Choice of Air Cargo Transshipment Airport
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View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics CIRJE-F-291 Choice of Air Cargo Transshipment Airport: An Application to Air Cargo Traffic to/from Northeast Asia Hiroshi Ohashi The University of Tokyo Tae-Seung Kim Korea Transport Institute Tae Hoon Oum Chunyan Yu University of British Columbia July 2004 CIRJE Discussion Papers can be downloaded without charge from: http://www.e.u-tokyo.ac.jp/cirje/research/03research02dp.html Discussion Papers are a series of manuscripts in their draft form. They are not intended for circulation or distribution except as indicated by the author. For that reason Discussion Papers may not be reproduced or distributed without the written consent of the author. Choice of Air Cargo Transshipment Airport: an application to air cargo traffic to/from Northeast Asia July 2004 Hiroshi Ohashi University of Tokyo Faculty of Economics [email protected] Tae-Seung Kim Korea Transport Institute [email protected] Tae Hoon Oum Chunyan Yu Sauder School of Business University of British Columbia [email protected] [email protected] Abstract Based on a unique data set of 760 air cargo transshipment routings to/from the Northeast Asian region in 2000, this paper applies an aggregate form of multinomial logit model to identify the critical factors influencing air cargo transshipment route choice decisions. The analysis focuses on the trade-off between monetary cost and time cost while considering other variables relevant for choice of transshipment airport. The estimation method considers the presence of unobserved attributes, and corrects for resulting endogeneity via a two-stage least squares estimation using instrumental variables. Our empirical results show that choice of air cargo transshipment hub is more sensitive to time cost than the monetary costs such as landing fees and line-haul price. For example, our simulation results suggest that a one-hour reduction in total transport and processing time for a particular O-D air cargo traffic would be more effective than a US$1,000 reduction in airport charges. This suggests that it is important to reduce air cargo connecting time at an airport via adequate investment in capacity and automation even by increasing landing and other airport charges. Acknowledgements: The authors would like to thank the Northeast Asian Economic Forum and Korea Transport Institute for project funding for data collection. Tae Oum acknowledges gratefully the Social Science and Humanities Research Council (SSHRC) of Canada for research grant support. 1 Choice of Air Cargo Transshipment Location: an application to air cargo traffic to/from Northeast Asia 1. Introduction World air cargo is a US$46 billion annual business (Hoang, 2002), and is expected to more than triple by 2021 (Boeing, 2002). Asian countries have experienced strong growth in the international air cargo business after the recovery of the financial crisis in 1997, and are expected to lead all other international geographic markets in average annual air growth over the next 20 years. Northeast Asia (NEA), including China, Korea and Japan, is the major growth markets as well as being the largest of Asian markets. It is home to three of the top five air cargo airports in the world: Hong Kong ranked 2nd in 2003 with 2.7 million tones of air cargo; Narita ranked 3rd at 2.2 million tonnes; and Incheon ranked 5th with 1.8 million tonnes. Shanghai Pudong and Beijing Capital International Airport were also ranked among the top 30 cargo airports in the world in 2003. The governments in the NEA countries have been actively pursuing economic policies that would help develop designated regions in their respective countries into global or regional transport and logistics hub. The ability of the airports in these designated regions to attractive carriers and air cargo traffic, particularly with respect to transshipment traffic, is crucial to the establishment of a transport and logistics hub. Many factors affect an airport’s ability to attract transshipment cargo traffic, including the airport’s current traffic flow patterns; airport infrastructure capacity and activities; linkage with regional and intercontinental airport network; service quality; and airport cost factors. While several existing studies provide conceptual discussions on the effects of these factors (Caves, 1996; Oum and Park, 2004), a severe lack of empirical studies on this topic remains. The purpose of this paper is to offer some empirical evidence on how airport service quality and transport cost factors affect the choice of air cargo transshipment location with an application to the NEA region. The paper applies an aggregate form of multinomial logit model to identify critical determinants of transshipment cargo flows. The analysis incorporates two major factors, monetary cost (such as line-haul cost and airport charges) and service quality in terms of time cost including cruising/flight time and connecting time at transshipment airports, along with some other controls. Our model estimation considers the presence of unobserved attributes, and corrects for the resulting endogeneity using appropriate instrumental variables. Our results indicate that the choice of transshipment location is more sensitive to service quality (in terms of time cost) than to monetary cost: cargo carriers/shippers would be willing to pay more than $1,000 in the form of increased airport charges to achieve a one-hour reduction in the transport and processing time for a particular O-D air cargo traffic. This finding implies that it would be more effective for the airports to attract transshipment cargo by reducing air cargo connecting time, rather than reducing airport charges. 2 A series of simulation exercises are also conducted using the estimated model to further measure the effect of changes in airport charges and service quality attributes on the transshipment location choices. Two policy alternatives are examined, one calls for reduction in airport charges, and the other calls for reduction in cargo connecting time at the transshipment airport. The results from the simulation exercises indicate that a 20% increase in transshipment traffic could be achieved by a 30% reduction in air cargo connecting time or a 50% reduction in airport charges. This finding implies that it may make sense to raise airport charges for capacity expansion and automation including electronic data interchange (EDI) system in order to improve air cargo connecting time at the airport. The paper is organized as follows: Section 2 provides a general discussion of air cargo business, and introduces the data set and important explanatory variables. Section 3 describes the market share model for a particular O-D air cargo traffic which is used to uncover determinants of air cargo transshipment location choice in the NEA region. Section 4 presents estimation results. Section 5 conducts simulation exercises using the case of Seoul/Incheon. Section 6 summarizes our main findings and conclusions. 2. Air Cargo Business and Data This section describes the international air cargo business in the NEA region, and introduces major variables that likely influence the air cargo transshipment activities. Many of the discussions on institutional features of air cargo business are taken from Rigas Doganis (2002). The logistics of moving air cargo is more complicated than that of moving passengers. It involves packaging, preparing documentation, arranging insurance, collecting cargo from shippers, facilitating customs clearance at origin and destination, and completing final delivery. This complexity of the job has encouraged the growth of specialist firms that carry out these tasks on behalf of shippers and provide an interface between shippers and airlines. In this paper, we consider freight forwarders, consolidators, or large shippers as decision makers with respects to air cargo routing choice. For simplicity, we refer these three agents altogether as “freight forwarders,” unless the use of this term creates confusion. Air cargo business is inherently competitive. This is because most cargo, except for emergency cargo, is indifferent to the routings from its origin to its destination. A shipper is not concerned whether a shipment goes from New York to Kuala Lumpur via Tokyo, Shanghai, or Hong Kong as a transshipment point, provided that the shipment arrives at Kuala Lumpur within the expected time. Thus, in most cases, a freight forwarder would choose among numerous routings and carriers to move their cargo to the final destination. Therefore, there is more competition among airports for transshipment cargo than for passengers. 3 Transshipment is a very important aspect of the air cargo industry in the NEA region as indicated by Figure 1. Figure 1 shows that 70 % of air cargo traffic between North American and the NEA countries has one or more transshipment points before reaching their final destination in 2000. Anchorage has the highest share of transshipment air cargo originating from North America, as most U.S. carriers use short or medium haul aircrafts to collect their cargo and consolidate them at Anchorage, and then use long-haul aircrafts to deliver to the NEA region. About half of the air cargo traffic going from NEA to North America is transshipped at Tokyo. A similar pattern could be observed in the NEA- Europe markets as shown by Figure 2: about 60 % of the cargo traffic between the NEA region and Europe has at least one transshipment point on the way to the destination; and Tokyo is a dominant transshipment point in the market. Ideally, we would like to trace each shipment from their origin to destination. However, we have to rely on air cargo traffic flow between gateway airports because of lack of data. Thus, we implicitly assume that there is no alternative routing choice beyond the gateway airports. Table 1 lists major gateway airports and their main characteristics related to the air cargo traffic in the NEA region.