Some simple economic realities of ferries

The economics of vehicle-passenger ferries are really quite simple. If you are going to transport foot passengers using ferries between centres of population to connect with other forms of public transport (e.g. buses and trains) then you have a basic choice between transporting these foot passengers in a passenger-only vessel or in a vehicle-passenger vessel.

Foot passengers typically generate little revenue but they are high cost to cater for - not just for comfort and shelter reasons but because most regulatory authorities, including the UK require high crewing levels for passenger safety reasons and this crewing level tends to reflect how many foot passengers could use the vessel (what is it certified to carry), not how much it actually carries on specific trips.

For these reasons, foot passengers generally require a significant subsidy if ferry operators are to be induced to offer these services using a passenger-only vessel on a specific route.

Now suppose instead of using a passenger-only vessel, the operator could transport those foot passengers using a vehicle-passenger ferry. This transforms the economics of foot passengers on most routes (like most of the CalMac network) first because vehicle-related traffic usually delivers the bulk of revenues on most such routes, and second because adding vehicles (which generally just need little more than a flat deck) usually does not add as much to costs as it does to revenues on such routes. So adding vehicle-carrying services can help defray some or all of the losses that would have been incurred if the service was just foot passenger only.

The important point here is that the foot passengers are generally loss-making activities while if there are commercial profits to be made on a route it is likely to be from vehicular carryings.

This economics of this was illustrated in the Deloitte Touche report (2000) on the Gourock-Dunoon ferries published by the Scottish Executive which calculated that a two-vessel foot passenger only service on the town centre to town centre route here would make an operating loss of about £600,000 a year.

Using figures supplied by CalMac they calculated that the operating loss would be turned into a operating surplus of about £600,000 a year if these foot passengers were instead transported between the two town centres using two modern bow-and-stern loading vehicle-passenger ferries.

Adding allowances for the capital costs of procuring vessels did add more to costs in the respective cases, but even then the vehicle-passenger ferry option still just about broke even in present value terms implying very little need for subsidy, with profitable vehicle-carrying just about compensating for costly foot passenger carrying.

By contrast, not only did the foot passenger option offer less in the way of services, it would make a substantial loss and would need major amounts of subsidy before any commercial operator would be persuaded to take it on.

These basic economics are reflected in ferry networks around the world and not just Gourock-Dunoon or the CalMac network in general. It is not just economics, it is basic common sense - if a route can carry vehicles as well as passengers then it usually makes sense to combine these services in a single vessel than to split them into separate vessels. Washington State Ferries, which performs much the same function off the northwest coast of the United States that CalMac does off the northwest coast of Scotland has recently been replacing what is left of is passenger-only fleet for exactly that reason.

However, bearing in mind that it is the vehicular segment of such ferry markets that is likely to be commercially profitable, a weak or non-existent domestic regulatory regime could open up such markets to cherry picking. What exactly will be cherrypicked may depend on the market in question, in some routes close to urban centres it may be mostly commuters in cars, in more agricultural regions it could be more freight and livestock, but whatever it is it is likely to be vehicle-related. What the cherry pickers do not want to do is to encourage walk-on foot passengers for the reasons set out above.

The cherry pickers may be able to exploit locational and frequency advantages that are not open to (or are restricted for) what is left of the public ferry service that they are drawing trade from. The result is that as the public ferry service progressively loses the vehicle-related segment that had helped defray the costs of foot passenger carrying, its losses increase and so its corresponding needs for subsidy increase. If there are any vehicle-related services still left on the public service, the cherry picker will complain about unfair competition from the public service and will claim that subsidy for foot passengers is being used to subsidise the public service's dwindling vehicle-related traffic and compete unfairly against the cherrypickers own unsubsidized services.

The reality of course is that the public service's loss of the vehicle-related traffic is exposing the underlying hard economics of carrying foot passengers which is why both losses and subsidy are increasing. For a cherry picker to complain about the public service's subsidy is a bit like a mugger complaining about its victim's hospital bills. In the EU, the European Commission gives guides to help governments avoid or resist such threats through simple accounting procedures - should the government choose to use them. But subsidiarity here means it is for national or regional governments to frame the necessary statutory frameworks and regulatory controls that will protect the public interest here, it is not the European Commission's job to do that.

Eventually the public service may lose all its vehicle-related traffic, whether by attrition or government caving in to pressure and lobbying. But there is still a need for foot passenger traffic between the centres of population linking with buses and trains. The government advertises for and gets a passenger-only service. This of course will require massive subsidy for the reasons set out above.

So to summarise, if we have weak or non-existent regulatory control of cherrypicking of segments of ferry services, then we can move a state where we have a single ferry service offering combined vehicular and passenger services to one in which there is a private service mostly for vehicles and another subsidised service for foot passengers only. There may be no real difference in terms of service that could otherwise have been developed if there had still been a combined vehicular and passenger service, but now there is the loss of economies and the costliness of two parallel services - one a private vehicle-carrying monopoly being able to set the level of prices and services that maximizes profits for its shareholders, the other a passenger-only operator that not only has gets a substantial subsidy from the taxpayers but has to also make its own profit to persuade it to take on this operation.

While the cherypicker may talk of the benefits of private enterprise, what we have here is an unregulated monopoly, parallel services and unnecessary subsidy. It is difficult to imagine a worse, more inefficient and costly outcome for the users, the taxpayer, the dependent communities and local economic development.

There will also be assorted consultants, lobbyists and political interests around to tell the public and policymakers that this outcome is the best of all worlds. Of course there will be such voices, there always are in such circumstances, that is what consultants and lobbyist do and why they are employed, but that does not change the economics of what has happened.

The good news is that while routes in general and in principle are open to such degradation, mostly it does not happen. Even a country based around free markets like the United States knows what governmental and regulatory weakness of the type I have described above lead to, and since they have moved well beyond the economics of the Wild West they generally have statutory frameworks and regulatory regimes to prevent such degradation of public services, even where they are operated by private firms.

To find cases like this you have to find weak and incompetent government and a virtual absence of coherent regulatory standards and controls.

Neil Kay, 25th February 2011