The most expensive ferry in the world
A number of candidates can be suggested for the most expensive ferry service in the world, though UK services such as the Isle of Wight ferries or CalMac (especailly the short Colintraive-Rhubobach crossing) are frequently mentioned in this context. One difficulty in getting agreement is that different criteria can be used to assess this issue. Here we use three basic economic criteria to judge this and cross-check the reasonableness of the analysis against profit performance indicators. We conclude that a case can be made for Western Ferries (Clyde) as the most expensive ferry service and analyse why this has come about, with special emphasis on the role of government here. We note that government tender plans for the competing CalMac Gourock-Dunoon service may exacerbate this situation since they are likely to lead to a Western Ferries monopoly of vehicle-carrying across the Clyde Estuary with further public interest implications for fares and levels of service.
What is the most expensive ferry service in the world? This is a question which can throw up many candidates. There are cases that can be made for island ferries in exotic parts of the world, but on closer examination what appear to be high fares per kilometer travelled are often a reflection of extremely short distances and/or low volumes of traffic which have to bear the burden of the fixed costs of the operation. There are some overnight ferries which have high fares in absolute terms but that is often a reflection of the long distance and a blurring of the distinction between ferry and cruise services.
However most web searches consistently throw up one domain as hosting the most expensive ferries in the world, and that is the UK, whether it is CalMac in Scotland or the Isle of Wight with Red Funnel and Wightlink (this latter market has been the subject of a number of OFT investigations in the past, one of which reports led to the accolade in the UK parliament in the Nineties as their being most the expensive ferries in the world ). This has major public interest implications (including for economic and social and development) given that ferries can be the major (or indeed only) practical way to connect whole communities to the outside world. For these reasons, domestic ferry services (whether publicly or privately owned) are generally seen as essential public services by national and regional governments and regulated appropriately.
Many CalMac services have come down in price (albeit possibly temporarily) with the RET pilot for the CalMac Western Isles services. Of the CalMac routes which are not part of the RET pilot, Colintraive-Rhubodach is often cited as candidate for the most expensive ferry in the world, with a single journey for car and driver costing £7.70 (£5 per journey for multi-journey tickets) for a journey of a few hundred yards. However, CalMac Colintraive-Rhubodach carried just 87,000 cars in 2009, a relatively small number which pales into insignificance when compared with the likes of Western Ferries (584,000 cars in 2009) on the other side of the Cowal Peninsula. At extremely short distances and small volumes of traffic like Colintraive-Rhubodach, price per kilometer can shoot up given ship and shore-based fixed costs and the inability to generate economies of scale that larger volumes of traffic would generate. Colintraive-Rhubodach is admittedly a contender here but faces mitigating circumstances.
In the last resort, whether or not a service can truly be considered
expensive in relation to the service it provides has to be considered
against economic criteria. We use three criteria here to explore the question
of who might (and might not be) candidates for the most expensive ferry
service in the world.
Given their regular appearances in global "most expensive ferry" lists, we make particular reference to CalMac and Isles of Wight services. Anything which can be considered expensive when benchmarked against these services must be considered a contender for most expensive ferry in the world.
The first three services in the table below are all in the Clyde estuary area in Scotland with Western Ferries being a private operator which competes (in vehicle carrying) with CalMac Gourock-Dunoon, while CalMac Wemyss Bay Rothesay is the main ferry service to Bute. Two Isle of Wight (IoW) services are included in the table. The two WSF (Washington State Ferries) in the Seattle / Puget Sound area in the north-west US are included to give domestic estuary ferry services comparators other than the Clyde. The Forth Road Bridge is included because it provides the transport link across the Forth Estuary that Western Ferries and CalMac Gourock-Dunoon provide across the Clyde. .
(2) Length of crossing
The fares below reflect fares as of Winter 2010, with "vehicle + driver (best discount)" being the best fare per journey advertised for multi-journey and frequent traveler tickets, where available. NOTE: Methods for calculating fares may vary between operators, the analysis here was made as comparable between operators as possible - eg Red Funnel can vary by time of day, an average fare was taken for a weekday . The best discount fares for Western Ferries and CalMac Gourock-Dunoon are available in local shops. for frequent rravellers.
Sources: Company information and Scottish Transport Statistics.(Fares and dollar/sterling rates current as of 29th December 2010)
Although the CalMac Gourock-Dunoon service is almost twice as long as Western Ferries, the CalMac standard fare of car + driver is actually cheaper than Western Ferries. Remarkably, Western Ferries standard fare is almost as high as CalMac Wemyss Bay Rothesay despite the latter being three times the length of Western Ferries route. The Isle of Wight standard fares for car and driver are dearer than for Western with a much longer route, but in terms of price per km, Western Ferries is about 50% more expensive. The much longer WSF services are much cheaper than Western Ferries even though the fall of sterling relative to the dollar should have narrowed that differential recently.
These points about Western Ferries being relatively expensive compared to these other services still hold when frequent traveler or multi-journey discounts for car and driver are taken into account (see last column in the table above). And if you want to make a decision about crossing the rivers Clyde or Forth based on cost, the table indicates you would be advised to choose the Forth crossing.
The CalMac, WSF, and Forth Road Bridge services are subsidized, the other services generally are not, though Western did receive a major grant to help it extend its shore based infrastructure. The grants to the other services help pay for public services (such as provision for foot passengers) which Western can totally or partially avoid incurring, and which are discussed briefly in section 4 below.
Western Ferries is clearly a candidate for most expensive ferry based on this criterion.
(3) Volume of traffic
Volume of traffic should help cheapen rates charged by operators. Red Funnel carry about 600,000 cars annually (about the same amount as Western) , WSF Seattle-Bremerton about 370,000, WSF Clinton-Mukilteo about 920,000 (no separate figures for IoW Portsmouth-Fishbourne to hand). On the Clyde, the CalMac Gourock-Dunoon service carried 71,000 cars in 2009, CalMac Rothesay Wemyss Bay carried 163,000. By way of contrast, Western Ferries carried 584.000 cars in that year. That is just over half the amount of car traffic carried that year by the entire CalMac network covering the West of Scotland and the Western Isles..
On these figures, there is no argument that any higher rates charged by Western Ferries compared to other operators could be justified by its scale of operation. Its substantial scale of operation should allow it to exploit major economies of scale such as in shore-based costs and overheads, and this could reasonably be expected to be reflected in its charges. The fact that it is not means that we may conclude that it is also expensive on the second criterion.
(4) Nature of service
Basic economic and common sense suggests that the more services or facilities
provided in a service, the more expensive it can be expected to be (speed,
passenger facilities etc). The more basic the service, the cheaper it
Western Ferries fleet can be seen on this
webpage. The ferries are designed around an open deck. There is limited
seating for foot passengers. There are toilet facilities on board, though
no such facilities at the terminals (unlike for other ferry services on
this table). There are no refreshment facilities though others of the
table above such as the CalMac and Isle of Wight ferries all have café
facilities; this can be a valued part of such services given that for
many travelers (vehicle or foot) the ferry journey can be part of a much
Foot passengers deliver little revenue but can be expensive to provide for, most directly in the form of crew manning levels for safety reasons, these are set by the regulatory body the MCA. Higher passenger levels can mean higher crewing levels. Also foot passengers can be especially costly to provide as far as ship based and shore based resources facilities are concerned since they need facilities comfort and protection (and often subsidy) that vehicles do not need. Western Ferries shore-based facilities for waiting foot passengers at its terminal on the south side of the Clyde (McInroy's Point) are shown in the picture below. There is similar provision for waiting foot passengers at its terminal on the north side of the Clyde (Hunters Quay) This is the only waiting accommodation and facilities available including winter, there are no toilet facilities at either terminal
There is no commercial advantage to Western from encouraging or providing for foot passengers and this is reflected in their basic service which is oriented around the high value and low cost vehicle market. It is also is a slow service at around 6 knots which adds to fuel savings for the company.
Western does a call out emergency service for ambulances but it is to be expected that someone has to do this and since Western Ferries has essentially supplanted the public service operator across the Clyde it is reasonable to expect it to provide a service that CalMac would normally have been expected to provide.
In short, Western does not provide additional facilities (speed, passenger services) compared to others which would justify charging premium fares. In terms of nature of service provided, Western would appear to be expensive compared to the other ferry companies in the table above, each of which all offer additional services (speed, passenger facilities) compared to those offered by Western
So the features noted in Sections 3 and 4 appear to reinforce the conclusions of Section 2 that Western Ferries is expensive compared to the other ferry companies in that table
If a service is to be considered expensive in relation to the service offered, we would expect this to be reflected in the financial performance of the firm and some features of the market and we look at these issues in the next two sections.
(5) Western's financial performance
Some summary statistics for Western Ferries financial performance over the last six years are shown in the table below
Source: Company annual reports
Western Ferries operating margins are remarkable. The Deloitte Touche report into the Gourock-Dunoon ferries noted that ferry operations are usually low margin businesses operating in slow growth mature markets. They benchmarked Western and CalMac's financial performance in the Nineties against a number of other UK ferry companies and found the companies surveyed typically had low profit margins with an average (median) operating margin for the seven operators (excluding Western) of 6.5%.
This is broadly consistent with profit margins for the UK rail operators which like ferries tend to be stable low risk businesses with relatively secure sources of revenue. UK Rail companies operating margins are typically less than 5%, see here.
The operating margins for UK bus operators average about 11% for the big five operators, nearly double that of the smaller operators, see here, these high rates for the big operators has led to Office of Fair Trading looking at this market again recently.
So the UK transport industry in general is not usually a high margin industry. Broadly speaking a 5% operating margin is usually considered reasonable in the transport sector, with anything over 10% likely to be seen as indicative of some kind of market distortion, with public interest implications.
For Western to have an average operating margin of nearly 30% over the past six years is remarkable and suggests something very unusual is happening in this market. The corresponding figures for Wightlink in 2007 were 21 per cent and Red Funnel 16 per cent, both well below that of Western in that year (see here page 77: the report also mentions separately high profit margins for the Isle of Man Steam Packet Company but notes that this may not be directly comparable to the other ferry companies because of different accounting conventions and modes of operation).
We shall look at what is unusual about this market in the next section and why Western has such a level of profit.
However beyond this, a note in passing on Western's after-profit tax is merited. Essentially Western paid no tax (net) over the last six years, with a £6,000 tax rebate in 2003-04 balancing £6,000 tonnage tax paid in lieu of corporation tax over the six years 2003-09. This is likely to have given them a further competitive advantage in deterring entry given the ability this would give Western in any price war
The auditors notes to the 2009 accounts takes note of Western's tonnage tax dispute with HMRC (see here and here and here) and says if corporation tax were payable for that year an amount of £468,000 would have been provided. They noted the total corporation tax payable if tonnage tax election was not permitted would have been £2,555,000 plus interest as of March 2009. As far as is known, the dispute between HMRC and Western is still unresolved at the time of writing.
(6) How did this come about?
How did Western Ferries' extreme levels of profitability come about?
First, it reflects cherry picking. A previous MD of Western Ferries objected when I noted that Western was a cherry picker but it was a statement of fact, it is not a pejorative term and was not intended as an insult, and it is not illegal in the UK though it is controlled and regulated for in most other UK essential services, and could also be in the case of the UK ferry services. Cherry picking also tends to push up subsidy and the burden on the taxpayer by leaving the public service operator with the loss making parts the cherry picker does not want. In fact, Western cherry picked three times over along the lines discussed in Section 2, 3 and 4 above when it entered this market. It cherry picked (a) a short crossing (b) a high volume market (then second only to the Kyle-Kyleakin ferry in terms of volume on the CalMac network, Kyle-Kyleakin was itself to be replaced by the Skye Bridge) and (c) the high value low cost vehicle carrying segment in this market. Cherry picking low cost / high value activities was why Western could envisage running the service without subsidy. All this reflected commendable entrepreneurial insight but it would not have been sufficient to create what has happened here without government support and protection.
Second, it reflects the actions of the Thatcher government in the early Eighties who restricted the frequency of the competing CalMac Gourock-Dunoon vehicle service to one an hour (CalMac had already started a half-hourly vehicle-passenger service 30 years ago but were made to end it by government restrictions). This restriction is still in place today, while Western runs up to 4 ferries an hour without restriction. Not surprisingly this has meant that vehicle users have gravitated to the Western service. As an operator, CalMac was entitled to complain about this restriction as a breach of EU competition rules, but it could not do so since the restriction was imposed by their shareholders, Scottish ministers.
Third, CalMac did put forward proposals for an enhanced Gourock-Dunoon service ten years ago which would just about have compensated for the inevitable subsidy that foot passengers need by running a frequent vehicle-passenger service, but Scottish ministers failed to give CalMac the permission required to procure the vessels needed and run such a service.
In short, how this came about was as much due to government protection as it was entrepreneurial endeavour.
(7) Consequences of high ferry costs
There is usually no realistic alternative to a ferry which is why governments typically deal with the issue of the public interest here through state ownership, direct regulation or (more rarely) by encouraging competition. They have failed to do this in the case of the Clyde ferries.
In the case of some islands it could be argued that the benefits of low ferry fares might be limited by the absorptive capacity of the islands in coping with enhanced traffic, but that is not an argument that can usually be made against estuary transport links such as the Forth Road Bridge or the Gourock-Dunoon ferries.
In the case of high ferry costs, visitors and holiday makers are deterred;
transport firms face higher costs which they may pass on to shops and
households; individuals, families and businesses are put off moving into
an area which has consequences for economic development, community cohesion,
employment opportunities and housing markets.
In the case of Gourock-Dunoon there is also the cost to the taxpayer. Had CalMac been allowed to deploy a frequent vehicle and passenger service as they proposed this would effectively have eliminated subsidy on the route, with profitable and unsubsidized vehicle carryings compensating for subsidized foot passengers. This would also have been fully compliant with EC and UK competition law. Instead the tax payer is currently carrying a burden of well over £2mill a year subsidy on the CalMac Gourock-Dunon route. All this was and is totally unnecessary.
(8) Conclusions and the Future
We conclude we have a reasonable candidate in Western Ferries to compare with the likes of Colintraive-Rhubodach and the Isle of Wight ferries for the dubious accolade of the most expensive ferry service in the world. In these areas at least, the UK can still be considered a world-beater.
However that is not the end of the matter.
The Scottish Government is presently putting the CalMac Gourock-Dunoon service out to tender. Because the Government has not built the car ferries needed of the type that was suggested by CalMac as long ago as ten years ago (and which could and should still be built), the route will inevitably go (at best) passenger-only when it is tendered leaving Western Ferries as sole vehicle ferry operator across the Clyde. As I have noted on this website, FoI requests by me here and here and here confirm that the Government's claims that "suitable" vehicle-carrying ferries are available on the second hand market are simply wrong and misleading.
Western Ferries have previously argued they could not have a monopoly because they say users have a "road option" but as I have noted before, the Gourock-Dunoon ferries act as the transport link across the Clyde estuary just as the Forth bridges act as the transport link across the Forth estuary. The "road option" would involve a detour of 82 miles. In distance terms that would be similar to a "road option" for the Forth Road Bridge detouring through Glasgow.
So the conclusion that we have a reasonable candidate for the most expensive ferry service in the world in Western Ferries has to be augmented by the expectation that Western Ferries will soon have the power to charge what they like, unencumbered by what is left of the competition to it on the Clyde.
When that happens, there is no reason to expect it to become less expensive, if anything the risks are on the upside since Western Ferries commercial obligations are to its seven shareholders. There is little chance that the OFT will take an interest in this because although these transport links are crucial for regional economic and social development they are typically of a scale that is below the radar of the competition authorities (who are more usually concerned with national or regional markets). In any case, most national governments regard it as their responsibility to set a level playing field for transport operators and other essential services and guard the public interest through legislative and regulatory protection and safeguards. The fact that successive governments have not done this here (rather the reverse) has been reflected in the degradation of the public service and the public interest.
At the same time it is hoped that governmental authorities will recognise that they have both the power and the responsibility to recognise and address the public interest issues that have arisen here. After all, if other countries have managed to avoid hosting the most expensive ferry service in the world, how have they managed this? There are options open to the Scottish Government under EC law here, but to find a solution the first requirements are recognition that there is a problem and a willingness to consider options in which the government plays the role of defender of the public interest rather than just promoter of the private interest.
Neil Kay January 2011