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Ishaan Nag – My diary of the human society.

Tag: logistics

  • The fallacy of accounting and opportunity cost: Why air cargo’s popularity just does not quit despite spiking jet fuel costs.

    Ishaan

    The world commodities market, especially for crude oil, is volatile at historically high levels at the time of writing this blogpost, with crude oil averaging USD 103.9/barrel following speculative inflationary pressures on price due to the closure of the Strait of Hormuz in March 2026. Jet fuel prices rose to USD 124.7/barrel in Q1 2026, which represents a 36% YoY increase. Despite these skyrocketing prices,  global air cargo freight demand remains robust. This is despite the fact that this means of transport is notoriously cost ineffective at first glance, estimated to cost 4-5 times more than road transport, and 12-16 times that of maritime freight. 

    Air cargo is usually characterized by high value goods, usually exceeding USD 4/kg while freight rates themselves are USD 1.5-4.5/kg. These are perishable, time sensitive goods such as medicines, consumer goods, food, inputs which need to meet deadlines for manufactured products or even documents, apart from emergency shipments. Despite the niche, necessary nature of the cargo leading to lower elasticity of demand, standard economic theory would predict demand to fall at a certain, albeit low rate. Yet according to the IATA, the volume of international cargo actually increased 3.7% YoY, despite these upward pressures in price. Are firms making a terribly irrational decision, or are we sinking into fallacies? An important consideration to keep in mind is the distinction between the actual accounting cost of air freight, reflected by the price increase we see, and the economic opportunity cost of transporting these goods by other means, which has also increased, arguably disproportionately. 

    The proverb “time is money” is most prominent in this case. The incredible amount of time saved by transporting a modest amount of time sensitive, perishable cargo through a metal tube nearing the speed of time is quantitatively more than the per unit cost saved by transporting mammoth amounts of those goods bound by a deadline through a mega ship taking several delays and complex port logistics and risking delays. This is what the true price of time demonstrates: avoiding an unavoidable time tariff no amount of corporate lobbying can successfully avoid. For firms, air cargo provides a means of hedging against overreliance on maritime, which too has been  recently marred by a series of global conflicts causing bottlenecks in the supply chain, such as the Houthi strikes and increased danger of transporting through the red sea, the strait of Hormuz blockade, and the Suez Canal blocking, with incredibly high insurance premiums for maritime transport following. Planes need not worry about more than blocked airspaces in which rerouting is far simpler. Customs, clearing and other administrative processes are faster with air freight, further reducing the aforementioned true price of time further.

    Air transport may also serve to provide a good logistic fit; say a manager in Zara finds out new kinds of fashion which trend and have high demand, but that in itself is very temporary, and any delays in introducing or replenishing that line of fashion would entirely render a very valuable line almost fully worthless. The premium charged by air freight is merely worth it. 

    Moreover, as fuel consumption is mostly proportional to the aircraft weight and distance flown, the variable or marginal cost is thus based on weight and destination. Thus, for shorter distances air freight rates per unit distance are higher, as larger proportions of the trip are spent on ground (internodal transport through roads). Marginal cost thus diminishes as the value of goods and distance increases. 

    Macroeconomic studies, particularly one focusing on US imports provide a good case for fast, expensive air transport. They find that long transit delays lower the probability that a country will successfully export goods. One can thus think of the air freight premium as an investment for customer retention. Moreover, it is estimated that each day in transit is worth between 0.6%-2.2% of the goods’ value. Thus, each day of transit delay leads to a true price time based tax 0.6%-2.2% of the goods’ value. This represents depreciated, dead capital which has already been paid for in costs of production yet cannot generate 100% of the estimated revenue. Depending on the delay caused by maritime transport over air freight, depreciation cost often exceed costs saved by choosing a cheaper, more uncertain mode of transport. This is when opportunity cost of choosing road or maritime transport exceeds the accounting cost of air freight. 

    Macroeconomic studies on transport logistics, specifically Hummels and Schaur isolate air transport costs to model trade with distant trade partners. Here the total trade with neighbouring partners is separated between air and maritime transport.

    For making a quantitatively sound conclusion, we infer that:

    total cost of shipping via any mode = direct freight cost + time depreciation cost + Inventory holding cost

    To make the decision to choose air over maritime transport, we need:

    TTC(maritime) > TTC(air)

    (TTC- Total Transport Cost)

    We know, that from the total cost of shipping, the first component is much higher in air, while the second and third components are higher in maritime. This implies:

    direct freight cost + time depreciation cost + Inventory holding cost(maritime) > direct freight cost + time depreciation cost + Inventory holding cost(air)

    Expanding this inequality, we see that air transport become more feasible when the loss in keeping a unit of the specific good in transit is higher than the extra freight cost per day saved by choosing a cheaper alternative, say maritime.

    Hummel and Schaur find that:

    Extra freight cost per day saved = (c(air)-c(maritime))/(t(maritime) – t (air))

    Where: 

    c=cost

    t=days

    As distance increases, numerator increases but denominator decreases at a greater rate. Increasing cost per day saved by choosing air transport.

    So long as maritime transport remains more volatile than air transport, and trade takes place between partners located far enough apart, it holds rational to pay the premium price and accounting cost of using air transport to save far greater on the opportunity cost of using maritime transport. 

    Bibliography

    Hummels, D. L., & Schaur, G. (2002). Time as a trade barrier. GTAP Working Paper Series, 103(7), 2935–2959. https://doi.org/10.1257/aer.103.7.2935

    Quarterly Air Transport Chartbook Q1 2026. (n.d.). https://www.iata.org/en/publications/economics/reports/quarterly-air-transport-chartbook-q1-2026/

    Aviation Value Chain Brief. (n.d.-b). https://www.iata.org/en/publications/economics/reports/aviation-value-chain-brief-15-february-2024/

    Review of Maritime Transport 2025: Staying the course in turbulent waters |. (2025, September 24). UN Trade and Development (UNCTAD). https://unctad.org/publication/review-maritime-transport-2025

    World Bank Group. (2023). Air Freight: A Market Study with Implications for Landlocked Countries. In World Bank. https://www.worldbank.org/en/topic/transport/publication/air-freight-study

    Golub, S. S. . ., & Tomasik, B. (2008). Measures of international transport cost for OECD countries. OECD Economics Department Working Papers. https://doi.org/10.1787/241707325051

  • TOPIC: ASSET-LIGHT STRATEGIES OF HOTEL BRAND MAMMOTHS: THE GOLDEN GOOSE WHICH MAY DIGEST ITS OWN EGGS?

    Ishaan

    Hotels interest me. Fresh towels arriving when demanded (though nowadays with a fair share of guilt), rooms allocated and emptying like a massive game of Djenga, the logistics are simply fascinating. Heck, anyone would be proud to own one, especially if their hotel, their brainchild, is not only NOT in a deep mire of debt (as is usually with the hospitality industry) but part of a global, profitable mammoth. Or would they?

    Hilton, Hyatt and Mariott seem to disagree, and rather vehemently given the data. These are three of the largest hotel conglomerates in the world, with Hilton and Mariott operating over 9000 each and Hyatt operating almost 1500 hotels and properties. However, less than 10% of these hotels are actually owned by these conglomerates. Hilton only operates and owns 5% if its properties, Marriott an even lower 0.5% while Hyatt owns and operates a shocking total of merely 20 US properties. The very vast majority of the properties are franchise driven, with independent owner-operators, the most prominent of which includes MCR and Apple.

    From what I thus understand, there is essentially a shift in the revenue model of these conglomerates. Revenue is now also derived from these owner-operators who are mostly real estate investment trusts. They pay a certain percentage fee on profits to “fly the flags” of the conglomerate brands and in exchange get credibility, name and hence, business. This also goes easy on the balance sheet of the conglomerate brands. As these tangible properties are sold off, wiping assets also implies a wiping off of massive debt incurred from those properties. That liquid cash is then used to buy up other hotel brands. In fact, Hyatt bought Standard International after it sold real estate for Playa resorts for USD 2 Billion, reportedly to pay off loans worth USD 1.7 Billion, hence reducing debt from the balance sheet from USD 6 Billion to USD 4.3 Billion. There are further such sales, as Hyatt sold more than USD 5.7 Billion in real estate since 2017 at 15x EBITDA and invested USD 4.4 Billion at 9.5x EBITDA in acquiring SI and Apple leisure group. Brand acquisition is what conglomerates spend now, not real estate. 

    This goes on in a cycle; as more and more rights are bought, Return on Equity increases since in since independent owner-operators which used to pay a fee to Standard international to fly their flag will pay it to brands like Hyatt. What essentially thus results is something rather lucrative: a one-time investment to generate consistent income, a golden egg of sorts. There is low responsibility of handing real estate which essentially serves as a means of hedging against real estate prices.

    But it goes both ways; brands must also prove themselves worthy for independent hoteliers to demand such a hefty fee on profits. Apart from the name attraction, brands provide data driven logistic support. Dynamic pricing data is also made available, which helps hotel managers make decisions on how to time their price changes so that the number of rooms booked remains consistent across days even with a highly versatile demand. They also provide discounts on bookings through third party aggregators, all contributing to greater business for these independent hoteliers as well as healthy cash flow. Really makes you think: what’s the point, what’s the future of these megalithic brands?

    These real estate investment trusts are the ones owning the hotel properties, employing crew and operating services. The brands thus lose their touch, since at their base identity they are hoteliers. 

    Furthermore, REITs require standardization for maximizing profits; predictability is thus vastly preferred over having diverse outliers. Following this doctrine, standardizing the standard operating procedures of services along with a universe system of logistics management to reduce operating costs gives off a monotonous “feel” as they are often not just making the quality consistent but rather the aesthetics too. This reduces brand loyalty through lack of variety. Close substitutes being available thus imply high elasticity of demand where low price takes precedence as a parameter when deciding one’s stay.  There is thus no point left of loyalty programs to maintain brand loyalty even when brands don’t own hotel properties themselves. In essence, brands are reduced to utility companies and service providers, which basically turn into commodities with close substitutes. Demand is thus not hedged against price hikes as the differentiating factor, or some unique selling point disappears. Some other utility or service provider (which may be far away from the hospitality industry too!) like Amazon or some SaaS company or some other facility provider which have achieved economies of scale could give the same service as these brands for a lower price. REITs can thus be willing to  sacrifice brand recognition for cost efficiency, making these brands highly dispensable.

    The risk of the formation of a bubble is also something to be considered. Real estate at the evry least has some kind of intrinsic value even though prices get inflated in that sector as well. An imperfect estimation of brand value is what generates revenue and profit. When there’s no tangible product for hotel brands to tether themselves to, there is a much more serious risk of overvaluation of brand value. If the previously explored risk of other companies providing the same service for lower price to elastic demand owner operators is actually realized, this bubble will burst,and  investors of these brands would take a big hit.

    Bottom line: I feel that this asset light model is indeed a short run win. Maybe the goose will keep on laying eggs. But it is important to be careful and let’s not overestimate how indispensable these brand name flags are for owner operators.