Getting goods from one side of the country to the other is big business. In this Industry Focus: Energy segment, Motley Fool analyst Sean O'Reilly and contributor Adam Levine-Weinberg explain how companies decide which mode of transportation to use to move their goods -- whether plane, ship, train, or truck. Find out how time and the size of goods factor into play, which method is usually the cheapest, how distance affects the overall cost of shipping goods, what method Apple (NASDAQ:AAPL) uses to move its iPhones and why that makes sense, and more.
A full transcript follows the video.
This video was recorded on June 22, 2017.
Sean O'Reilly: I want to ship something across the country, how do I figure out what is the best mode of transportation to use?
Adam Levine-Weinberg: There are several factors that are important to making that decision. The main one is how fast you need your item to get where it's going. So, speed, there's a big trade-off between speed and cost. Obviously, on the flip side, you have cost. How much is the cost of shipping as a percentage of the value of the good that you're shipping? Are you shipping something that you're going to sell for $10, or something you're going to sell for $1,000? That obviously has an impact on how much you can afford to pay for shipping to determine whether or not it's worth it to get there fast or take this slower route. On top of that, you have size. Obviously larger items, or bulky or heavy items, cost more to ship. So those are some of the most important things that you need to take into account.
O'Reilly: And this is definitely something that anybody who has gone to FedEx (NYSE:FDX) or the UPS (NYSE:UPS) Store or the post office and said, "I need something there tomorrow," and it's, like, $30 to send an envelope. It's because of the speed factor. So how did those factors that you just listed impact the cost to move something, and what are the best options for each?
Levine-Weinberg: We'll start with speed. Obviously, if you need something to get there fast, then you need to use air, especially if you're going long distance. If you're going within a few hundred miles, then the truck could get you there in one day. But if you're doing longer distances, the trade-off is really between the ship, rail, and air, and air is going to be several days or even weeks faster. So that's why people will use that. Obviously, air shipments are extremely expensive. To a large extent, this also will depend on how bulky the item is, or how much you need to send at one time. Going back to your example of FedEx, if you're just sending an envelope, it will cost you $20 to $30 to get it there in a day. But it's only $20 to $30, and if it's something that really needs to be there, that's not the end of the world. If you're trying to ship a piano or something like that, then you're going to be paying a lot more than $30 to ship it by air.
O'Reilly: [laughs] Why is that the option you came up with?
Levine-Weinberg: [laughs] I'm just trying to come up with something particularly heavy.
O'Reilly: If you're shipping an elephant ... [laughs]
Levine-Weinberg: So, to start out, you have this speed and size. If you're trying to send a really small item, it can actually be cheaper to send it by air than by ship, because there's more handling involved in sending something by ship. So even though that would normally be much cheaper than air travel, it can actually be more expensive, because if it's containerized, you need to get it into a container boxed up with lots of other things. You need people to take it off, split up the shipment again, and get it to the final destination. In those unusual cases, air can actually be the cheapest as well as the fastest. But generally speaking, sending something by FedEx is going to cost a lot of money. Now, I should mention there are cases where you can actually justify sending large volumes of goods by air. One example of that was reported on pretty extensively a few years ago is why Apple uses air shipments for its iPhones, especially around product launches. It costs about $250,000, or at least it did back in 2013. It's probably a little less now, because fuel prices have come down. But about $250,000 to ship by air a plane full of iPhones --
O'Reilly: I'm picturing this right now, by the way.
Levine-Weinberg: -- from China back to Memphis, which is where FedEx has their big hub in the U.S. for shipment to all the Apple Stores and individual customers within the U.S. Now, that's a lot of money, but you can fit 450,000 iPhones onto this plane. So that's less than $1 a phone. And if you're talking about making people wait an extra three weeks to send a ship from China to the U.S., then this is a no-brainer. You're going to spend the extra $1 --
O'Reilly: Sorry to interrupt. You said 450,000 iPhones. At $800 apiece, that is $360 million worth of iPhones at retail.
Levine-Weinberg: Right. So, in that context, $250,000 shipping costs --
O'Reilly: Drop in the bucket.
Levine-Weinberg: -- it just doesn't matter.
O'Reilly: So, obviously, if I need to get a super-important contract to California today or tomorrow -- plane, automatically. If it's less urgent, what sort of distances are we talking about for the efficiency of one option over another to take hold?
Levine-Weinberg: For transporting something by road on a truck, the cost is linear and it goes up almost 1:1 with the distance. So the cost of sending something by truck 1,000 miles is about twice as much as sending it 500 miles. By contrast, for train and ship, there's a lot more cost involved at the beginning and the end of getting something onto the train or onto the ship, and then getting it off of the train or the ship. In most cases, except in very specialized circumstances, everything is going through a terminal, so at either end, you need to have trucks to get something from the pickup point to the terminal, and then from the terminal to the drop-off point. So the result of that is, for shorter distances, 300 to 500 miles or less, trucks are always the most efficient option. When you get a little longer than that, in that thousand-mile range, that's when trains are really at their best. And ships, when you get past 1,000 miles, can often be more efficient. That also depends a lot on geography. If you're looking at the United States, it actually makes sense to send trains all the way across the country, because to go by ship from New York to San Francisco, you have to go all the way down to the Panama Canal, you have to pay the canal fees, and it's quite a way out of the way. So in that case, you would usually want to send something, at least if it's on the smaller side, by train across the country, rather than taking a containership.
Adam Levine-Weinberg owns shares of Apple. Adam Levine-Weinberg has the following options: long January 2018 $90 calls on Apple, short January 2018 $140 calls on Apple, and short February 2018 $160 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.