Airships in Intercontinental Shipping: The Demand Side

Airships in Intercontinental Shipping: The Demand Side

Airships in Intercontinental Shipping: The Demand Side

More than any other market, intercontinental shipping is where airships can foreseeably achieve vast success. This is where engineering and economics meet and give birth to wonders. Airships’ inherent technological advantages, low fuel consumption and huge payloads enable them to capture hundreds of billions, even trillions of ton-miles’ worth of freight business from cargo jets and ships. Cargo airships can be to intercontinental transport what trucks and rail are to overland transport, the middle option that captures a huge swath of medium-value freight. A mere 1% of world maritime freight, at prices comparable to those of trucks on land, would send revenues over $100 billion. By capturing a plausible 12% of maritime freight, which is far less than the middle options share of the overland market, cargo airships’ annual revenue could surpass $2 trillion. If you find all this hard to believe, read on.

Basic Economics: The Motivation for Trade

For present purposes, it is important to begin with an understanding of trade at an abstract level. This permits some generalization from the present to a future world with a different mix of transportation options.

Intercontinental shipping is a “derived demand,” a consequence of demand for other things. For example, Canadians want to consume coffee, bananas and mangoes, that is a primary demand. But none of these products grow in Canada. This results in a need for long-distance or intercontinental shipping. The shipping is not consumed directly, but is a means to consume something else.

As important as absolute inability to grow things, like mangoes in Canada, is relative inability to grow things, an instance of what economists call “comparative advantage.” In temperate regions, most of what people consume could be grown locally, but often conditions are more favorable for growing it somewhere else. In the state of Maine, for example, it is possible to grow strawberries, grapes, and most temperate zone crops, but Maine is only economically competitive in blueberries and potatoes. Everything else is imported. By enabling regions to specialize in what they grow best and trade for the rest, long-distance shipping improves global productivity and raises living standards.

A driver of comparative advantage in indoor activities is what economists call “factor endowments.” The “factors” are broad categories of production inputs like labor and capital. As a rough generalization, regions with highly educated people and/or physical capital relative to their populations have comparative advantage in capital- or skill-intensive industries and production processes. Poorer, less educated regions with large populations have comparative advantage in labor-intensive manufacturing. Thus Germany exports Magnetic Resonance Imaging (MRI) equipment, and Bangladesh exports T-shirts. Despite their differences, both depend on affordable transportation.

Bangladesh’s rise to be a global T-shirt supplier is a testament to the rise of containerized shipping. Offshoring of labor-intensive production processes from high-wage, developed countries to poorer countries with cheap, abundant labor became a major trend in late 20th-century as trade barriers were reduced. Global supply chains became possible. Without the lower transport cost innovation of ocean containers however, China and most of southeast Asia would still be trapped in grinding poverty.

Like ocean containers, cargo airships will expand the options for intercontinental trade. Consumers may indulge their taste for more variety, eating produce and using products from faraway places more than today. Manufacturers may send more work offshore and further “split up the value chain” resulting in more trans-ocean transport.

Time versus Money: The Multidimensional Cost of Shipping

The cost of long-distance shipping is multidimensional. The shipper pays the carrier so much money per ton, per cubic meter or per container load. The shipper also pays in time, while they wait for goods to move from origin to destination for sale. Other logistics costs are important too, such as the need to break down and package large goods, or the deterioration in quality that may occur due to the way goods are handled in transit. Nevertheless, the tradeoff between the time and money costs of shipping is a major determinant of transportation choice.

The speed of shipping matters for three main reasons. Shippers demand speed in order to get goods to market faster, to prevent inventory losses and to recover working capital tied up in high-value goods more quickly.

Slow transportation requires longer lead times in organizational planning which may interfere with agility, creativity, and adaptability in response to new information. Business strategies like “lean” manufacturing use faster logistics to mitigate the need for large inventories, and to accelerate the product cycle. Just-in-time delivery increases a company’s transportation spend, while economizing on warehousing and waste.

Perishable and fashion dependent goods inherently lose value over time. This is usually referred to as shrinkage. The value of the inventory that is shipped is less than the value of goods that arrive. Worse, if the time in transit causes the shipper to miss the market opportunity (especially for fashion goods), the losses can be substantial.

Having valuable goods tied up in transit leads to working capital opportunity cost. This applies to all cargo, but is far more important for goods with a high value relative to their weight. The working capital opportunity cost motivates a premium for faster shipping in proportion to the value-to-weight ratio of the goods being shipped. A company whose marginal cost of capital is 12% will save $1,000 by getting $1,000,000 of goods delivered three days sooner.

The way shippers navigate the tradeoff between cost and speed largely determines the market shares of the transport modes. Figure 2 presents the market shares by value of the modes of transport for US imports and exports in 2017. In terms of the value of trade, approximately one-quarter of all external freight flows with the US is done by air. Virtually all trade with Canada and Mexico, the US’s two largest trading partners, is carried by truck and rail, but for the rest of the world, air and water are the only options. Exports by sea and by air are nearly equal as measured by value, although by weight air is just a small fraction of sea borne trade.

Figure 1. International Freight Modal Shares by Value for US Imports and Exports, 2017

The modal shares of US international trade contrast sharply with the modal shares for cargo transport within the US, as shown in Figure 2, where trucks dominate all the transport under 1,500 miles. The purple color in the chart mostly represents intermodal rail, which begins to increase its market share for distances beyond 750 miles and equals trucking beyond 2,000 miles. Air transport also increases its market share as distances become longer, but the middle options in terms of cost and speed, truck and rail, dominate throughout. They dominate by tonnage (not shown) as well as by value.

Figure 2. Market Shares by Freight Value and Distance for Transport in the US, 2016

For the majority of value-added overland freight, trucks and intermodal rail containers offer the most appealing combinations of cost and speed. If cargo airships fulfill their inherent technological promise, they should become to intercontinental shipping the middle option that is currently missing.

How Much Freight Will Cargo Airships Carry?

Most tender fruits and vegetables are too perishable to travel by sea, and a lot of fashion goods would move by airship in place of cargo jets. A laborious study should be undertaken, starting with an inventory of all goods shipped internationally, and inquiring, for each good, how perishability, fashion dependence, high value-to-weight ratio, product cycles and/or just-in-time production, would likely affect the choices of intercontinental shippers of airships versus cargo jets and container ships.

Working capital opportunity cost helps identify which goods might switch from container lines to cargo airships when they get big enough, e.g., with capacities of 125 tons or more, to move cargo for a fraction of the price that jets must charge. If an airship can move, say, $1,000,000 worth of goods from China to the US in 4 days instead of 27 on a ship, that might be worth $23,000 in working capital opportunity cost alone. If these goods travel 8,000 miles and weigh 125 tons, the working capital opportunity cost would justify paying a premium of just 2.3 cents per ton-mile, not enough to make airships competitive. But if $1,000,000 of product weighs 10 tons, i.e., the goods are worth about $50/kilogram, the working capital opportunity cost of airship transport alone is enough to justify a premium of 29 cents per ton-mile, likely enough to make the cargo airships of the future competitive. Guitars, shoes, paintings, and most electronics, then, are valuable enough to be worth accelerating for the sake of recovery of working capital.

The price point where working capital opportunity cost justifies moving goods at jet speed is much higher. If goods are worth $8,000/kilogram, then to move a ton of them from China to the US three days faster by jet instead of airship would save $8,000 in working capital opportunity cost, justifying the shipper in paying $1 extra per ton-mile for the jet. The difficulty of imagining goods worth $8,000/kilogram is suggestive of the difficulty cargo jets will have competing with cargo airships for the freight business.

As mentioned in the first post of this blog, ships accounted for about 60 trillion ton-miles of cargo transport in 2017, and planes, for about 137 billion. Suppose cargo airships captured most, say 90 billion ton-miles, of the market of cargo jets. With an average airship payload of 125 tons, an average speed of 80 miles per hour, and the airships well-utilized, flying an average of 300 days per year, 20 hours per day, each cargo airship would produce an average of 60 million ton-miles of cargo transport services per year. So 90 billion ton-miles of cargo airship freight would keep 1,500 cargo airships busy, enough to comprise a fairly dense transport network. At 30 cents per ton-mile, cargo airship annual revenues would be $27 billion, about one-tenth of the 2018 annual revenue of Apple.

But it is by capturing significant market share from ships that cargo airships could get wildly successful. A mere 1% of ships’ market share would mean 600 billion ton-miles of cargo transport, enough to keep, say, 10,000 airships busy. At 30 cents per ton-mile, giant airship revenues could hit $180 billion annually. At that volume, the network could be dense enough worldwide to serve almost all shippers conveniently. If airships captured 12%, still far short of the absolute majority of freight by tonnage and value that the middle options in overland trade carry, revenues would top $2 trillion, more than Walmart, Amazon, Apple, Google, ExxonMobil, and Facebook combined. Investors, take note!

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