Intercontinental Trade and Mode Choice

Around 40% of the value but less than 1% of intercontinental trade weight moves by air and most of the remainder by sea. In cross border markets connected with a land border, most volumes are moved on trucks and trains, although coastal or inland shipping can also play a role. Between China and Europe, rail has been playing an increasing role. Understanding what drives mode choice is key to understanding the demand for freight transportation capacity, in particular for air cargo and long-distance rail, where small shifts to and from ships can have big impacts.

Mode Combinations

Shippers essentially have a choice of a combination of four modes: air, sea, as well as rail and road in markets that can connect via land, such as China to Central Asia and Europe, or between North and Latin America. Except for door-to-door trucking or courier services, all shipments require transfer between modes, usually to or from a truck. Figure 1 provides an overview of the main modal combinations.

There are also some market where special modal combinations may be viable. This includes Sea-Air combinations in markets where there are directional air cargo imbalances which create low back-haul freight rates, or even rail to air markets. This is a topic we intend to cover in more detail, with markets such as the Caribbean, the Gulf or Central Asia providing some cases where these kinds of combinations can work. Generally, we find that Sea-air or rail to air markets (and vice versa) are temporary in nature and do not justify supporting infrastructure investments.

Trade-offs Between Modes

The choice of a service will involve trade-off between certain characteristics, primarily cost, speed, reliability, security:

• Cost: door-to-door transportation charges, duties, taxes as well as the cost of additional services
• Speed: door-to-door elapsed time
• Reliability: pick-up and delivery time windows
• Security: in transit loss or damage

Depending on the cargo, the shipper may have a mix of additional handling or service requirements including climate control, special packaging, shipment visibility, billing, storage and warehousing, to name a few.

Figure 2 provides an illustrative overview of the differences in transit time and (pre-COVID) cost per kg for cargo moving between China and Europe. Shippers have the choice between express and general air cargo, rail, sea-air and containerised shipping options.

In practice a shipper will choose a particular provider rather than a particular mode, although the trade-offs between modes or transportation products is implicit. Some examples include:

• A global express provider or “integrator” such as DHL, FedEx, UPS or a regionally focused company such as SF Express, Aramex, or Estafeta.
• Mail or parcel post using a postal company or courier
• An airline, shipping line, trucking company or railway
• A freight forwarder such as DHL Global Forwarding, DSV, Kuehne and Nagel or regionally focused company such as Mainfreight, or one specialised on a certain product
• A charter brokers
• A logistics provider who can manage part of or a company’s entire supply chain, including the use of various modes of shipping, storage, and inventory management.

Rules for Determining Mode Choice

We are concerned less with the decisions made on an individual shipper level but with the overall outcome for the market. While there are some commodities that do not have much of a choice of mode, most traffic that is carried on aircraft or in containers moves by both modes (see Figure 3).

Air and sea are not mutually exclusive. And bulk commodities such as wheat or certain ores are also transported on container shipping services.

There are a number of reasons why both air, sea (as well as long distance road or rail transport) are feasible modes of transportation, including:

• Value – the more valuable the commodity, the more important the cost of interest of inventory in transit and the less important the cost of transportation. However, value per kg is not a good predictor or whether an item moves by air or sea.
• Nature of the Commodity – product characteristics often determine the choice of mode. For example, certain dangerous goods cannot be transported on aircraft.
• Nature of Demand – for critical or economically perishable cargo the choice of mode is predetermined. During peaks in demand seasonal mode shift can be observed.
• Dimensions: some industrial equipment is too large to fit into aircraft despite high value and criticality
• Consignment size – the larger the shipment, the more options a shipper had in terms of mode and transportation product. For small shipments express and air tend to be more economical.
• Relative price of air and sea freight, as well as the price elasticity of demand for certain transportation products. Particularly in 2020-2022, the ratio of sea to air changed significantly in favour of air freight.
• Logistics and Inventory Management: Structurally, the way industries manage their logistics and inventory has a strong impact on the use of air vs sea. Some shippers will take a more scientific approach in balancing their transportation and inventory related costs, while for others logistics philosophy may determine transportation procurement decisions. An example of this is the clothing and apparel business where some companies move most of their product by air while others use primarily sea freight.
• Sustainability considerations: some companies shun the use of airfreight as part of their pledge to reduce carbon emissions relating to transport.

In our experience, there is no simple method for determining mode share, but requires commodity and market level analysis to explain and predict expected effects.