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Economies of traffic density and scale in the integrated air cargo industry: The cost structures of FedEx Express and UPS Airlines

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  • Lakew, Paulos Ashebir

Abstract

This paper examines the cost structures of the leading integrated air cargo carriers, FedEx Express and UPS Airlines. A total cost model is estimated for the two carriers using quarterly data on domestic operations and costs over a nine-year period (2003–2011). The estimated model indicates that the integrated industry exhibits increasing returns to traffic density and constant returns to scale. Accounting for carrier-specific differences in cost structure and network size, FedEx Express is found to be more cost-efficient than UPS Airlines. Looking at the carriers individually, UPS Airlines exhibits substantial economies of traffic density and constant returns to scale while FedEx Express' cost structure is characterized by weak economies of density and constant returns to scale. The combined effect of returns to density and returns to scale on the cost structures of integrated carriers is captured by economies of size. Both FedEx Express and UPS Airlines exhibit economies of size, indicating that carriers in the integrated industry can be more cost efficient by making appropriate adjustments to their network size as their output grows. Moreover, the relative cost-efficiencies of the carriers are reversed when their network-size differences are not controlled.

Suggested Citation

  • Lakew, Paulos Ashebir, 2014. "Economies of traffic density and scale in the integrated air cargo industry: The cost structures of FedEx Express and UPS Airlines," Journal of Air Transport Management, Elsevier, vol. 35(C), pages 29-38.
    • Handle: RePEc:eee:jaitra:v:35:y:2014:i:c:p:29-38
    DOI: 10.1016/j.jairtraman.2013.11.001
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    References listed on IDEAS

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    1. Kiesling, Max K. & Hansen, Mark, 1993. "Integrated Air Freight Cost Structure: The Case of Federal Express," University of California Transportation Center, Working Papers qt7338517g, University of California Transportation Center.
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    Cited by:

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    2. Malighetti, Paolo & Martini, Gianmaria & Redondi, Renato & Scotti, Davide, 2019. "Air transport networks of global integrators in the more liberalized Asian air cargo industry," Transport Policy, Elsevier, vol. 80(C), pages 12-23.
    3. Bombelli, Alessandro & Santos, Bruno F. & Tavasszy, Lóránt, 2020. "Analysis of the air cargo transport network using a complex network theory perspective," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 138(C).
    4. Paolo Malighetti & Gianmaria Martini & Renato Redondi & Davide Scotti, 2019. "Integrators’ Air Transport Networks in Europe," Networks and Spatial Economics, Springer, vol. 19(2), pages 557-581, June.
    5. Chao, Ching-Cheng & Li, Ru-Guo, 2017. "Effects of cargo types and load efficiency on airline cargo revenues," Journal of Air Transport Management, Elsevier, vol. 61(C), pages 26-33.
    6. Balliauw, Matteo & Meersman, Hilde & Onghena, Evy & Van de Voorde, Eddy, 2018. "US all-cargo carriers’ cost structure and efficiency: A stochastic frontier analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 112(C), pages 29-45.
    7. Zakharenko, Roman & Luttmann, Alexander, 2023. "Downsizing the jet: A forecast of economic effects of increased automation in aviation," Transportation Research Part B: Methodological, Elsevier, vol. 170(C), pages 25-47.

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    More about this item

    Keywords

    Air cargo; Economies of density; Economies of scale; Economies of size; FedEx Express; UPS Airlines;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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