Quick Response Freight Manual: Final Report

2.0 Factors Affecting Freight Demand

2.1 Introduction

This chapter identifies and describes a number of factors that affect the demand for freight. The factors may either directly influence the demand for goods and services, which in turn affect the demand for freight; or they may impact on the costs and/or levels of service of one or more freight transport modes, which influence whether or not (as well as how) the freight demands will be met.

The purpose of this chapter is to provide transportation planners and analysts meaningful insights on various determinants of freight demand. However, it is not the intent of this chapter to identify and discuss the universe of factors that bear directly or indirectly on freight demand. An adequate understanding of the mechanism and extent by which some of these factors influence the characteristics of the goods and commodities produced and consumed as well as the manner in which they are shipped is crucial to freight analysis and planning. These factors are generally used for forecasting future traffic (Chapter 3), estimating volumes of trips generated and attracted and distributing trips over the transportation network (Chapter 4), and predicting the impacts of new or planned facilities (Chapter 5).

The factors influencing the demand for freight are more complex and interdependent than the factors influencing passenger demand because:¹

decisions by shippers, carriers and receivers affect whether or not a particular shipment is made and, if so, by what mode and route;
there are many different types of commodities that make up the freight traffic, and these commodities have wide range of prices or values associated with them (also some are perishable while others are not);
freight movements are measured in various units such as dollar value, quantity, weight, volume, container, carload, truckload etc.; and
the cost of moving freight is much harder to determine compared with cost to move passengers because more specialized services are required for freight (i.e. handling, loading, unloading, classifying, storing, packaging, warehousing, inventorying, etc.).

In this chapter, the discussions pertaining to the factors affecting freight demand are mostly adopted from the NCHRP 8-30 report, Forecasting Freight Transportation Demand, prepared by Cambridge Systematics Inc. The factors discussed in that report include:

The Economy
Industrial Location Patterns
Globalization of Business
International Trade Agreements
International Transportation Agreements
Just-in-Time Inventory Practices
Carrier-Shipper Alliances
Centralized Warehousing
Packaging Materials
Recycling
Economic Regulation and Deregulation
Intermodal Operating Agreements
Fuel Prices
Publicly Provided Infrastructure
User Charges and Other Taxes
Government Subsidization of Carriers
Environmental Policies and Restrictions
Safety Policies and Restrictions
Effects of Changes in Truck Size and Weight Limits
Congestion
Technological Advances

Additional explanations are provided to describe the characteristics of freight that are heavily influenced by each factor. A matrix of freight demand characteristics (i.e. commodity, shipment, mode and logistics cost) versus factors affecting freight demand is developed at the end of the chapter.

Since the degree by which each factor influences freight demand varies from case to case, it is not possible to make definitive assessments of their absolute and relative importance in determining freight demand. The planner should be able to make appropriate judgment based on his or her knowledge of the specific situation.

2.2 Factors that Affect Freight Demand²

1. The Economy

As a derived demand, freight demand is primarily influenced by the volume of goods produced and consumed. Expansion in the national economy, or the economy of any region, results in increases in overall demand (in terms of volume) for goods and services, while economic contractions result in demand reductions. Overall economic condition is also indicative of the buying/purchasing power of the population. The types and values of commodities produced and consumed usually reflect this economic condition.

At the national level, the size of the economy is most frequently measured in dollar terms as gross national product (GNP) or gross domestic product (GDP). However, freight demand is more closely related to the goods-production component of GNP or GDP. While real GDP of goods is a reasonable overall measure of the economy's influence on freight demand, it measures goods production in dollars rather than in weight or volume. Production of low value (dollars per ton) bulk commodities, such as agricultural products and coal, generate a larger share of freight demand than their total value would indicate.

2. Industrial Location Patterns

Industrial location patterns are critical to determining transport demand as measured in ton-miles, line-haul miles or other units which reflect length of haul. The influence of spatial distribution can best be measured through its actual effect on demand - as average length of haul by commodity or total ton-miles transported. The spatial distribution of economic activity also influences mode choice, with many commodities likely to be shipped by one mode when distances are short and by another when distances are longer. Travel time, reliability, shipping costs and other logistics costs are all a function of distance and vary from mode to mode. Another freight characteristic that is influenced by location (and hence distance) is the perishability of the product.

3. Globalization of Business

Many companies today manage worldwide production and distribution systems, and national economies are increasingly being integrated into a global economy. As production facilities are shifted to locations around the globe where products can be produced more economically, the demand for world trade will continue to increase. The patterns of domestic and foreign production and distribution vary significantly by industry and product type, and they affect transportation requirements in the United States. For example, increasing imports from Asia eventually may warrant containership service directly from India, a service that would operate through the Suez Canal to the East Coast of the United States. These containers would then be transported inland from the East Coast, instead of from the West Coast as currently is the case.

The changing patterns of world trade influence both transport flows and mode choice. The costs of production and distribution of commodities will reflect much higher economies of scale compared to more localized businesses. The average length of haul for freight is also much higher for global businesses, and usually involves more than one line-haul or terminal facility. Most worldwide freight flows are intermodal, which highlights the need for standardization of packaging, equipment, handling, and safety procedures.

4. International Trade Agreements

Global production and distribution are also affected by international trade agreements, quotas, and tariff restrictions. The dynamics of the global marketplace have driven the formation of numerous large regional trading blocs including the European Union (EU), the ASEAN Free Trade Area (AFTA), and most important for the United States the North American Free Trade Agreement (NAFTA). The essence of the NAFTA is to lower total costs (i.e. distribution and logistics costs) for North American businesses exporting goods within the North American market. The tariff elimination schedule will allow all trade between Canada and the United States to be duty-free by 1998. For most U.S.-Mexico and Canada-Mexico trade, tariffs will be phased out by the year 2003.

The implications of the NAFTA have been significant for freight transportation interests, particularly in the border regions. NAFTA provisions radically change cross-border transportation systems (particularly between the United States and Mexico) which were complicated by regulations which increased costs. The passage of the NAFTA also spawned the implementation of the Customs Modernization and Informed Compliance Act (or MOD Act), which gave Customs the authority to expand its automated entry system. Over time, it allows Customs to eliminate old systems and adopt practices which will save both taxpayers and the trade community time and money. As tariff rates decline and cargo flows increase, improvements to the border infrastructure and the border crossing processes will continue to be made.

Further integration of economies of individual countries into regional economic and trading blocs is likely to occur.

5. International Transportation Agreements
Bilateral and multilateral international transportation agreements often involve complex negotiations as the nations involved seek to protect their interests and to create opportunities for trade and economic growth. Where carrier entry or participation is restricted in a particular market, rates tend to be higher. Each mode operates under a unique set of international arrangements. International air service agreements define the service routes, and they control the number of carriers from each country, as well as the type of aircraft, that can serve those routes. Although international water transport is largely free from route restrictions, carrier conferences influence rates and services in major markets, and cargo preferences may limit carrier participation in some trade. International motor carrier operations in North America are likely to become more efficient and competitive as a result of NAFTA, under which various prohibitions on U.S., Mexican, and Canadian carriers will be phased out and safety standards will be harmonized. In recent years, U.S. and Canadian rail carriers have become more integrated, affecting service, rates, and rail competition.

6. Just-in-Time (JIT) Inventory Practices
JIT systems focus on keeping inventories at minimum levels by coordinating input deliveries with production schedules. Adoption of a JIT system often results in increasing the frequency with which inbound shipments are scheduled, decreasing the lead times and sizes of these shipments, and increasing the importance of receiving these shipments on time. Firms which adopt JIT systems often reduce the number of suppliers and transport companies with which they deal and select suppliers which are close enough to be able to deliver shipments within short lead times.

The effects on freight demand are to increase the number of individual shipments, decrease their length of haul and transport costs, and increase the reliability of on-time delivery. There may be some shifts to modes which are faster or better able to handle smaller shipment sizes. Within modes, the shift is likely to be to carriers capable of providing highly reliable service.

7. Carrier-Shipper Alliances
There have been dramatic changes in the institutional relationships among transportation providers and users. Shippers demand faster, reliable, "seamless" door-to-door transportation services, often without stating a mode preference. Such services can be made available through a single vendor who can arrange, manage, and monitor the movement. Increasingly, shippers are entering into partnerships with, and often providing in-plant space for, personnel of logistics companies which, in turn, often are subsidiaries of carriers.

The major impacts of carrier-shipper alliances on freight demand include lower logistics costs per unit of commodity, higher reliability of on-time delivery and lower probability of loss or damage claim.

8. Centralized Warehousing
As transportation systems have become more efficient and more reliable, there has been more consolidation of warehousing and distribution. This has resulted in part from the fact that manufacturing firms are increasing their use of third-party logistics providers who specialize in optimizing the distribution process. The results include increases in the demand for transportation (as reflected in ton-miles or line-haul miles) and in associated costs (i.e. line-haul, loading/unloading and in-transit logistics costs). However, centralized warehousing reduces the cost to keep and maintain an inventory which include storage space requirements, storage costs and shelf loss.

9. Packaging Materials
The use of lightweight materials as protective packaging for many manufactured products has resulted in a reduction in average weight and density (weight/volume) of shipments. This means that heavy fragile products such as appliances, glass products, computers and equipment are now more transportable than they used to be. The increase in low-density shipments has also created a demand for larger truck trailers and shipping containers (i.e. higher volume or cube limit).

10. Recycling
Increased use of recycled materials such as paper, aluminum, plastics and glass products affects freight origin and destination patterns, lengths of haul, and mode choice for several commodities. Recycling plants are frequently located near the markets they serve (i.e. residential or business communities that use recycled products), which also provide them with materials for recycling. The types of commodities, vehicles/carriers and routes associated with freight transportation depend upon the sizes and spatial distributions of the recycling plants and the markets they serve.

11. Economic Regulation and Deregulation
Deregulation within the transportation industry was driven by the desire to encourage greater price and service competition and to increase opportunities to develop multimodal and intermodal relationships among and within the various modes. The trend toward regulatory change began with the Transportation Act of 1940, but was most evident in the deregulatory actions taken in the 1970's and 1980's. These actions include the Airline Deregulation Act of 1978 (which was preceded by deregulation of the all-cargo air services industry in 1977), the Motor Carrier Act of 1980, the Staggers Rail Act of 1980, and the Shipping Act of 1984. All of these actions paved the way for the growth in intermodalism, the formation of multimodal transportation companies and alliances, and the evolution of logistics management -- all of which have substantial impacts on the costs and level of service of freight transportation.

12. Intermodal Operating Agreements
Transportation carriers have become increasingly multimodal, looking for the most effective ways to integrate and market their capacity and to combine the services of rail, truck, water, and air modes. Traditional competitors, both within and across modes, are recognizing the need to build cooperative relationships. As a result of intermodal operating agreements and joint ventures, carriers are able to offer a broader range of services and to tailor service packages for individual shippers, resulting in lower costs and higher levels of service for freight transportation.

13. Fuel Prices
For all modes of transportation, fuel is a large and volatile cost component. An increase in fuel prices is likely to result in transportation rate increases for faster modes (e.g., air) and for premium services provided by a given mode (e.g., high speed rail container and trailer carriage). Line-haul cost of various modes, which is a function of distance, will also be impacted by fuel price changes. Accordingly, some changes in demand for specific commodities or shift of mode may occur. When evaluating the effect of fuel price changes on choice of mode, it is necessary to consider fuel requirements for competing services rather than modal averages.

14. Publicly-Provided Infrastructure
Carriers (except for rail) rely heavily on publicly-financed and maintained infrastructure. The Federal Aviation Administration is responsible for airport runways and related airside infrastructure, as well as the air traffic control system. The U.S. Army Corps of Engineers is responsible for waterway and harbor maintenance and for the operation of locks and dams. The U.S. Coast Guard provides navigation aids and operates Vessel Traffic Services at selected ports. The Federal Highway Administration implements the federal aid highway program which funds the National Highway System and other highways on the basis of a matching formula; and most major highways are constructed and maintained by state highway agencies.

All infrastructure systems tend to be expanded somewhat more slowly than the freight carriers and shippers would like, resulting in higher travel times and operating costs, less reliable delivery times, limitations in type, size and weight of vehicles and shipments, constraints in delivery and pick-up time schedules and higher in-transit logistics costs. The quality of local infrastructure and the degree of congestion also affect shipper choices of mode, transfer facilities and ports.

15. User Charges and Other Taxes
User charges are the principal means of financing publicly-provided infrastructure. Government efforts to recover the costs of building and maintaining transportation infrastructure will continue to affect the competitive position of the modes involved. For the water mode, harbor maintenance fees fund approximately 40 percent of construction and maintenance costs for coastal harbors, and a variety of user charges (wharfage, dockage, equipment rental fees, gate fees, franchise fees) finance port operations. For the air mode, federal spending on airports and airways is supported by taxes on domestic and international airline passenger tickets, air cargo waybills, and fuel taxes (all of which are deposited in the Airport and Airway Trust Fund), with construction and operation of individual airports also financed through revenue bonds, facility leases, landing fees, and slot fees. Federal highway programs are supported by the Highway Trust Fund, which receives fuel taxes, an annual heavy vehicle use tax, and excise taxes. Most states also have highway or transportation trust funds, some with constitutional restrictions on how those funds are used.

In addition to user charges, transportation companies pay business, sales, and property taxes. Most of the revenue from these taxes is used for general operations of federal, state and local governments, though some is available for transportation applications. There continues to be considerable discussion and debate relating to the use of fuel taxes for non-transportation purposes.

All forms of user fees and taxes affect the total freight transportation cost, resulting in higher rates and prices for carriers, shippers and receivers of products. These fees and taxes can be imposed based upon the value, weight, volume or dimension of commodities, shipments and vehicles, thus affecting these characteristics of freight in the traffic stream.

16. Government Subsidization of Carriers
Government subsidization of carriers reduces transport costs and affects competition between classes of carriers, between modes, and between operators of carriers registered in different countries. Among domestic carriers, the rail industry has been concerned about subsidization of the motor carrier and barge industries. With the exception of public subsidies for operations on otherwise unprofitable branch lines, railroads currently do not receive any government subsidies (although they were the beneficiaries of historic subsidies, including granting of right-of-way and in some cases adjoining lands). Barges, on the other hand, provide service on waterways operated and maintained by the U.S. Army Corps of Engineers and pay a relatively small portion of the cost of constructing, operating, and maintaining the waterway infrastructure. Similarly, trucks operate on public roads, and the issue of whether heavy trucks pay their fair share of federal highway taxes continues to be controversial.

Operating subsidies to U.S.-flag vessel operators are likely to end in the near future. This could mean the demise of the U.S. merchant marine, as vessel operators reflag. Some argue that air carriers do not pay an appropriate share of costs associated with the air traffic control system, but the financial condition of the airline industry makes any substantial near-term increase in user charges unlikely.

17. Environmental Policies and Restrictions
Environmental policies and restrictions affect all modes of transportation. The restrictions placed on the water mode and ports include the Clean Water Act, the Oil Pollution Act, dredge disposal controls, and speed and draft restrictions. Motor carriers are most affected by emissions controls and clean fuel requirements. Air carriers, particularly the all-cargo carriers that operate older aircraft and that operate primarily at night, are most affected by noise restrictions. These environmental policies and restrictions significantly add to the cost of freight transportation. In addition to the impacts of environmental policies on modal costs, freight demand also is affected by environmental policies which affect decisions on the locations of industrial sites and the locations at which raw materials are produced.

18. Safety Policies and Restrictions
Safety regulations increase carrier capital and operating costs while reducing all accident-related costs (insurance, liability payments, loss and damage, and delay). These regulations also create some small costs for safety inspections and record-keeping. One example of a regulatory action that resulted in demonstrable accident cost savings is the Federal 55 mph speed limit.

The regulation of hazardous materials (hazmat) transport increases transport costs. Although we are aware of no data on the costs of hazmat regulation, we believe these costs do represent a significant proportion of carrier operating costs for hazmat shipments. Route restrictions for hazmat truck operations are the responsibility of state and local governments. The amount of such route restrictions is probably increasing, and may become a significant factor in choice of mode in the future

Although changes in safety regulations may have some effect on carrier costs and on modal competition, aside from the effects on the cost of hazmat carriage, these effects are likely to be small relative to those of most of the other factors discussed in this chapter.

19. Effects of Changes in Truck Size and Weight Limits
Changes in truck size and weight limits can have a significant impact on the cost of goods movement by truck. Truck size and weight limits control the amount of payload that can be carried on a truck. For high-density freight, the maximum payload usually is controlled by weight limits; for low-density freight, the maximum payload usually is controlled by the cubic capacity of the truck (i.e., length, width, and height limits). Because increases in truck size and weight limits increase the payload per trip, fewer truck trips are required to carry the same amount of freight. Longer and heavier trucks generally cost more to operate on a per-vehicle-mile basis; however, these increases only partially offset any cost savings associated with making fewer trips.

Changes in truck size and weight limits may result in shifts of freight to or from other modes, particularly rail. Without the diversion of additional freight from rail, increases in truck size and weight limits would be expected to reduce truck traffic volumes. The extent to which volume reductions would be offset by the diversion of freight to trucks is an important issue in the debate over the effects of changes in limits.

20. Congestion
In many urban areas, increasing highway congestion is affecting the cost and efficiency of truck transport, and the reliability required by just-in-time shipping. Highway congestion affects trucking costs primarily by increasing the number of driver hours and vehicles required to haul a given amount of freight and by reducing truck fuel economies.

Recent studies of congestion have distinguished recurring congestion from the effects of incidents such as disabled vehicles, accidents, and construction or maintenance activities. To meet delivery schedules in congested areas, allowances must be made for the possibility of incident-related delays. Such allowances are costly to truckers, since they increase the time that a driver and vehicle are idle.

Increasing congestion in large metropolitan areas has led to proposals for truck bans during peak periods in some metropolitan areas. In 1988, Los Angeles Mayor Thomas Bradley proposed a plan for reducing congestion which included a truck-permitting program that would drastically reduce the number of large trucks allowed to operate on the streets of Los Angeles during the morning and evening peak periods.

Congestion also exists in air, water and rail freight transportation resulting in increased operating cost and lower level of service.

21. Technological Advances
A number of significant technological advances in equipment and information systems over the past three decades have had a profound impact on freight transportation involving all modes. The most notable equipment advances include containerization, double-stack technology, automation and robotics, handling and interchange systems, automated terminals, and conveyance design. Advances in information systems include electronic data interchange (EDI), automated equipment identification (AEI), applications of Intelligent Transportation Systems (ITS) to commercial vehicle operations, global positioning systems, and cargo/container routing and tracking systems. Many of the technologies which enable significant increases in productivity are readily available, while others require significant financial investment before achieving wide application. It should be noted that there are regulatory, market, and institutional obstacles to be overcome before some of these advances can be implemented.

Technology will continue to evolve and improve, affecting all facets of freight transportation including the type, size and weight of commodities, the means by which they are produced and distributed, and the associated costs.

2.3 Summary

Table 2.1 shows a list of freight demand characteristics pertaining to the commodity, shipment, mode and logistics costs, and whether or not these characteristics are influenced by the factors discussed above.

Some of the factors described have an influence on the type, weight, volume and value (prices) of commodities shipped. For example, a healthy economy characterized by high GDP, high average income and raised consumer confidence will most likely exhibit heavy consumer spending on many different types of commodities in addition to the basic ones such as food and general necessities. The consumers can afford to buy more expensive items in bigger quantities, and extra income will be available for purchasing products that they can normally live without including some appliances, electronics and all forms of equipment/tools. Other commodity attributes that may be influenced by the factors are the perishability of the products, their storage space requirements and degree of hazard. For example, technological advances in refrigeration may allow some perishable commodities to last longer than they would under normal circumstances. High volume packaged product (e.g. using Styrofoam etc.) would require a lot more storage space than the same item unpacked. Finally, stricter safety and environmental policies on hazardous waste transport would significantly reduce the quantity of such hazardous materials (i.e. chemical wasters, radioactive substances) being moved from one place to another.

The second category of freight characteristics, shipment, refers to the length or distance and the number of transfer points involved in the shipment of the commodities. International trade agreements such as NAFTA would eliminate barriers to free trade between the United States and other countries thereby increasing not only the volume of commodities shipped but the average line-haul distance (e.g. vehicle-miles traveled) and number of transfer points (stops) for these commodities.

The impacts of the factors on logistics costs, modal attributes and level of service characteristics including volume/weight limits, travel costs, reliability, travel time and probability of loss or damage are dependent on the specific type of mode and route the carrier or shipper uses. Some of the factors identified may impact all modes available for freight transport. For example, the overall economy and fuel prices usually have the same impact on all modes. However, other factors identified may affect some modes or routes more heavily than the others, which not only changes their logistics costs and modal level of service characteristics but also their relative attractiveness compared to other modes. Economic regulation/deregulation on air freight transportation may change the modal choices of regular air freight shippers and carriers. Truck size and weight limits will hurt the trucking industry by increasing the cost to move commodities by truck.

Note further that the impacts of the factors on freight demand characteristics can vary in magnitude and extent, which are not reflected in the table.

Table 2.1
Demand Factors vs. Freight Characteristics

(view Table 2-1)

Endnotes

¹See NCHRP 8-31 Final Report, Multimodal Corridor and Capacity Analysis Manual, Cambridge Systematics Inc. March 1996.

²For more detailed discussions, see NCHRP 8-30 Report - Forecasting Freight Transportation Demand. A Guidebook for Planners and Policy Analysts. Cambridge Systematics Inc., January 1996.