Three major components, related to transactions, shipments, and the friction of distance, impact transport costs.
Transport systems face requirements to increase their capacity and to reduce the costs of mobility. All users (e.g. individuals, corporations, institutions, governments, etc.) must negotiate or bid for the mobility of passengers and freight because supplies, distribution systems, tariffs, salaries, locations, marketing techniques as well as fuel costs are constantly changing. There are also costs involved in gathering information, negotiating, and enforcing contracts and transactions, often referred to as the cost of doing business. Trade also involves transaction costs that all agents attempt to reduce since transaction costs account for a growing share of the resources consumed by the economy.
Frequently, corporations and individuals must decide how to route passengers or freight through the transport system. For passengers, this choice has been considerably expanded in the context of rising incomes and the availability of modes. For freight, the production of light and high-value consumer goods, such as electronics, and less bulky production techniques have expanded the locational choice of production and distribution. It is not uncommon for transport costs to account for 10% of the total cost of a product. This share also roughly applies to personal mobility, where households spend about 10% of their income on transportation, including automobile ownership, which has a complex cost structure. Thus, the choice of a transportation mode to route passengers and freight between origins and destinations becomes important and depends on several factors such as the nature of the goods, the available infrastructures, origins and destinations, technology, and their respective distances. Jointly, they define transportation costs.
Components of the Transport Market
Transportation offers a spectrum of costs and level of services, which results in substantial differences across the world. The price of a transport service includes the direct out-of-the-pocket money costs to the user. It also includes time costs and costs related to possible inefficiencies, discomfort, and risk (e.g. unexpected delays). However, economic actors often base their choice of transport mode or route on only part of the total transport price. For example, motorists are biased by short-run marginal costs. They might narrow down the price of a specific trip by car to fuel costs only, thereby excluding fixed costs such as depreciation, insurance, and vehicle tax.
Many shippers or freight forwarders are primarily guided by direct money costs when considering the price factor in the modal choice. The narrow focus on direct money costs is, to some extent, attributable to the fact that time costs and costs related to possible inefficiencies are harder to calculate and often can only be fully assessed after the cargo has arrived. There are significant conditions affecting transport costs and thus transport rates.
- Distance and time
The impacts of geography mainly involve distance and accessibility. Distance is commonly the most basic condition affecting transport costs. The more it is difficult to trade space for a cost, the more the friction of distance is important. It can be expressed in terms of length, time, economic costs, or the amount of energy used. It varies significantly according to the type of transportation mode involved and the efficiency of specific transport routes. Landlocked countries tend to have higher transport costs, often twice as much, as they do not have direct access to maritime transportation. The impact of geography on the cost structure can be expanded to include several rate zones, such as one for local, another for the nation, and another for exports.
The transport time component is also an important consideration as it is associated with the service factor of transportation. They include the transport time, the order time, the timing, the punctuality, and the frequency. For instance, a maritime shipping company may offer a container transport service between several North American and Pacific Asian ports. It may take 12 days to service two ports across the Pacific (transport time), and a port call is done every two days (frequency). To secure a slot on a ship, a freight forwarder must call at least five days in advance (order time). For a specific port terminal, a ship arrives at 8 AM and leaves at 5 PM (timing), with the average delay being six hours (punctuality).
Type of product
Many products require packaging, special handling, which are bulky or perishable. Coal is a commodity that is easier to transport than fruits or fresh flowers as it requires rudimentary storage facilities and can be transshipped using rudimentary equipment. Insurance costs are also to be considered and are commonly a function of the value to weight ratio and the risk associated with the movement. As such, different economic sectors incur different transport costs as they each have their own transport intensity. With containerization, the type of product plays little in the transport cost since rates are set per container, but products still need to be loaded or unloaded from the container.
For passengers, comfort and amenities must be provided, especially if long-distance travel is involved. These amenities have a cost but can also be a source of revenue, such as for retail and restoration.
- Economies of scale and energy
The larger the quantities transported, the lower the unit transport cost. Economies of scale or the possibilities to apply them are particularly suitable for bulk commodities such as energy (coal, oil), minerals, and grains if they are transported in large quantities. A similar trend also applies to container shipping with larger containerships involving lower unit costs. For the transportation of passengers economies of scale are salient for public transit systems. However, they are limited by the demand as the maximum-sized transport unit that can be assigned on a route cannot exceed the available demand without impairing its profitability.
Transport activities are large consumers of energy, especially oil. About 60% of all global oil consumption is attributed to transport activities. Transport typically accounts for about 25% of all the energy consumption of an economy. The costs of several energy-intensive transport modes, such as maritime and air transport, are particularly susceptible to fluctuations in energy prices since energy accounts to close to half their operating costs.
- Empty backhauls
Many transport interactions involve empty backhauls since it is uncommon to have a perfect match between an inbound and a return trip. Commuting patterns involve imbalanced flows and empty return trips. For international trade, imbalances between imports and exports have an impact on transport costs. This is especially the case for container transportation since trade imbalances imply the repositioning of empty containers that must be taken into account in the total transport costs. Consequently, if a trade balance is strongly negative (more imports than exports), transport costs for imports tend to be higher than for exports. Significant transport rate imbalances have emerged along major trade routes. The same condition applies at the national and local levels where freight flows are often unidirectional, implying empty backhaul movements.
- Infrastructures and modes
The efficiency and capacity of transport modes and terminals have a direct impact on transport costs. Poor infrastructures imply higher transport costs, delays, and adverse economic consequences. More developed transport systems tend to have lower transport costs since they are more reliable, connected, and can handle more movements.
Different transport costs characterize different modes since each has their own capacity limitations and operational conditions. A core aspect concerns the suitability of modes according to the distance involved and the nature of what is being carried. When two or more modes are directly competing for the same market, the outcome often results in lower transport costs and the development of niches. Containerized transportation permitted a significant reduction in freight transport rates worldwide by allowing relatively small transport units (containers) to be carried in massified loads.
- Competition, regulation, and subsidies
Concerns the complex competitive and regulatory environment in which transportation takes place. Transport services taking place over highly competitive segments tend to be of lower cost than on segments with limited competition (oligopoly or monopoly). International competition has favored concentration in many segments of the transport industry, namely maritime and air modes. Regulations, such as tariffs, cabotage laws, labor, security, and safety impose additional transport costs, particularly in developing economies.
If the infrastructure is expensive to develop and maintain, this cost should be reflected in fares to cover the amortization of the asset. Publicly available roads are a form of cross-subsidy since they offer their users free infrastructure. Still, freedom of access can be misleading as sales and fuel taxes are paid by users and these funds are used for road infrastructure construction and maintenance. If a government or a corporation uses other sectors of its activities to subsidize the full costs of transport infrastructure, then this cross-subsidy is having an impact on its costs. Taxes and tolls are commonly used to cross-subsidize public transit.
- Surcharges, taxes and tolls
Surcharges refer to an array of fees, often set in an arbitrary fashion, to reflect temporary conditions that may impact on the costs assumed by the transporter. They also take place when fares are regulated, leaving the operator to find alternative sources of revenue. The most common are fuel surcharges, security fees, geopolitical risk premiums, and additional baggage fees. The passenger transport industry, particularly airlines, has become dependent on a wide array of surcharges as a source of revenue for operators. Yield management is another form of surcharge where a transport service provider changes its rate according to fluctuations in demand.