacity limits and operational conditions. When modes compete for the same customers, the outcome is lower transport cost. Competition and regulation: More competition, more transport providers trying to compete on cost (attracting the customer), means lower costs for the consumer. Regulations such as tariffs, cabotage laws, labour and safety often add to transport costs.

Types of transport costs: The more affordable transportation is, the more frequent the movements, the more likely of transportation over long distances (if it is too expensive, people will only transport things over short distances).

- Freight on board (FOB) is an INCOTERM that refers to the price of a good in conjunction to the factory costs and shipping costs from the factory, to the consumer. The consumer pays the transport costs, which is dependent on distance travelled. - Cost Insurance Freight (CIF) considers the price of a good, the insurance cost and the transportation cost. A uniform delivered price is achieved for all customers everywhere, with no spatially variable shipping price.

FOB vs. CIF: FOB (positively linear line on graph) = Price can be cheaper than CIF if the distance is shorter and =<CIF, as CIF = a fixed cost (horizontal line on graph)

Why ship CIF?

Importers prefer CIF terms when either theyre new to international trade or they have relatively little freight volume. These importers often find CIF simpler in that their suppliers are responsible for arranging freight and insurance details. Under these terms the importer relinquishes control of choosing freight carriers, routing and other shipping specifics. For these companies, convenience outweighs the need for enhanced shipment control and associated freight savings.

Why ship FOB?

Buying Free On Board has two major benefits over CIF, more competitive freight rates and enhanced shipment control. When shipping CIF, companies must be careful that theyre shipping rates are competitive since overseas suppliers are inclined to mark up their freight cost for the extra service provided in arranging shipments. U.S. importers quickly learn that they can obtain very competitive shipping rates even with small to medium freight volumes. While cost is always important, there is another major reason for buying FOB.

Increased supply chain visibility and control is a critical FOB benefit. By taking title to the goods as they cross the ships rail at the overseas port of shipment, importers are better able to obtain accurate and timely shipment information by working with the third party logistics provider of their choosing. In this way, they are assured their freight partner is working in their best interest, not that of their suppliers.

- Terminal Costs is the cost related to loading, transshipment and unloading. Two major terminal costs can be considered: loading and unloading at the origin and destination, which are unavoidable, and intermediate (transshipment) costs that can be avoided.

- Line-haul costs are a function of distance over which a unit of freight is carried. This cost is incurred for transporting goods over a route, but does not include costs of loading and unloading goods, merely just costs that vary based on distance.

- Capital costs apply to the physical assets of transportation, such as infrastructure, terminals and vehicles.

Transportation fulfils a derived transport demand and supports mobility. It is a service which cannot be stored (perishability) and must be used immediately. Without movement, transport infrastructure would be useless, and without infrastructure, movements could not occur/ occur in a cost efficient manner.

Transport supply is the capacity of transportation infrastructure and modes. Transport supply is expressed in infrastructures (capacity), services (frequency), networks (movement). The number of passengers, volume (liquid), or mass (freight) that can be transported per unit of time and space, is commonly used to measure transport supply. Transport demand is the expression of the transport needs. Similar to supply, it also expressed in terms of number of people, volume or tonnes per unit of time and space.

Transport supply combines modal and intermodal supply. Modal supply is the capacity of a mode (e.g. air) to support traffic. The supply of one mode influences the supply of others, such as roads where different modes compete for the same infrastructure. Intermodal supply is the capacity to transship goods and people from one mode to another (maritime to road / road to air). The potential demand is the amount of traffic if transport costs did not exist. The realised demand is the traffic that actually takes place (real). Demand should not exceed capacity.

Most of the time, transport demand is stable and recurrent, which means it is easier to plan and forecast. However, sometimes it can be unstable and uncertain, which makes it difficult to offer an adequate level of service. Public transportation (train and tram) is recurring and predictable, while emergency response (ambulance) is unpredictable demand. Transport demand functions vary according to what is transported:


Passengers: For road and air passengers, demand is a function of demographics (income, age, ethnicity, gender, mode preferences) Freight: For freight transportation, demand is a function of the nature, and the importance of economic activities (GDP), and mode preferences. Freight demand is more harder to evaluate than passengers. Information: For telecommunications, the demand can be a function of criteria like population (demand for telephone calls), volume of activities (stock exchange), standard of living and education.

Transport demand and supply interact until equilibrium is reached between the quantity of transport the market is willing to use at a given price, and the quantity being supplied for that price level.

If transport costs are high, demand is low as the consumers of a transport service are less likely to use it/seek other alternatives. If transport costs are low, demand would be high as users would get more services for the same cost. The supply curve is the opposite, if costs are high, transport providers (3PL's) would be willing to supply high quantities of services since profits are likely to arise, whereas if costs were low, the quantity of transport services would be low as many providers see little benefit at operating at a loss.