The criterion for making the decision regarding the mode of transport is the nature of the product. If the product is perishable and cannot survive the sea voyage, the only practical way of transportation is by air. In fact, in such situations, the element of choice is not there, because such goods are to be transported by air if these have to be exported at all.
The next criterion relates to the availability of time for making the goods available in the markets. If the time is very short, goods are necessarily to be air freighted. This will be case for emergency shipments.
In general, cargoes which are high value but low volume are eminently suitable for transport by air. This is because in the case of such product, incidence of freight costs as a proportion to final landed price in the importing country will be fairly low and therefore, is not likely to affect adversely the competitive position.
In general the criteria which should be taken in mind in deciding on the proper mode of transport are: cost, speed, frequency, reliability, safety and appropriateness with regard to the product. So far as the last factor is concerned, air transport will obviously not be the proper mode where every large bulk volume is to be transported. The lifting capacity of aircraft puts restriction on the physical dimension of the cargo, though the introduction of the large all-cargo jets in recent times has to some extent solved this problem. Similarly, with respect to the first factor, namely, costs, air transport suffers from the handicap that the direct variable transportation cost happens to be highest in comparison to all other modes of transport. But as has been pointed out above, the total distribution system costs may as well be lower for air transport, at least for certain items. With respect to all others factors, viz., speed, frequency, reliability and safety, the air transport may score over sea transport.
In analyzing the total distribution cost system, it is necessary to distinguish between the fixed costs and variable cost. Three segments namely, transportation, packaging and receiving and shipping may be termed as variable costs. The rest of the segments are under the category of fixed costs.
It has been observed that there is an inverse relationship between the per unit variable cost of distribution and the per unit fixed cost of distribution. Moreover, for sea transport, fixed distribution cost is relatively higher than the fixed distribution cost for air transport. Variables distribution cost is, however, much higher for air than the sea transport.
The reasons for the inverse relationship mentioned above is that inventory carrying costs are often a substantial part of firm’s fixed costs of distribution the cost of transportation usually constitute a significant proportion of variable distribution costs. As a firm utilizes slower methods of transportation, order cycle time increase and fixed costs per unit increase because larger quantities of inventory must be carried in order to fill the same level of orders. Slower forms of transportation typically cost less, resulting in decreased variable costs.
Advantages of Air Transport:
Basically, here are 10 reasons which can make total distribution costs cheaper through the use of air transport, at least for certain categories of merchandise. The reasons are:
1. Low inventory carrying costs.
2. Decreased capital costs of goods in transit
3. Less packing lowers cost and reduces chargeable weight
4. Related surface transport costs are reduced
5. The loss due to rough handling and pilferage is reduced it the minimum
6. Breakage is negligible
7. Deterioration is avoided
8. Obsolescence is eliminated
9. Insurance premium is reduced
10. Costs related to administration, ordering etc are minimized.
Indian exporters have started moving some items by air to foreign markets. Currently air cargo accounts for 4 per cent of India’s export in volume and 40 per cent in value. Perishables, leather and textiles account for 78 per cent of air exports for India. Other principal items that are being exported by air are cut and polished diamonds, gems and jewelry and precious metals. All these products satisfy to criterion of high value and low volume and therefore it becomes profitable to export such goods by air. Some high carpets are also moving by air now.