I'
t.~~~} . '~~'.":'I::;; · SCOTTISH EXECUTIVE
, . THE SCOTTISH EXECUTIVE DEVELOPMENT DEPARTMENT
GOUROCK - DUNOONFERRY SERVICE
FINAL REPORT
Deloitte & Touche 39 George Street Edinburgh Em 2HZ CONTENTS Page
EXECUTIVE SUMMARY
1. INTRODUCTION 1
1.1 Background 1
1.2 Study Objectives and Terms of Reference 2
1.3 Report Structure 2
2. APPROACH 4
2.1 Introduction 4
2.2 Phase 1 :,Set-up 4
2.3 Phase 2 : Fact-finding 6
2.4 Phase 3 : Optj~ns Assessment 6
2.5 Phase 4 : Reporting ·7
3. THE SERVICE PROVIDERS 8
3.1 Caledonian MacBrayne Limited 8
3.2 Western Ferries Limited 8
3.3 Passenger Volumes by Category Carriedhy Each Servite Provider 9
3.4 Route Regulation 10
4. ROUTE OPERATIONS 12
4.1 The Routes 12
4.2 The Vessels 15.
4.3 Service Capacity 18
4.4 Service Demand Over Time' 21
4.5 Forecast Growth in Traffic Volumesand Tariffs 24
4.6 The Piers 26
4.7 Timetables 33
4.8 Tariffs 35 CONTENTS Page
5. THE MARKET 40
5.1 Introduction 40
5.2 Historical View of the Market 40
5.3 General Demand Factors 40
5.4 Deman,~ on the Cowal Peninsula 42
5.5 Tourism Demand on the Isle of Bute 43
5.6 Estimating Commuter Traffic 45
5.7 Marketing 45
5.8 Trends\in Traffic Carried 45
6. FUTURE INVESTMENT REQUIREMENTS 50
6.1 Vessel Replacement 50
6.2 Terminal Upgrading and Replacement. 51
6.3 Conclusions 53
7. FINANCIAL ANALYSIS 54
7.1 Methodology 54
7.2 Cost Structures 55
7.3 Comparative Financial Analysis 57
8. OPTIONS FOR FUTURE SERVICE DELIVERY 60
8.1 Introduction 60
8.2 The Six Feasible Options for Service Delivery 60
8.3 The"Financial Assessment of Different Options 61
8.4 The Current Position 61
8.5 Option A: the status quo (the base case) 65
8.6 Option B: enhanced Gourock/Dunoon Service 72
8.7 Option C: GourockIDunooD service - foot passengers only 77
8.8 Option D: GourockIDuDoon service closed 81 CONTENTS Page
8.9 Option E: McInroy's PointJDunoon 86
8.10 Option :F : closure ofthe McInroy's PointlHunter's Quay service 89
8.11 Public Expenditure Implications 91
8.12 The Impact on the Mcinroy's PointIHunter's Quay Service Operator 93
9. SUMMARY OF THE STRENGTHS AND WEAKNESSES OF EACH OPTION94
10. IMPLEMENTATION ISSUES AND NEXT STEPS 96
10.1 The Base Case 96
10.2 The Implementation of Change 97
10.3 Conclusions 100 EXECUTIVE SUMMARY
Study Background and Objectives
The towns of Gourock in Inverclyde and Dunoon on the Cowal peninsula are currently served by two ferry operators, Caledonian MacBrayne (CalMac) and Western Ferries .. The two services operate between different coastal points. CalMac's service runs between the two town centres of Gourock and Dunoon, while the We~ern Ferries' service runs between McInroy's Point (Gourock) and Hunter's Quay (Dunoon). Nevertheless, the two services are effectively in direct competition . , with one another.
Western Ferries is a private company n:m on a fully commercial basis. CalMac is state-o~ed and receives a subsidy for running socially necessary passenger services. This subsidy is not route specific; However, since 1981/82, CalMac's service \ frequency on the Gourock/Dunoon route has, in principle, been restricted to one per hour to ensure that the public subsidy is not used to force a private operator off the route. In practice, CalMac has actually run more services than implied by hourly restriction to meet peak demand. These additional services are advertised and the Scottish Office is aware of them.
CalMac's existing fleet capacity on the route is obsolete and nearing the end of its J useful life. Its replacement may require significant investment of public funds, and :1 may also require substantial investment in the piers at Gourock and Dunoon. Before committing these funds, ·the Scottish Office, in conjunction with CalMac and Western Ferries,. commissioned this study to advise on the 'future options for the structure and regulation of the Gourock/Dunoon ferry services.
Route Demand
The total trafficcarrled on the route each year, including foot and vehicle passengers, has risen from approximately 1.2 million in 1992 to 1.45 million in 1997. CalMac's' share ofth610tal has been stable at just over 0.6 million passengers per apnuni, while Western Ferries' has risen from 0.6 million to 0.8 million per annum. Further analysis suggests that the reason for this is that half of CalMaG' s market· comprises foot passengers, while Western Ferries' is the market leader for car passengers, and car traffic, has increased more rapidly tban foot traffic on the route.
The most likely forecast is for a continuation of the historic trend of steady modest growth of between 1% and 3% per annum in both passenger and vehicular demand on the route.
i Route Capacity
In· the operational year examined,' CalMac operated four vessels in the Inverclyde area. These vessels served the Wemyss Bay..:Rothesay and Gourock-Dunoon routes, as well as the Clyde cruising programme. Three of these vessels. can carry up to 510 passengers and 40 cars each, with the fourth having a' carrying capacity of 356 passengers and 32 cars. Western Ferries' fleet comprises five vessels of varying capacity. The smallest has a capacity of 200 passengers and 22 cars, two can carry 220 passengers and 37· cars, and one carries 296 passengers and 32 cars. Our calculations ~dicate that the combined capacity of the two services is well in excess . of current demand, with only 12-14% of foot passenger capacity utilised. Spare car capacity is less, but still significant: CalMac' s car capacity is on average only 29% utilised, whiIe.Western Ferries' is 60% utilised.
Our conclusion is that either operator could meet full route demand on a nonnal day.
We also examined the question of whether they could each meet demand peaks., Our analysis indicates that,,·with some adjustJnents in service structure and frequency; either operator separately could meet peak demand, with the single exception of the CowaI Games weekend in August. Demand during this weekend is abnormally high, and could be met by charters contracted for its specific requirements.
Future Options for Service Delivery •. We examined a range of options for future service delivery. The key generic alternatives are summarised be~ow.
1. The status· quo. Under this option, route ~perations would continue as at present. CalMac's route capacity is near the end of its useful life and is technically obsolete. Ideally, a "do minimum" option would necessitate medium-tenn inv-estment in new capacity on the' Gourock/Dunoon route, both in vessels and pier infrastructure. CalMac' s oWn 1996 corporate plan envisaged a vessel investment' programme costing £16.5 million over the period 2001-2005 to replace three vessels at ~ cost of£5.5 million each. It also envisaged a further £2 million to finance improved linkspans at Dunoon and Rothesay, and £0.5 million at" Gourock. Western Ferries is planning to replace one of-its five ships within the next two years, adding 9% capacity to its. fleet, to accommodate continuing modest growth in its maJJket. It is ,also planning to upgrade its pier at Hunter's Quay and to continue maintaining McInroy's Point. Overall, a capital investment in excess of £20 million would be required under this scenario.
Even if the programme was cut back to, say, £14 million, it would still equate to approxiniately £10 for each of the 1.4 million passengers who currently use the 'route annually - more than twice the currently quoted standard ·adult return fare. This indicates that the investment programme would not be affordable using commercial finance, and could only be funded with substantial public sector support. However, it is doubtful whether this could be justified on economic grounds, because the reason for the non-viability of this option is that there is excess capacity on the route relative to current and likely future traffic levels.
We looked at a range of variants of this option. Under one, CalMac was assumed to continue running its existing (techriologically obsolete) fleet as long as possible, to avoid the heavy investment costs associated with replacing it.' The problem with "this variant is the heavy recurrent costs associated with running the ships, combined with their relatively low utilisation, ,results is a continuation of the service's current operating deficit of approximately £0.8 million per annum. Under another, we examined the implications if the CalMac service waS designed for :foot passengers only. Costs are cut under this variant, but the service cont~ues to sustain an operating deficit, although this is reduced to approximately £0.6 million per annum. It should be noted that this proposal is 110tconsidered to have\long-tenn prospects by either operator.
2: Closure of one of the existing services. While the "status quo" option and its variants are only sustainable with the continuing injection of substantial public subsidies into the GourockIDunoonservice,-closureof one'of the existing services would imply that the route could be run on a fully self-financing basis by the' surviving operator. Capacity wouid' be in line with route demand, and future investment costs could be fully funded from tariff revenues at no cost to the public purse.
In reality, we do not believethat iUs likely that the MCInroy's PointlHunter's Quay route would close. The existing service operator is trading profitably and able to fund its investment requirementS.on a fully commercial basis. In a free market, there is no reason why closure should occur under these circumstances.
"- The closure of the existing Gourock/Dunoon service would involve one-off redundancy costs. It could also imply that certain unavoidable overheads had to . be absoroed by other services within the CalMac network, increasing their costs and reducing their viability. Nevertheless, this option wol11dresult in a net saving in public expenditure compared to the status quo. However, it would also result in" the loss of a direct link between,Gourockrailway station and Dunoon town centre, although Western Ferries has expressed its willingness in principle to run a dedicated express bus service between these two points via the McInroy's PointlHunter's Quay ferry at no extra cost.
As a variant of this option, we examined the hypothetical feasibility of a service between McID.roy'sPoint and Dunoon Pier, if it was regarded as desirable to continue a ferry service directly into Dunoon. Unlike the McInroy's PointlHunter's Quay ferry service, this would not, be commercially viable; a public subsidy of approximately £65,000 per annum would be required to meet
.~ iii the investment costs directly associated with it. However, additional expenditure might be required in premium payments to buyout existing route rights, and the implementation of this theoretical option would be complex and difficult. In any event, it would only be justifiable if the economic benefits of continuing a direct ferry link to Dunoon were clearly demonstrated; an issue which lies beyond the scope of this study.
3. An enhanced Gourock/Dunoon service. Under this option, which has been proposed by CalMac, the operation of the existing Gourock/Dunoon service , would be radically changed. The feasibility of these proposals cannot be validated by either Western Ferries or De10itte & Touche, as it requires a great deal of further analysis of the technical feasibility of the option and the effect on the town . of Dunoon. The GourockJDunoon service operator would invest in two new roll- .on roll-off vessels, enabling more rapid turnaround "times than at present for . vehicles on either end of the crossing. Their cost structure would be similar to that currently operated by Western Ferries which would be a significant operational change for CalMac to implement. Dunoon Pier would not be refurbished; instead, a low-cost concrete slipway would be installed at a suitable location to be determined near to the existing pier. The investment costs of this option might amount to approximately £8.5 million, of which £7.6 million might be spent on the vessels. Following this investment, the service might generate an operating surplus rising from £0,5 million in the early years of operation to £0.7 million by Year 12, so the net present cost of this option may be only approximately £2 million. The McInroy's PointlHunter's Quay service would continue as at present.
COBClu~ions
We were not asked to recommend a single option. However, ftom the above analysis it is clear that the "status quo" is not a cheap option for the public purse. A single service between McInroy's Point and Hunter's Quay appears commercially viable and implies much lower costs for the taxpayer. However, it loses the benefits of-. consumer choice and competition, and would mark an end to ferry travel to Dunoon pier. For these reasons; there may be merit in further examining the technical feasibility and commercial viability of the radical changes to the GourocklDunoon" ferry service proposed by CalMac. However, it should be emphasised that we cannot give any assurance that the outcome of such a study will be positive.
iv 1. INTRODUCTION
1.1 Background
Gourock and Dunoon are currently served by two ferry operators· - Caledonian MacBrayne (CalMac) and Western Ferries. The two services operate between different coastal points: CalMac's service runs between the two town centres of Gourock and Dunoon, while the Western Ferries service runs between McInroy's Point, just inside Gourock, to Hunter's Quay, whicll is just inside Dunoon. Nevertheless, the ,services can be considered to be in direct competition with each other.
Currently, CalMac receives a state revenue subsidy on the basis that it provides a socially necessary passenger service. This subsidy is not route specific, but allocated as a general contribution ~owards CalMac's operating costs throughout the network it serves. Grants for capital inve~tment are made available by the Scottish Office on approval, of an investment appraisal prepared by CalMac ..
However, in order to ensure that the public subsidy is not used to undermine a private operator on the Gourock / Dunoon route, CalMac's ser0-ce frequency is restricted, by the Secretary of State for' Scotland, to a maximum Qf one return trip per hour. The annual number of trips run by CalMac is actually approximately one fifth greater than this, due to additional .services· at peak times, but these additional services are advertised and the Scottish Office is aware of them.
This arrangement was introduced just prior to 1982. At that time, the Secretary of State announced his intention to withdraw the public subsidy from the CalMac service and transfer it to Western Ferries' service, but this decision was subject to a route closure enquiry by the Scottish Transport Users"' Consultative Committee (STUCC) 1. There was considerable public opposition to the proposal to withdraw CalMac's service, particularly for foot passengers~ because of concerns about its impact on service frequency, cost and quality. Accordingly, the STUCC recommended against the proposal. As a result, the Government decided to allow both operators to continue on the route, with CalMac restricted to one"advertised return journey per hour, but authorised to use vessels capable of ,., carrYing vehicles. The Secretary of State at the time also decided to reduce the subsidy for. .~ the route from approximately £0.5 million per annum to £0.25 million per annum, calculated on the amount required in respect of foot passengers.
Nevertheless, in the longer term, the sustainability and suitability of this arrangement is in doubt a:i:1dthe Scottish Office now believes that it is unsatisfactory to provide a subsidy to a , public sector:feiTy operator which is competing with the private sector.
1 The STUCC is now known as the CalMac Users 'Consultative Committee (CMUCC). There is a general requirement to refer to the CMUCC in any situation where CalMac intends to withdraw a service.
1 1.2 Study Objectives and Terms of Reference
The Scottish Office, in conjunction with CalMac and Western Ferries (Clyde), therefore , commissioned this study to provide advice on the future pattern, structure and regulation of ferry services between Gourock and Dunoon~ The purpose of the study was not to provide a single recommendation, but rather to identify and consider a range of feasible options with a view to reporting objectively on the relative advantages or disadvantages of each, particularly with regard to their fmancial and operational viabi]ity.
The tenns of reference for the study required that it would be undertaken in two main stages:
• Stag~ 1, comprising a fact~finding exercise to provide a comprehensive analysis of the current situation, including a description of the services offered by CalMac and Western Ferries, 'and their current and future capacity requirements; and
• Stage 2, in which the consultants were required to develop options for future service delivery and to assess them against a number of criteria.
The detailed tenns of reference are included as Appendix 1 to this report.
1.3 Report Structure
.This report of the study is structured as follows :
• in the next section we describe the approach and methodology we adopted to address the issues covered by the two stages of the study;
• in Section 3 we describe the serVice providers and method of route regulation;
• Section 4 describes the current arrangements for route operation;
• Section 5 discusses the market considerations likely to apply to any future solution;
'" • Section 6 examines the future investment requirements for vessels and pier infrastructure serving the GourockIDunoon crossing;
• Section 7 analyses the current costs of service delivery;
• in Section 8, we assess six possible options for future service delivery on the route, estimate the costs associated with each, and analyse their implications in terms of likely costs to the public purse;
• in Section 9, we summarise the strengths and weaknesses of each option;
2 • in section 10, we discuss the issues connected with the implementation of each option, and outline the next steps in the consideration of the future delivery of ferry services in the,Inverc1yde-Cowal area.
3 2. APPROACH
2.1 Introduction
oUr overall approach to the study is shown in Figure 2.1 overleaf. --In summary, we undertook the assignment in four phases:
• set up, when the work programme and sources for the study were agreed, _a list of interviewees drawn up, and the scope of the interview programme defined;
• fact-finding, when data relevant to the current and future performance of the GOUfock/Dunoon ferry service operated by CalMac, and the Hunter's QuaylMcInroy's PoiJ;1tservice operated by Western Ferries, were collated;
• analysis, when the data gathered in the fact-fmding phase were used to assess potential options for meeting future service demand; and
• reporting, whfm the fmal results and conclusions of the study were delivered to the Steering Group responsible for the study.
The tasks undertaken in each phase are summarised in Figure 2.1.
The work undertaken in each phase is described in greater detail below. 2.2 Phase 1 : Set-up
In this phase, we prepared a draft work programme for the consideration of the study sponsors at an inception meeting held with the Steering -Group. This meeting confirmed the scope and timetable for the study, and covered the following agenda:
• a /ist of sources for the study, including previous studies of the Gourock/Dunoon service undertaken by Pieda and KPMG respectively, and other studies providing information on' economic and competition is~;uesrelevant to the provision of the GourocklDunoon ferry se~ice2. In addition to this published research, key sources included management accounts and other management information supplied by Western Ferries and CalMac;
2 These included the Monopolies and Mergers Commission Report on Cross-Solen! Ferries: A report on the existence or possible existence oJ a monopoly situation in relation to the supply oj ferry services between the Isle of Wight and the mainland of England, Cm 1825, HMSO, 1992; the 1983 Monopolies and Mergers Commission Report on Caledonian MacBrayne Ltd, Cm. 8805, HMSO, 1982, and the reportby the Scottish Office Industry Department on Fare Price Elasticities on the Caledonian MacBrayne Ferry Network by R.A. Henderson and D.l. Maddison, ESU Research Paper No 30 (1993).
-4 .,f"
Figure 2.1
GOUROCKjDUNOON FERRY SERVICE OVERALL APPROACH
PHASE TASKS OUTPUTS 1. Set up
2. Diagnosis
3. Prognosis
4. Reporting
5 • a list of interviewees. The interviewees from whom infonnation for the study was sought included officers in the three sponsoring bodies, and Argyll & Bute Council with respect to the economic outlook for the. area served by the Gourock/Dunoon ferry service and future options for the piers oWned by the Council, particularly the Dunoon Pier;
• the scope of the interviews, and the information to be sought from each interviewee, including historic data and forecasts of traffic, the costs of service delivery, hull capacity and load factors, and any investment requirements.
A key' output of the Inception Meeting was. an agreed project plan which confirmed the outputs required from the study and specified key milestones to be achieved.
2.3 Phase 2 : Fact-finding
The second phase of th~ study' involved the collection of data relevant to the current and future 'operation of the two ferry services (Gourock/Dunoon and McInroy's PointIHunter's Quay), as well as the CalMac service from Weymss Bay to Rothesay. The key data relevant for the study were provided by the sponsoring parties themselves. Both parties provided detailed ~cial data, some of which is summarised in this report. Both parties also provided data on the structure and .level of their traffic, but CalMac provided the bulk of the data for peak daily and hourly flows: (although both companies retain records of passenger numbers by sailing, as required by law, Western Ferries has only recently started to analyse these records).
The main output from this research was a detailed assessment of the upper Clyde ferry market, traffic volumes, costs of service delivery and investment requirements.
A key input to this model was a market analysis encompassing:
• travel patterns, distinguishing between passengers, cars, coaches. and freight vehicles;
• travel volumes at different hours of the day, days of the week, and months of the year;
• traffic peaks; and
• current and projected load factors.
Finally, we examined future investment requirements on the route, with respect both to shipping capacity and supporting infrastructure.
2.4 Phase 3 : Options Assessment .
.In the third phase of the study, we analysed the facts gathered in Phase 2 in order to aSsess potential options for meeting future traffic demand ..
6 A number of options were indicated in the Tenns of Reference for the study. Other possible options were identified during the fact~fmding phase. In order to finalise the options and assessment criteria, three separate workshops were organised with each of the study sponsors. The purpose of each workshop was to:
• check the data gathered in the fact-finding phase;
• enhance and expand on the possible options for meeting service demands;
• clarifY issues surrounding policy, route structure, vessel requirements, pier infrastructure, etc.; .
• elaborate the criteria for assessing the identified options; and
• undertake' a preliminary assessment of each of the options. \ The findings of the three workshops fed into a more detailed analysis and costing of feasible options . .t
2.5 Phase 4 : Reporting
The final stage of the study irivolved setting out our findings in a Final ~eport .
..~,,' ! ••'4-<
7 3. THE SERVICE PROVIDERS
3.1 Caledonian MacBrayne Limited
Caledonian MacBrayne Limited is wholly owned by the Secretary of State for Scotland. CalMac has been in existence in its present form since 1973, although it came into being under the Transport Act of 1968, and operates publicly subsidised ferry services allover the West Coast of Scotland.
Public Subsidy
CalMac currently benefits from an annual revenue subsidy from the Scottish Office. This amounted to £11.7 milljon in the 1996/97 fiscal year, an increase nom £8.3 million in 199~/96. A key reason for the increase in the overall CalMac. subsidy in 1996/97 was the withdrawal of the Kyle/Kyleakin service, which had been one of the most profitable in the CalMhc network, following the opening of the Skye Bridge.3 In addition, CalMac has informed us that the recent maritime accidents involving ferries have led to expenditure over the past few years to conform with higher safety standards.
The Scottish Office subsidy is estimated in advance to cover the likely revenue deficit including depreciation on ships and teiminals. Grants for major capital expenditure such a~ new ships are additional. Howev.er, the Gourock-Dunoon route has not benefitted from any significant. capital investment in recent years, ~xcept for some berth modifications at £200,000 in 1994.
The revenue subsidy is not allocated to specific routes. However:
• the portion of CalMac's subsidy allocated to the GourocklDunoon route is intended to ~ubsidise foot passengers only;."
• according to our calculations (described in Sections 7 and·8), the revenue deficit on the GourockIDuiloon service considered separately is approximately £0.45 million per annum, excluding the allocation of a head ·office overhead, and £0.85 million if the. overhead is inclu.ded.
3.2 Western Ferries Limited
Western Ferries (Clyde) Limited was a management buy-out in 1985 from Western Ferries (Argyll) Ltd, which operated to Islay and still operates between Islay and Jura. The company is managed by Stirling Shipmanagement Ltd, which also .manages Stirling Shipping Company ~td, the largest UK supply boat owner and operator. Day to day operations are managed locally in Hunter's Quay.
3 This also resulted in the disposal of surplus vessels designed specifically, for the route at a loss to CalMac.
8 All day-to-day operational matters relating to Western Ferries (Clyde) Ltd., henceforward described as Western Ferries, are dealt with in Hunter's Quay. All financial and administrative matters are addressed by the Glasgow office of Stirling Shipmanagement Ltd.
In the year ended 31 March 1997, Western Ferries (Clyde) Ltd. made an operating surplus of £811,000 and a net profit of£186,000.
3.3 Passenger Volumes by Category Carried by Each Service Provider
The operators are very different in the type of traffic they carry. Figures 3.1. and 3.2 show the proportion of foot to car passengers carried by each. Clearly, almost half of CalMac's present market is made up of foot passengers, By contrast, only 16% of Western Ferries' market comprises foot passengers, with over three-quarters comprising car passengers. This issue is dealt with in more detail in Section 5. The total number of passengers carried on the two routes was 1.45 million in 1996, comprising approximately 0.44 million foot passengers and 0.91 million car passengers.
Figure 3.1 Composition of CalMac's passengers on the GourockIDunoon route in 1996
:';'
CalMac • make up of trafftc1996
c03ch p3Ssengers -5%
foot P3ssengers 49% C3r p3$sengers 45%
Source: CalMac
9 Figure 3.2 Composition of Western Ferries' passengers on the Hunter's QuaylMcInroy's Point· route in 1996
Western Ferries: make~p oftrafflc 1996
<;OaCh passengers 6%
carpassengors 77%
Source: Western Ferries
.3.4 Route Regulation
3.4.1 Ministerial ServiceCommitments
There is a general commitment by the Secretary of State for Scotland that there will continue to be a passenger service between Gourock and Dunoon, and that any intention to withdraw this service will be subject to a reference to the CMUCC and will have to be advertised for a six month period.
3.4.2 The Regulatory Framework
There is no formal regulatory framework for the delivery of this service obligation. The Scottish Office does not seek to control fares on the route. Although it sets o-yera11network service standards for CalMac, it does not set standards by individual route and it has not subjected delivery of services on the Gourock/Dunoon route to a competitive tender. However, in 1982, the Scottish Office lirrnted the frequency of services which CalMac could offer to one round trip sailing every hour. This had the effect of maintaining the overau. service capacity of both operators at the same level. However, Western Ferries has more than doubled its service capacity since tha~ time-. The CalMac service has also been extended so that CalMac advertises additional services at peak times and the Scottish Office is aware of this, although permission was not sought in advance. All other aspects of the operation of the GourockJDunoon ferry are matters for CalMac' s management.
. The consequence of these arrangements is that CalMac has continued to operate the route in limited competition with Western Ferries.
10 These arrangements are not subject to regular review, but will continue indefinitely until one of the parties terminates them; They are updated annually through a letter sent by the Scottish Office to CalMac which covers aU of its services.
The existing framework is recognised not to be wholly satisfactory because of the limitations placed on service delivery by one of the companies, compounded by the fact that the existing arrangements are only sustainable with the support of a public subsidy. A key question is whether this represents the least-cost method of honouring the Ministerial service commitment. ..
3.4.3 Performance Indicators
In disbursing the grant, the Scottish Office monitors three performance indicators:
• . financial targets - fare revenue as a percentage' of operating costs, with an .'overall target of reducing the subsidy element (Le. increasing the percentage of operatingcostscovered'through fares);
• efficiency targets - based on a unit measure of operating cost, cost of providing a passenger or car kilometre of service; and
• performance targets - based on the quality of services delivered, measured against benchmarks such as the punctuality and reliability of service.
At present, these standard targets are set for CalMac's service as a whole, but they could in principle be disaggregated into targets for individual routes. 4. ROUTE OPERATIONS
4.1 The Routes
A section of CalMac's routes in the west of Scotland is shown in Figure 4.1 below. Figure 4.2 shows the relative locations of the CalMac's and Western Ferries' services between Gourock and Dunoon.
Figure 4.1 CalMac's Routes
M~ SCOTLAND
ms3ua Glegow•
Source: CalMac brochure
12 Figure 4.2. shows the relative locations of the CalMac and Western Ferries' service.
Figure 4.2 CaIMac's and Western Ferries' Routes
"'HUNTER'S ;i"!"~~A Y C.1ledonian M"dkayne Firry
TO LAKGS ••••
Source: Western Ferries' published tin:1etable
4.1.1 GourockJDunoon and Hunter's QuaylMcInroy's Point
The GourocklDunoon route run by CalMac links the centres of the two towns and connects with a rail head at Gourock, which provides a direct rail service into Glasgow. As a consequence, it is attractive to, and primarily used by, foot passengers, who account for half of the CalMac traffic.
The piers for the Western Ferries service are McInroy's Point and Hunters' Quay, . and are within the town limits of Gourock and Dunoon, but not at the town centres. The out-of-town location arguably makes this route more appropriate for the vehicles which constitute its primary source of demand, since traffic congestion is less of a problem. However, Argyll and Bute Council considers that "tourist traffic landing- at Dunoon, rather than Hunter's Quay, is essential to the economic health of the town and considers any potential traffic congestion as a lesser problem. Turning to t .Gourock, traffic coming from Glasgow inust travel through Gourock to reach )"'" McInroy's Point, which is approximately two miles further away, so if cars use McInroy's Point rather than Gourock, this probably increases the flow of traffic through the centre of Gourock.
13 -
The general praCtice on ferry services is to take the shortest possible route to achieve the lowest possible fuel and other running costs. This would be McInroy's PointlHunter's Quay which, at two nautical miles, is half the length of the Gourock/Dunoon route. Gourock/Dunoon, on the other hand, links two town centres and, therefore, offers the possibility of encouraging non-car travel.
The crossing is scheduled to take twenty minutes for both services, although in practice ·the Western Ferries service takes slightly less.
The road distance between Dunoon and .Glasgow, a common destination of travellers on these services, is 75 miles. To reach Dunoon from Gourock by road rather than by ferry adds about an how to the journey, and potentially two and a half hours in heavy supuner traffic.
Both services h~ve a core demand from business traffic on weekdays, although this is , augmented by leisure travellers and tourists, particularly at the weekend during the summer. The closure of the American naval base at Holy Loch several years ago led· to the release of cheap housing formerly used by servicemen onto the market, which helped to stimulate the growth of commuter traffic on both services. 4.1.2 W~myssBaylRothesayroute
The Wemyss BaylRothesay route is operated by CalMac alone. It is driven to a much greater extent by tourism than the. GourockIDunoon route. It benefits from a rail head at the ferry tenninal at WemyssBay which makes the crossing ideal for foot paSsengers going on a day trip to the island of Bute. The crossing takes half an hour.
4.1.3 A Single Route?
It could· be inferred from the description of the services above that there is considerable duplication. In the provision of ferry services. between Gourock and Dunoon. In principle, the costs of service delivery between Gourock and Dunoon could be reduced if there was a single crossing between two terminals However, the following practical constraints to a "single route" solution should be borne in mind:
•. each company operates a different docking system, so the piers used by the two . operators are not readily interchangeable;
• the ~orking arrangements of the two companies are different. .CalMac operates with three pier hands at Gourock, and one office staff member per shift in Gourock, together with one office person at Dunoon, while Western Ferries operates with one pier hand per pier per shift. Argyll and Bute Council operates with four staff per shift at. Dunoon. While rationalisation and harmonisation of working arrangements is not impossible, it would require consultation with all the affected parties;
14 • if a port has received the benefit of public money, it is deemed to be a "common user" pier, open to any vessel as long as it pays the relevant charges. This is subject to availability at the pier and the level of charges set by the pier owner. Consequently, the pier may not be as open in practice as it is in theory. Accordingly, while Western Ferries retains exclusive access to its piers because it is privately owned and financed, CalMac must allow access to all vessels on the Gourock Pier and, Argyll & Bute Council must allow similar access on the Dunoon Pier. At present, only a small number of fishing vessels and leisure boats take advantage of such access, but even if CalMac were the lone service provider, it would, in principle, have no right to prevent Western Ferries from using the ..-' pIers;
• one of the re<;lSonswhy Western Ferries has not made use of the "common user" piers of Gourock and Dunoon is the way public pier charges are calculated. They m:e divided into berthing dues and traffic dues, the former being based on the ntunber of calls and the latter on the number of passengers carried. By using its, own pier at Hunter's Quay, Western Ferries avoids paying increased traffic dues if it increases passenger volumes but remains responsible for pier maintenance and repair. However, analysis of its accounts reveals that this is cheaper than paying berthing dues at Dunoon. The same is true of CalMac's activity at Gourock Pier, which it'owns: Western Ferries' charges at McInroy's Point are based on turnover, but are still cheaper than Dunoon Pier's charges;
• both operators have been asked by Argyll and Bute Council if they would share facilities. The response has been that they would require separate linkspansand marshalling areas.
4.2 The Vessels
4.2.1 <:aU\iac
CalMac operates four vessels on the Upper Clyde, which are interchangeable between the GourocklDunoon and Wemyss Bay/Rothesay routes. CalMac's four vessels are called the Juno; Jupiter, Saturn and Pioneer. Jupiter has Class 3· ,certification, so she can help with CalMac's Arran route as well. Pioneer has Class IIA certification and is capable of operating on any route in the C~Mac' network. She now acts as a fleet st~dby vessel all year round.
In the winter, a back-up ship is normally required to cover for ships undergoing their aDnual overhau14, and, for the vessels mentioned above, Pioneer is used for this purpose as well as providing relief cover on the Mallaig/Small Isle service.
4 ,All passenger vessels in the UK must be docked and inspected annually before their passenger certification is renewed.
15 The vessels allocated to the two routes are summarised in Figure 4.3:
Figure 4.3 Vessels on the GourockIDunoonand Wemyss Bay - Rothesay routes
Name of vessel Year built Years old Juno 1974 23 Jupiter 1974 23 Pioneer 1974 23 . Saturn 1978 19 Source: FelT)' Publications Red Book
During the low season, one of the vessels is allocated to full-time operation on eac .of the two routes, with a third vessel rotating between them by providing rush hot cover on the GourocklDunoon route and operating on the Wemyss BaylRothesa route for the rest of the day. Similar arrangements prevail in the summer, but further vessel is deployed on theWemyss Bay/Rothesay route during this period t meet peak tourist demand. The,purpose of this arrangement is t9 allow all vessels t be taken out of service for periodic maintenance. It also has the effect of spreadin the usage of the vessels.
A number of factors make the CalMac vessels more expensive to operate than, thos of Western Ferries:
• they are expensive to upgrade or refurbish;
• they are comparatively expensive to maintain. Although the vessels have bee well maintained arid may be expected to last for some time to ,come, the maintenance has been on an annual cycle. This is because CalMac was not able 1 , predict the eventual replacement date for its vessels with any certainty, since th was dependant on the public spending programme. Annual maintenance in th manner is more expensive than less frequent overhauls undertaken within planned life cycle maintenance programme;
• they are technologically obsolete, as they are side and stem loading rather tbf bow and stem loading, like the Western Ferries vessels. This means:
~ some car passengers may have to reverse to leave the vessel. Lor commercia,]. vehicles may be unable to perform the turn require. Accordingly, travellers may prefer to use Western Ferries' vessels;
16 => if CalMac takes longer than the timetabled 10 minutes to unload, the service may become delayed. If the service becomes delayed, then CalMac runs the risk of losing business to Western Ferries, since people can choose not to wait. The back~up vessel (when available) has been
" required to make up a sailing when the delays have accumulated; " .~ => because of the technical aspects of side-loading and the exposed nature of Dunoon Pier, during adverse weather the vessels would not be able to berth side-to, resulting in additional cancellations;
• Cal,Mac operates to a higher level afpassenger' certification than Western Ferries, because its vessels operate on the Wemyss BaylRothesay route which is further out to sea. In the winter, the Wemyss Bay routes are rated Class '4, while the GotirockJDunoon route is a Class 5, to which less stringent standards apply. The different certification means that the presep.t vessels must have more crew and equipment on board. The effect is that the vessels are over-specified for the GourockJDunoon route. If the present vessels were taken off the Wemyss Bay- Rothesay route, some savings in manning costs might be realised;
• partly as a result of this higher specification, CalMac's vessels require more crew than We~em Ferries. CalMac's vessels operate with a crew of nine, excluding 1 catering staff, compared to Western Ferries' complement of four crew. These are' 'I the minimum crew numbers allowed by the MSA, irrespective of the number of 'I j j passengers. The design of CalMac' s vessels also, necessitates more crew than Western Ferries' to dock the vessel and to evacuate passengers in an emergency;
"! , j • the crew work two and three day shifts and do not all live locally. Consequently, I I accommodation is provided on board for non-local crew; J • CalMac's vessels offer' a highe,r level of on-board services than the We~tern Ferries' vessels, including the-provision of lounges and bars. CalMac has recently contracted out its catering operations for both ship and shore catering.
These factors tend to increase CalMac's costs. In addition, its ships are faster than the Western Ferries' ships, with a speed of approximately 12 knots, ap.d they are' highly manoeuvrable, due to Voss Schneider propellers. However, this does result in . higher fuel consumption and maintenance costs. - 4.2.2 WesternFerries
Western Ferries does not use new vessels on the McInroy's Pointl Hunter's Quay route. Its hulls were purchased second-hand and refurbished and'refitted. They appear in good condition. It is not known how many more such hulls are available world-wide.
Western Ferries' fleet is listed in Figure 4.4 overleai:
17 Figure 4.4 Vessels operating on the Hunter's QuaylMcInroy's Point Route
Name of vessel Year built Years old Year refurbished Sound of Shuna 1962 35 1973 Sound of Scarba 1960 37 1973 Sound of Sleat 1960 37 1989 Sound of Scalpay 1962 36 1995 Sound of Sanda 1964 33 1996 Source: Western Ferries
.Scalpay and Sanda were totally refurbished when purchased in 1995 and 1996 respectively, including a complete renewal of their propulsion packages.
Western Ferries' vessels operate at eight knots, 33% slower than CalMac's vessels. However, the distance is shorter. Western Ferries currently runs more frequent services than CalMac, due to restrictions on service currently applied to CalMac: WesternF erries operates every 15-20 minutes, w1rile CalMac operates half-hourly.
In tenns of design, the vessels are more open. to the weather and offer fewer comforts. However, they are all bow and stem loading, with ramps at both ends and can take longer vehicles than CalMac. Two of Western Ferries' vessels are also slightly less manoeuvrable than CalMac's.
4.3 Service Capacity
CalMac's vessel capacity is sho~'in Figure 4.5, while Western Ferries is shown in Figure 4.6 ov~rleaf.
Figure 4.5 CalMac vessel capacity
Name of vessel Passenger capacity Car capacity
Juno 510 40 Jupiter 510 40 Pioneer 356 32 Saturn 510 40 Source: CalMac
18 Figure 4.6 Western Ferries vessel capacity
Name of vessel Passenger Car capacity capacity maxima Sound of Shuna 200 26 Sound of Scarba 200 22 Sound of Sleat 296 32 Sound of Scalpay 220 37 Sound of San~a 220 37
Source: Western Ferries
Although Western Ferries' vessels are somewhat smaller than CalMac's in tenns of car and passenger capacity, overall service capacity is also made up of frequency of sailings. The following figure illustrates the ability of Western Ferries to put on additional sailings:
Figure 4.7 . Western Ferries runs
Western Ferries actual! scheduled runs
30,000
25,000
20,000 c1/1 o nissed ::I 15,000 .. • extra runs -0 10,000 0 III scheduled c 5,000
0
-5,000 years
Source: Western Ferries
What this shows is that:
• Western Ferries puts on around 20,000 runs per annum (under a 20 or 15 minute service). This compares to CalMac's scheduled 12,451 sailings (see Figure.4.18);
• Western Ferries puts on extra runs amounting to 16-18% of its scheduled runs, which CalMac is restricted from doing.
The average level of utilisation for each service has been calculated by dividing the actual service offered, in terms· of number of runs made, by the actual number of cars and
19 passengers. The results· are shown in Figure 4.8. The major implication of this calculation is that there is currently substantial overcapaCity on the route.
Figure 4.8 .Overall service capacity
Total runs 1996 Car capacity Passenger utilised capacity utilised
CalMac 12,314 29% 12%
Western .Ferries 25;852 60% 14%
Total 38,166 48.5% 13%
Source: Deloitte & Touche, based on data supplied by CalMac & Western Ferries
A further question we examined was whether either operator, considered separately, could carry all the current traffic on the route, bearing in mind that neither operator is forecasting significant growth on the route.
If Western Ferries was to take all existing tra:fflc, we calculate that its capacity utilisation over a full year would be 79% for cars and 25% for passengers.
If CalMac was to do the same, its capacity utilisation would be 121% for cars, i.e., at their present capacity, they would not be able to meet demand. However, CalMac would also be able to meet route demand if its were permitted to alter its service patterns. Passenger capacity utilisation would also be 25% .
. The assumptions used in this calculation are as follows:
CalMac Western Ferries Commercial vehicles are equivalent to 3 cars 3 cars
. Coaches are equivalent to - 4.cars 3 cars Passengers per car 2.5 1.5 - Passengers' per cv 1 1 Passengers per coach 35 20 .
Source: CalMac and Western Ferries
20 4.4 Service Demand Over Time
While the conclusion of the previous section is that a single operator could meet average traffic demand on the Gourock/Dunoon route, a key question is whether a single operator could meet peak demand during the busiest hours of the busiest days of the year.
In terms of the seasonal pattern of demand, the peak weekend is the weekend of the Cowal Games, held on the last Saturday in August.
Tourist traffic is highest in the summer and Saturday is the peak day. Figure 4.9 gives hourly passenger numbers, during the Cowal Games on Saturday 31 August 1996 and compares them to the numbers on a typical weekday in February 1996 outside the tourist season when demand may be judged to be close to its core minimum level, and with the day with the next highest tra.f:ijc,Saturday 10 August 1996.
Figure 4.9 CalMac high/low all traffic comparison 1996-97 from Gourock to Dunoon \
Daily traffic: hi-low I 600 I 500
j 400
.1, • Tuesday 06102196 7 300 • QJw al Garms saturday 31108196 "" 2nd highest Saturday 1G'08f96
200
100
o 00:00 04:48 09:36 14:24 19:12 00:00 sailingS
Source: CalMac daily data
The major message emerging from Figure 4.9 is that the Cowal Games weekend is highly abnormal. The level of traffic carried on this weekend is several times greater than the next busiest day in the year. For this reason, it woWd be uneconomic to plan route capacity simply in order to meet this peak.
It may be possible to address the issue of the Cowal Games weekend through, for example, chartering vessels. The Upper Clyde requires vessels with very low draughts, which may be '
21 difficult to source, and while Western Ferries' eight knot-speed vessels are comparatively easy to source, it is less easy to find CalMac's present 12-knot vessels. Nevertheless, the Waverley seems an obvious solution. Although it might appear that CalMac, therefore, does not need its present 500 passenger capacity vessels, it should be borne in mind that they were purchased with the intention of being interchangeable with other vessels on other routes. CalMac has also attempted to reduce the creWing levels to below 500 passenger capacity levels on its vessels through discussions with the Maritime SafetyAgency (MSA), to date unsuccessfully. It should also be noted that the data shown relates toCalMac only, as Western Ferries has only recently begun to analyse records of passenger numbers by individual sailing. Without equivalent data from Western Ferries, it is difficult to predict, with any certainty, total capacity requireplents for this route on a daily and hourly basis. However, a working assumption is that, as CalMac is carrying 43% of all passenger traffic, then the traffic patterns shown, multiplied up bya factor of 100/43, would give a reasonable approximation of the·total flow of traffic across the two routes. This would suggest, for example, that the busie~t day of the year, aside from the Cowal Games, would require a total capacity of 465 passenger units, if CalMac's service frequency were maintained. If service frequency were changed, then this capacity requirement would alter: for example, if service frequency was . doubled, then, in theory, capacity requirements would be halved. This assumes a constant, but highly Unlikely,traffic flow which does not take account of traffic peaks and troughs.. Analysis of Western Ferries' data for one representative ship on a busy day ( in this case, Easter Saturday) shows the effects of these peaks and troughs: .
Figure 4.10 Western Ferries daily peaks & troughs: Easter Saturday 1997 (both ways)
SQUnd of Sanda peak day capacity uliflsation .
100 00 80 70 ••6 60 :: 50 5 = 40 ."#. 30
20 10 o 0 0 0 0 0 0 0 0 0 0 .~ :g ~g:5g:5g 0 ~ ~ :5 ~ N N ~ N N ~ ~ 0 :5 § ~ OJ '" ,;;'" ,;;'" r.; '" 0 'F ~ ~ ~ g g ~ ~ t! ~ '" t! ti ~ :! ~ ~ ~ .~ ~ ~ times '"
Source: Western Ferries activity data
While the average car capacity utilisation on this day was only 53%, it ranged from 14% on the 07:30 a.m. sailing, to 86% on ~e 18:55p.m. sailing.
22 A review of weekly data throughout the year 1996 indicates the following minimum and maximum ranges for a si~gle journey (CalMac data only):
Figure 4.11 CalMac high flow comparison: weekly, GourockIDunoon
1996 Vehicles Average vehicles Passengers Average calendar (incl. -coaches) per sailing passengers per year sailing Low 1,328 10 7,142 55 6/1/96 10/2/96 , High 4,018 31 36,555 281 31/8/96 31/8/96
Source: CalMac weekly data
Note to Table: during the week of 6 January 1996 sailings were disrupted by bad weather and there were no sailings at all on New Year's Day. The number of sailings was, therefore, reduced. Average sailings per week are normally 130 (one way).
Figure 4.12 CalMac high/low traffic comparison: time of day, Gourockl Dunoon
Daily activity-peaks and troughs
250
200
iii g 150 .. IIITuesday 06102196 GI DI .2nd highest Saturday 10/08/96 5i 100 on :I Q. 50
0 0 0 0 0 0 0 0 0 0 0 It) 0 I'- 0 It) 0 0 0 ~ It) N It) N N N N N N N ..•. ~ N ..•. N ..•. N N ('oj cD t-:. cD Oi ~ N i<) U) t-:. a; a; 0 0 :g 0 ~ 0 0 ~ ~ ~ •... ~ :! ~ ~ ~ •... ~ ~ •... ('oj sailings
Source: CalMac
Figure 4.12 provides data for traffic flows on the CalMac service. between Gourock and Dunoon by time of day, for a typical day during the February low season and for the second busiest Saturday of the season.
23 The sailings shown at 14:45 p.m. and 16:47 p.m. were provided by the back-up vessel. Therefore, if the back-up vessel had not been available to service this route because it was in use elsewhere, the peaks shown for the Saturday lOth August 1996 may have been more pronounced.
It will be seen from the figure that there is a clear evening peak when returning commuters and shoppers travel from Gourock to Dunoon at 16:20 and 17:20. An analysis of the GourocklDunoon route would show a reverse peak during the morning peak hour.
If peak flow traffic volumes were pressing upwards on capacity limits, it might be worth considering differential peak/off peak tariffs to displace marginal leisure traveIIers out of the peak period onto voyages during quieter periods. This would be a cheaper and more economically efficient solution than investing substantial sums in the new capacity merely to meet this peak d~mand.
Figures 4.11 and 4.12 suggest that, taking the Cowal Games out of the equation, service capacity is not a limiting factor, as CaIMac scarcely ever reaches 200 passengers in a single sailing. Consequently, vessels· with .capacity for 500 passengers are not necessary specifically for this route, if tWo operators are maintained.
4.5 Forecast Growth in Traffic Volumes and Tariffs
There area number of drivers of market growth, which include the following:
• growth in numbers of tourists;
• growth in resident numbers;
• new products and services. For example, in the course of our interviews, CalMac stated that it was considering expanding the existing passenger service between Gourock and KiIcreggan into a car service.
There is a distinction in the historical growth patterns of both operators with the growth of demand for the Western Ferries service having been greater than that of the CalMac service over the past five years. There are certain special factors which account for at least part of this differential, for example the closure of the rail tunnel between Gourock and Greenock . from October 1993 to 1995, when the rail service was replaced by a connecting bus service resulting in a fall in CalMac's passenger numbers.
24 Figure 4.13 Growth in Total Passengers 1992-97
1992-93 1993-94 1994-95 1995-96 1996-97
CalMac -3% -3% 2% 1% 0%
Western 12% 7% 10% 8% 1% Ferries
Source: CaIMac & Western Femes
CalMac does not project passenger traffic growth on a route by route basis, but has told us that, for the'network as a whole, it is predicting 2% growth in passengers and cars, and 1% 'growth in cOJ;nmercialvehicle and coach traffic for both.1998 and 1999.
CalMac's experience suggests that the main driver of traffic demand is GDP growth. Taking account of a likely increase in real GDp of between 0% to 3.5% per annum, neither operator seems to be foreseeing any great change in the existing size of the market (presently 1.4 million passengers),
A recent report on The New Ship Effect5 concludes that the introduction of a new vessel to replace an old one can stimUlate an increase in carryings which remains permanently. In other :words, traffic volumes ~e ratclleted upwards by a new vessel, and a permanent' expansion in the market results. The report concludes that "the scale of the new ship effect has been positively and' significantly related both to the severity of the previous capacity constraints and to the subsequent pressure of demand as measured by the rate of growth in traffic carryings on the rest of the network." In other words, a new ship will have a larger impact on total carryings where there waS previously suppressed demand, and where the rate of demand growth is high. Our assessment is that neither factor applies strongly on the GourocklDunoon route, so that while some"stimulus to demand could be expected ITom a new ship, it would be likely to be modest. We take up this point when evaluating options for' the future of the service later in the report.
In terms of future tariff growths, CalMac has been advised by the Scottish, Office that it will- have to impose price rises exceeding inflation next year. The price behaviour of the two operators to date suggests that Western Ferries will follow suit. It is difficult to predict-any more long-term pricing strategy. Finally, any moves to reduce "bucket shop" discounts is , likely to increase average yields per passenger, which may in turn increase overall revenue if, as we suspect, the price elasticity of demand is less than unity.
5 The New Ship Effect on the Caledonian MacBrayne Network, RA. Henderson, The Scottish Office, May 1996
25 L.'_
4.6 The Piers
Ownership of the piers from which the services operate is given in Figure 4.14. The shortest route across the Inverclyde-Cow~ is McInroy's Point to Hunter's Quay. Wemyss Bay and Rothesay are much further out to sea and, consequently, the route is more exposed than the GourocklDunoon route. The terminals at Gourock and HUnter's Quay are more sheltered than those at Dunoon and McInroy's Point.
Figure 4.14 Ownership of the piers
Route Distance/ Operator Pier Owned by Time
Goutockl 4 nauticB.1 CalMac Gourock Entire pier owned by Dunoon miles CalMac
20 minutes Dunoon Argyll & Bute and, Council, including the '. normally, a linkspan 10-minute' turnaround
McInroy's 2 nautical ' Western , McInroy's Private landlord, rented PoiJ:ltlHunter's miles Femes Point to Western Femes Quay Linkspan owned by Western Femes - 15 to 20 Hunter's Western, Femes minutes Quay and5t07 minutes turnaround " Wemyss 6 nautical CalMac . Wemyss CalMac Bay/Rothesay miles Bay
30 minutes Rothesay Pier owned by Argyll & 15 & Bute Council; minutes linkspan owned and turnaround operated by CalMac
Source: interviews with CalMac & Western Femes
In Figure 4.15, the present condition of the piers and their ancillary facilities, are sununarised. The figure shows that there is considerable variance in the condition, of individual piers, which has implications for the timing and level of investment which will be
26 "'""------
needed to ensure future service delivery. This will be considered in greater detail in section 8.
i i I -j i I I i I .1 1 I
27 Figure 4.15 Condition of the piers
Pier Condition Linkspan Linkspan No. of Ramp ~ . Safe Parking! Marshalling & Waiting Transport (see Note to Table) age . condition! Berths Working links life Load (tonnes) Gourock Good 27 years Reasonabl 1 berth + 1 Stem 120 Adequate for present volumes, but Railway - routine maintenance only e/5 year standby difficult turn against traffic to enter station to life left berth + and exit the terminal. Glasgow / passenger Waiting room. local & 10ng- craft space distance coach service .Dunoon Poor 25 years Poor same as Side 90 Adequate for present volumes. Buses . Gourock Waiting room. to/from Cowal area Mcinroy's Adequate, but some piles 10-12 Medium I berth Linkspan 65 Limited marshalling! parking area. Local & Point and cross members require to good Limited foot passenger waiting long- strengthening &/ or facilities; caravan for staff. distance replacement coach service Hunter's Adequate, but some piles 12-15 Medium to 1 berth Linkspan 65 Limited marshalling area, with Local bus Quay and cross members require good potential for overspill onto main links strengthening &/ or road. replacement. Residential area. Upgrade work scheduled Limited waiting room. for 1997. Wemyss Good- routine maintenance 20 years Good 1 berth Stem 120 Adequate for present volumes. Railway Bay only Waiting rOOm. station to Glasgow + local bus Rothesay Good- routine maintenance 20 years Reasonabl 2 berths . ide, but could be re-sited 100 Adequate for presen.t volumes. only e for stem loading .. Waiting room. Source: Portia! interviews with CalMac & Western Ferries Note to Table: ..The OpInIOnSas to the condItion of the pIers are those of our technical advisers, Portia Management Services. However, since they are based on a brief visual survey, they should not be considered· conclusive.
?R 4.6.1 Gourock Pier
The Gourock Terminal is owned by CalMac. It is in a well sheltered situation and is, consequently, used as CalMac's "port of refuge". In other words, when adverse weather conditions make docking difficult for the vessels at Wemyss Bay and Ardrossan, they go to Gourock instead. However, if Gourock was abandoned, alternatives may be possible. For example, the Wemyss Bay vessels might lay up in Rothesay and the Arran vessels in Brodick, although that would imply a cessation of the service. Fairlie Pier may be capable of modification into alternative ports of refuge for the Arran vessels. The cost and transitional arrangements would need to be examined in greater detail; the cost of upgrading Ardrossan was estimated at £8 million in 1992.
CalMac also runs a passenger-only service to Kilcreggan, and a small number of cruises, from Gourock.
The G9urock Terminal is also CalMac's Head Office, housing all senior management and 1do staff. CalMac has advised us that if it were not the main operator of the GourocklDunoon route, it might relocate its Head Office elsewhere.
£400,000 of: CalMac's Head Office costs were allocated to the GourocklDunoon route in the most re.cent financial year.
The Gourock Terminal forms part of an ambitious waterfront development scheme costing an estimated £8 million which is currently under active consideration by· . Inverclyde CounciL As part of the scheme, a supermarket would be built near Gourock Pier and CalMac would be rehoused in improved· offices. The consortium, which includes the local authority, intend to apply for Millennium Commission funding to meet part of the costs of the development. 4.6.2 Dunoon Pier
Dunoon Pier is owned by Argyll and Butc Council and a proposal to refurbish and improve it was the subject of a recent application by the Council to the Scottish Office. As well as serving scheduled CalMac services to and from Gourock, some . use is made of the pier by non-scheduled vessels such as the Waverley cruise ship.
The pier is sited in an exposed position open to the southerly winds and swelL Sailings are sometimes suspended during periods of stormy weather.
Figure 4.16 (overleaf) shows that the percentage of cancellatioris on the route has run at below 1% in each of the last three years, and that they have fallen year-on-year from 117 in 1994 to 68 in 1996. Most cancellations are due to adverse weather conditions; and CalMac estimate that 90% of poor weather cancellations are attributable to the exposed position of Dunoon Pier and the submergence of the linkspan during extreme high tides.
29 ••••
Figure 4.16 CalMac cancellations on the GourockIDunoon route
1994 1995 1996 No. of sailings 12,262 11,895 12,305 No. of cancellations 117 86 68 As % total sailings 0.95% 0.72% 0.60% Causes of cancellations: Adverse weather 71 . 49 36 Mechanical failures 22 8 16 Other 24 29 16 Total: 117 86 68 Source: CalMac
The condition of the working part of the terminal is poor and will require maj or repair as well as ongoing maintenance if it is to remain operational in its present form., The piles of the linkspan ar~ made of steel-covered reinforced concrete; the steel is corroding and the concrete is crumbling. The Pier is also unsuitable for bow
and stem loading vessels, being equipped. only with a side ramp- .. We understand from CalMac that, since our visit, the Council has undertaken significant expenditure on the linkspan, but that further investment needs to be made on the pier.
30 Figure 4.17 Dunoon Pier Income & Expenditure 1997..98
£ £
CalMac berthing charges 111,600
Passenger & vehicle dues 154,000
Other income 39,400 i.e. pleasure craft, Waverley
Total Income . 305,000
staff Costs 205,000
PropertY Costs 10,000
Supplies & Services 17,000
Repairs & !y.1aintenance 50,000
Total Expenditure 282,000 (282,000)
Net Surplus 23,000
Source: Argyll & Bute Council
The surplus made at Dunoon Pier contributes to the cost~ on other piers.
31 -
Potential Capital Expenditure
The Council estimates the cost of upgrading and refurbishing Dunoon pier as follows.
Figure 4.18 Estimated cost of upgr~ding Dunoon Pier
Capital expenditure £m @ J996 prices
a) New linkspan 1.00
b) Breakwater to protect eXisting pier 1.75
c) Pier refurbishment 2.00
-.:~ subtotal . 4.75 d) 10% contingencies 0.50 Total 5.25
Source: Arg~l1& Bute Council
The pier building is a Gmde B listed puilding, under the protection of Historic Scotland. The estimates shown assume that refurbishnlent preserves the original timbers. If this condition is r~laxed, the cost could be reduced. Historic Scotland may be a source of refurbishment fundIDg, as may the. Millennium Commission and the Local Enterprise Company, Argyll & the Islands Enterprise. 4.6.3 Wemyss Bay Pier
The Wemyss Bay terminal is owned by CalMac. It is in a slightly exposed position but it is unusual for services to be cancelled due to adverse weather.
The railway station forms part of the terminal and major refurbishment of it is under way, with substantial fmancial assistance from Historic Scotland ..
4.6.4 llothesay Pier
The tenninal is in a well sheltered situation. , 4.6.5 Hunter's Quay
This terminal is in a sheltered situation and is not normally affected by adverse weather conditions. Analysis of information provided by Western Ferries shows that
32 ~~ J ,";C·
the level of cancellations on this route have never reached 0.5% between 1991 and 1996.
4.6.6 McInroy's Point
The McInroy's Point terminal is in a slightly exposed location, but is not normally disrupted by adverse weather.
:; Under the terms of the lease, the site will have to be restored to greenfield status when the site is given up. There are 18 years left to run on the lease. The landlord for .:~ the limd area is Ardgowan Estates (the Crown Estate own the seabed and this applies to all the terminals). The cost of returning the site to greenfield status is estimated by Western Ferries at between £100-200,000.
Western Ferries' linkspans are supported by compressed air tanks and, if they are
punctured, the service will be non-operational until they are.. repaired. However, Western Ferries tells us that there has only been one three hour incident of non- operationallinkspan in 25 years of service.
4.7 Timetables,
CalMac can, under the present arrangements, advertise only one return journey an hour on the Gourock/Dunoon route, which means it may lose commercial vehiCles and commuter I traffic to Western Ferries. At present, CalMac runs two additional services in.the moming and one in the afternoon above the hourly service and these extra sailings are advertised. :1 CalMac operates approximately 12,400 sailings annually on the Gourock/Dunoon route, 6,200 each way, equivalent to approximately 16 return sailings per day. The weekly pattern of these return sailings is as follows ..
Figure 4.19 CalMac Scheduled Sailings
No. of scheduled sailings Per s?Jmmer timetable M,W,F T, Th Sat Sun per week per year (*) Gourock/Dunoon 18 19 14 14 120 12,452 DunoonlGourock 18 19 14 14 120
(* less additional Sunday sailing, run in summer, for 7 months)
Source: CalMac Timetable
CalMac's records of sailings show a total of 12,305 sailings (i.e. 6,102 return sailings) took place during the year 1996~ This represents 99% of all scheduled sailings.
CalMac sets its timetable biannually (for summer and winter) and it consults on its timetable through the Shipping Services Advisory Committee. This body includes local councillors
33
. ! and representatives trom road haulage companies and the tourist industry. CalMac's use of its summer timetable has expanded in recent years :trom mid-May to September to Easter until mid-October ..
Key features of the two compani~s' timetables are suri:unarised in Figure 4.20 below.
Figure 4.20 GourockIDunoon : times of first and last sailings
lstllast sailing from CalMac Western time Ferries time GourockIMcInroy's Point 1st 06:20 06:30
Gourock/Mclnroy's Point last 20:20 23:30
Dunooh/Hunter's Quay 1st 06:50 07:00
DunoonIHunter's Quay last 20:45 midnight
Wemyss-Bay-Rothesay·: summer winter Wemyss Bay 1st 07:15 07:15
Wemyss Bay last 19:45 Mon-Thurs. 19:00 Mon-Thurs.
20:40 Fri. & Sun. 19:45 Fri.-Sun ..
23 :20 Sat.
Rothesay 1st 06:30 06:30 Rothesay last 19:00 Mon- Thurs. 18:15 Mon-Thurs.
19:45 Fri. & Sun. 19:00 Fri., Sat & 22:45 Sat. Sun.
Source: published timetables
Figure 4.20 shows that the earliest CaIMac sailing between Gourock and Dunoon is at 06:20 and the latest is at 20:45. Longer operational days were opposed by CaIMac's trade unions when last suggested. The Hours of Work legislation of the Maritime Safety Agency state that a minimum 8 hour break must be provided between shifts.
Western Ferries has no restrictions on its timetable arrangements. It operates a service every half hour, with 15 minute intervals at peak hours, and runs later into the night. Western Ferries' crews work a 40-hour week-and overtime is payable, so they are more flexible than CalMac in being able to put on extra vessels when needed.
34 With respect to the Wemyss Bay/Rothesay route, sailings are every three-quarters of an hour. CalMac operates 10,000 sailings between Rothesay and Wemyss Bay each year, equating to an average of 28 sailings per day.
CalMac put on later sailings on the Wemyss Bay/Rothesay route ~ast year. The initial uptake was disappointing, but CalMac does not expect a new timetabled vessel to be fully utilised for up to three years.
The use of a second ship on the Wemyss Bay/Rothesay route was a response to under- capacity problems. Even so, the last ship to the Isle of Bute leaves at 8 p.m.(via Rhubodach), or 7 p.m. via Rothesay, and we are advised that some companies which have relocated to the area have complained about this. Argyll and Bute Council would like to see this service extended beyond this time. Froin next year, the Pioneer will be a network resource and, if it is required elsewhere, then the Wemyss Bay service will not be able to offer the full advertised summer timetable.
4.8 Tariffs '
CalMac sets its prices on the basis of a pricing model limiting tariffs to the costs of service delivery .
Although the behaviour of competitors is said not to be a key factor, the two providers are close in price terms. Local people are reported to believe the existence of coni petition keeps prices low and accordingly support the continuance oft\v0 operators on theroute.
The tariffs charged on the route are shown in Figure 4.21 overleaf.
35 Figure 4.21 Operators' tariffs on the Gour(i}CklDunoonroute, March 1997-ApriI 1998
Category CalMac "Bucket Western Ferries Published shops" Published £ £ Passengers: adult standard return 4.70 4.20
adult off-peak return 4.00 none child standard return 2.35 none adult 'group standard return 3.90 none adult fO-journey 14.70 12.00 12.60 CalMac 11.50 WF , child lO-joui-ney ·7.35 6.00 free Car stan4ard return 12.10 12.60 Car and driver return 16.80 16.80 Car off-peak return 11.30 Car 1O-journey 38.50 28.60 53.60 shipboard CalMac 42.80 on shore (includes driver) Car & 4 passengers day saver 18.45 (summer only)-day return Coach retUrn 82.50 49.35 full (return) 28.35 empty (both single) Commercial vehicle (excl. VAT) up to 6m: 5m: £7.77 £11.25 6m: £23.12 up to 8m: 8m: £29.54 £24.15 & sliding scale + £2.65 per thereafter 0.5 m " or part thereof thereafter"
Source: CalMac & Western Ferries
36 .~! ..._------IIIIi------~--.-- !'
Western Ferries is reportedly perceived as cheaper than CalMac, although Figure 4.21 suggests that this is not always the case. In CalMac's view, CalMac has a reputation for high fares which is not borne out when it is compared with other ferry services on a cost-per- mile basis ..
Both operators sell heavily discounted tickets through agents or "bucket shops" .. The shops in question are newsagents and other small concerns. In CalMac's case, the discounted ticket prices exclude pier dues.
The CalMac network-wide ~tandard discount for the purch~e of a multi-journey pack of tickets is 40% for vehicles and 30% for passengers. CalMac's ~u1ti-journey tickets have a 6 month expiry date, while Western Ferries' are undated. This probably means that price increases do not have iIIlJ:!lediatefull impact for either operator, and, probably, that Western Ferries' price increases take longer to have effect than CalMac's.
CalMac offer~ pff-peak travel prices during the winter to those travelling from Gourock to Dunoon and all year round to those travelling ITom Dunoon. CalMac's lO-journey tickets are the same price' all year round. Western Ferries does not offer off-peak travel. There is no differential pricing to favour certain times of day with lower prices.
CalMac has never ti~d the cost of acquiring a new vessel into a fare increase. Instead, it has spread the cost of any new mvestment needed amongst the network ..
CalMac 8lso receives revenue ITom Strathc1yde Passenger Transport Executive in respect of .concessionary fares (as doesWestem Ferries), as well as a 5% commission on pier dues collected on behalf of Argyll & Bute Council in respect of Dunoon Pier, and income from a Royal Mail contract.
Western Ferries' tariffs are also shown in Figure 4.21. Unlike CalMac:
• Western Ferries does not allow pre-booking (CalMac pre-book commercial vehicles and coaches onto specific journeys);
• Western Ferries' multi-journey tickets are available for sale as single tickets, still at the discounted price, although the company is now trying to phase out this practice;
• Western Ferries offer season tickets to cars and passengers, while CalMac offer them to foot passengers only;
• Western Ferries let foot passenger pensioners travel free.
37 Average turnover per passenger type in 1996-97 is as follows.
Figure 4.22 Average turnover per traffic type
Traffic Type CalMac Western Ferries £ £. Passengers 1.25 0.77 Cars 3.98 4.30 Commercial vehicles 23.52 24.25
. Coaches 38.78 31.04 All 1.94 2.27
Saute: CaIMac & Western Femes traffic & revenue figures
Clearly, these figures do not compare with the quoted tariff in Figure 4.21. CalMac advised that a discount of 35% of quoted prices is usual for them on this route, due to multi-journey tickets, off-peak travel and "bucket shop" discount sales.
The ~ysis above shows that: . . . • CalMac generates more revenue per passenger and per coach, but less per ear;
•. Western Ferries' revenue per unit is higher than CalMac's.
Figure 4.23 .Comparison of CalMac tariffs per kilometreacross the network
Adult Qff-pelllk return tariff per kilQmeter
2.00
1.80
1.80
1.40
1.20
·'1.00 Go 0.80
0.60 0.40 0.20
0.00 .>0 t~ ~>o .. i~ g I! " 'Ii:; ..•.! ii I ~&L 5! ~~ i.. ~ ... .~ Route.~ o 'i
Source: MMGreport on Cross-Solent Ferries, Appendix 2.4 & existing CalMac tariffs
38
.i: The tables below and on the previous page reveal that, although Gourock/ Dunoon is 10th shortest out of26 routes in terms of distance (and 8th shortest in terms ofjoumey time), it is 16th out of 26 in terms of cost per kilometre. Even taking into account the fact that short routes suffer from sunk costs, Gourock/ Dunoon is in fact a relatively expensive route per kilometre. Therefore, the existence of competition on this route does not appear to have reduced fares compared to other routes. This sugge$1s that the current level of subsidy is financing excess capacity.
Figure 4.24 CalMae network routes by kilometre
IC= car:terry ! ranK ! . route k-m--j rC"·"·---··'--·--!·'-··-··-·---rrCOliill.raiVe:-ffitU'6odaCli-·--·-T---l, ~ i .. ---I, rc-· --- -..-.-.---.-t------2'IFlOnnplioif~Ioria----- ..·--·---··]---·-T· -·..-·, tc; I· 3 IKyies Scalpay-SCalPay I I'! ! ! !. , ! IC ! 4iLargs-Cumbrae 2 I ! I. 5 j Gourock -KlIcreggan i. 2 I Ie I 61Lochaline-Fisfm'ish i---3--I l~······ ··_·h"•.••••_ ••••••...•.•.•••...._ ..__ .~_h ••.~.•-··_-·.---- ••.•....-.:-_- ..-.-_.-- ..••.••_•.--~· ••••~--i..· -.-·;-·---·4 !C i 7lSconser-Raasay i 3 i ·re-·-···..----· ..··-..···..·-t- -·..·..· -·~·-'-g!TaymIOan:GJgIia-- ..-·..·..·..·--·"'" ··..l-..-..--·;:r·..·-·-·!· [c---'"....----t-· ._ ..... ermOry-KilC1iOan-----i----6--1· \C . ! 10 uroe -Dunoon ., ;
i. C .. t... tg- ochranza 8 fC- ·-----j-- --r211\irafuig-Annadale . 8 rc..-·-· ·····'-·-·r-- ···-..-..·..Tl/W emys-s:-Bay:Roffiesay·----:-·--r- ·-rr-· ~I· rC..--·..-..' ..-· ·'·..-·..·T---·..------Pfj..Oban:riSmore-· ..·---~-·-·..-..-..----1--- ..Tr ..---l 1(;- . I oiDoan-Craignure .. ! ----rr--.-! Ie. I. It; IArdrossan-Brodick , i 19 I i I 17IMatJaig-Eigg.. ! 20 j ! .. j 18jMaDaig:-Rhum i 23 ! r-----:-~u.;g:g-UCk: ~ I· TI-\ t~-"--"-'-l-'--"-~]fiiana1g-:-canna------'-+~7--1 Ie . ,. 2IjUig-TarbertlLocl1maddYr"4:7J rc I 22JRermacraig-IsJay· 521 . j '. ! !e . I 23jObarr-ColOnsay i 59 i 1:: J 24 [U1Ja.pool-Stonnoway \ M·! C------..·-·--r---....25T0'biD.:C01JiTiree-· ..---- r -9r-1 ~ [C---·--- ..--r----2~~-Cast1e6~~oaioolS(f8]et-·- ..T44~.i
Source: MMC report on Cross-Solent Femes, Appendix 2.4
39 ~------_.. ••••.-
5. THE MARKET
5.1 Introduction
In section 4, we examined current service. operation in detail. In this section, we analyse the market for the service on the route. in order to assess future operational needs.
5.2 Historical Viewof the Market
The heyday of this market was earlier in this century when Glasgow people made a habit.of taking trips " doon' the watter", which they did almost exclusively as foot passengers. As late as 1975, CalMac carried 1.1 million passengers in the year between Gourock and Dunoon.; With the growth in foreign holidays, the Upper Clyde's tourism industry shrank away. ~laces like Dunoon and Rothesay show evidence of past prosperity, but have been forced to fmd other sources of income. This is made difficult by their geography, but they have three advantages:
- Greenock's location as the tail~end of Silicon Valley; . - - although the US Naval Base has now left the area, the cheap residential properties left behind have attracted new residents;
- there have been some major tourist developments, such as Mount Stuart House (which has helped boost demand on the Wemyss Bay/Rothesay route), which was funded by the Local Enterprise Company in a bid to attract tourists, and is being heavily marketed by ScotRail, Stagecoach and CalMac ..
5.3 General Demand Factors
Demand o.p.the two routes is influenced by the following general factors:
-the underlying growth of the national and regional economy. This is the single most , .] important driver of demand for ferry travel. According to a 1993 analysis6, "the average' elasticity of growth in car carryings, with respect to GDP and consumer expenditure, '{4. was about +1.5 over the CalMac network as a whole. This means that every +1%
increase in GDP generated, on average, a 1.5% rise in CalMac's car carryings". The" ; :" income elasticity of different routes examined by the study varied between + 1.3 and +2.0~
6. An Appraisal of Caledonian MacBrayne's optio'nS for replacing the MV "Suilven" on the Ullapool / Stprnoway service, Economics & Statistics Unit 2, Scottish Office Industry Department, Caledonian MacBrayne Ltd, June 1993
~' 40 • the price of ferry services compared to alternative travel modes. The Scottish Office has recently undertaken a detaile4 analysis of fare price elasticities on the CalMac network7, which found that passenger fare elasticities ranged from a minimum of -0.4 to a maximum of -1.5.
Total route price elasticities (which cover cars as wen as passengers) broadly varied within the same range, although for the Kyle I Kyleakin route it was even lower than on the Western Isles route, at -0.28•
The Gourock/Dunoon route was not examined in the study, but on the evidence submitted to the study with respect to other CalMac routes, we would anticipate that the route elasticity is likely to be low, at -0.5 or less, because, like KylelKyleakin, it is a short crossing. The only feasible alternative for GourocklDunoon is a much longer road route. However, the cross-elasticity of demand is likely to be much higher because of competition between the two operators. In other words, if one operator unilaterally raisedits'ci.riffs, then one would expect asignificant switch in traffic to its competitor, but if they both raised real tariffs by, say, 5%, then total traffic demand on the route would be expected to fall by only 2.5% or less.
A further significant fmding of the Henderson I Maddison study was that "no evidence was found of significant seasonal differences in price elasti~ities'',9 .suggesting that there may be little difference in the sensitivity of leisure and business travellers to price ,changes. This leads them to conclude that, "tourist traffic is just as sensitive to price changes as local traffic. Efforts to try and concentrate fare increases on the tourist market run the danger of being counter productive". They conclude that the only, economic case for higher tariffs might occur ill peak periods when ships are operating near to capacity, when differential peak I off peak tariffs may act as an incentive to travel off-peak and; therefore, be a more cost-effective mechanism for demand management than investing substantial ,sums in new vessels;
• tourism growth. While business traffic constitutes the core demand for both the Western Ferries and CalMac services, tourism demand is a key secondary factor. However, tourism is' seasonal - having little impact on demand during the winter months, but being the largest single source of traffic at certain times in the summer. In addition, tourism is influenced by factors beyond the control of the two operators such as the weather, the exchange rate, and the growth in disposable incomes and leisure timelO• Tourism demand on the route under consideration is described iI\, greater detail below;
7 Fare Price Elasticities on the Caledonian MacBrayne Ferry Network by R.A. Henderson and D.J. Maddison, Economics & Statistics Unit 2, Scottish Office Industry Department 8 the Kyle I Kyleakin crossing has since been discontinued following the opening of the Skye Bridge 9 R.A. H~nderson and D.J. Maddison, op. cit., p.18 lOin a recent study for the British Tourist Authority, we carried out a detailed econometric analysis of the impact of the exchange rate and changes in GDP on the UK's international tourism receipts, and found elasticities of -1.4 for demand regressed against the trade weighted exchange rate of Sterling, and +0.63 for demand regressed against real OECD GDP for the period 1975-1995, with a correlation coefficient (R2) of 0.85. In other words, these two factors together explained between 75% and 90% of changes in the UK's international tourism receipts over the period, and if Sterling
41 • changes in consumer tastes for leisure activities. For example, if demand for day- trips declines, that could have a long-run dampening effect on the demand for the GourockIDunoon and Wemyss Bay/Rothesay crossings among leisure travellers;
• infrastructural constants. The market for increased sailings may be limited by the availability of suitable rail connections and of accommodation, both tourist and residential, in the areas being serviced;
• where there is more than ~)lleoperator, as here, demand for each is influenced by frequency and reliability cf service - compared to its competitor. In this case, Western Ferries offers three or four sailings per hour, while CalMac offers one or two;
• fmally, travellers. feel encouraged to wait fora vessel if they are able to see it coming into port: this is impossible in Gourock Pier.
5.4 Demand on. , the Cowal Peninsula
Argyll and the Islands Enterprise (ArE) is the local enterprise company for both the Cowal Peninsula and the Isle of Bute. It reports that the three major manufacturing companies in the Cowal area make frequent use of the ferry services. Western Ferries is .perceived as reacting more flexibly to market needs by, for example, putting on additional services at short notice: Ca..IMac's labour and other restrictions means it cannot do the same.
In terms of tourism, the Cowal peni,nsula has two large new caravan sites (for around-400 caravans each) which are, according to Dunoon Tourist Boar~ 90% full with residential caravans all year-round. This traffic travels to the area via the two ferry services and may accordingly be changing the present annual pattern of tourism, shown in.Figure 5.1 below.
Figure 5.1 Dunoon tourists 1996/97
~OD 14;OD 12,OD 1QOD ~OD qOD 4,OD 2.OXJ ·0
Source: Dunoon Tourist Board appreciated by 1% during the cotirse of a year this wQuld be expected to reduce her receipts from. international tourism receipts by 1.4%, other things being equal.
42 ._------~,. I;:;
Figure 5.1 requires some definition and caveats:
• theArgyll, the Isles, Loch Lomond, Stirling and Trossachs Tourist Board collects the data shown on the basis of the total number of persons who visit, write to or telephone the Tourist Information offices. The total number of visitors noted by the Tourist Board for 1996-97 is 72,000 for Dunoon and 80,000 for Rothesay; ;":I, • no information is available on the number of visitors who avoid both ferry services and '1' drive down the side of Loch Lomond to Argyll instead;
Given these caveats, Figure 5.1 shows a clear peak in the summer months, with 50% of all visitors to Dunoon coming in the three months between July and September, and less than a quarter visiting in the six months between November and April. It also shows that most visitors are UK residents, With only a small proportion of overseas tourists.
5.5 Tourism DemaJ;ld on the Isle of Bute
Bute is an island and is, therefore, dependent on its ferry links for all necessities. Bute has 7,000 residents and' its principal industries are agriculture, tourism, food and drink and manufacturing, in that order. However, it has benefited from'the BT HIE Initiative in having ISDN cabling installed to the island. As a consequence, a large information systems , company has relocated to the island. It should be noted that information systems companies are able to transport their products by post, rather than requiring a dedicated commercial vehicle.
In terms of tourism, AIE sees its core market as developing away from fortnight summer holidays to mini-breaks in off-peak seasons. AlE is financing a £lm development of an inner harbour which will attract yachtsmen to the area. It is hoped that this will increase the average rate, of expenditure per visitor, as yachting tourists are considered to be high spending visitors.
Figure 5.2 overleaf shows the total number of visitors to Rothesay, 'and indicates a gradual and probably rather fragile upward trend, with the number of visitors at 80,000 in 1996, slightly down on 1993.
43 Figure 5.2 Trends in Rothesay tourists
Rothesay visitors
100,000 ~ 80,000 .a E 60,000 lilli/Visitors I c..= 40,000 .s 20,000 'jjj '> 0 1993 1994 1995 . 1996 years
Source: Rothesay TouriSt Information Centre
Figure 5.3 Calculation of tourist demand on the GourocklDunoon route, 1996 (monthly totals x 12)
hi-low ~nalysis: C'almac1996 da1a
1.200,000
1,000,000
BOO,ooo
600,000
400,000
200,000 o
Source: CalMac weekly data, annualised equivalent
On the assumption that February multiplied by 12 months represents the non-tourist residential market, we calculate that approximately 50% of the traffic on the.
44 GourocklDunoon route is accounted for by tourists in the summer months, because traffic levels in August are double those in February.
5.6 Estimating Commuter Traffic
The BurnslMcPherson Market Research 1993 report was prepared for Argyll & the Islands Enterprise. One of its fmdings was that it estimated the total pool of commuters from Dunoon to Gourockin the range 350 to 400, and the pool of commuters from Gourock to Dunoon as between 125 and 175 per day.
CalMac has recently made some efforts to estimate the numbers of travell~rs who use the railway station (who mayor may not be commuters). However, it has not been able to take into account the student travellers, or the numbers travelling on multi-journey ticket, or combined rail/ferry' tickets, so the numbers collected are not enough to enable conclusions to be drawn. Nevertheless, they are believed by CalMac to be significant.
5.7 Marketing "
CalMac markets its service as the quality service. However, this is becoming increasingly difficult without bow and stem loading vessels.
CalMac also markets the "whole experience", not just the particular trip, and its brochUres advertise accommodation ~ well as giving ferry prices.
CalMac offers Hopscotch tickets, which allow the user to travel throughout its network of ferries. In this respect, CalMac· has suggested that it may wish to market Gourock as the gateway to the Highlands and to the whole CalMac network. This is because Gourock is at the end of the M8 motorway from Glasgow.
Western Ferries stresses the frequency o(its service. It also hires local people and markets itself as a local-grown company. It does not advertise nationally.
In summary, the two operators appear to occupy·distinct market niches and to utilise distinct approaches to marketing. Western Ferries focuses mainly on commuter business, while CalMac seeks to market to both leisure and business travellers.
5.8 Trends in Traffic Carried
5.8.1 Overview
The market for the routes across the Inverclyde-Cowal is segmented between foot passengers and vehicular traffic:
• CalMac's Gourock/Dunoon route is primarily used by foot passengers;
• vehicles constitute the primary source of demand for the Western Ferries service between Hunters' Quay and McInroy's Point;
45 • both these routes have a. core demand ITombusiness traffic on weekdays, although this is augmented by leisure travellers and tourists, particularly at the weekend;
• by contrast, demand for the Wemyss BaylRothesay route is driven to a much . greater extent by tourism, which accounts for half
. The total. number of .passengers carried on. the GourockIDunoon and Hunter's QuaylMcInroy's Point services is shown in Figure 5.4 below.
Figure 5.4 , . Passengers carried on the,GourocklDunoon routes, 1992-98
T~nds intotalpassenger nos. 1,600,000 \ 1,400,000
1,200,000
1,009,000
800,000 • Western 600,000 Ferries Ii!!I CaIMac 400,000
200,000 o 1992 1993 1994 1995 1996 . 1997 1998 est. • passenger units .
Source: Western Ferries and CalMac
1998 figures have been provided by Western Ferries. An assumption of 0% growth for 1998 has been assumed by us for CalMac, as this was the case between 1996-97 .
• The total numbers carried have increased :trom approximately ~.2 million in 1992 to 1.4 million in 1996, an increase of 17%.
• CalMac's market share has decreased by ten percentage points :trom 54% to 44% over the period between' 1992 and 1996.
Foot passenger numbers are shown in Figure 5.5 overleaf.
46 .r-~------~-_.
Figure 5.5 Foot passengers carried on the Gourock/Dunoon routes, 1992-96
Foot passe ngers1992-1996
450,000
400,000
350,000
300,000
250,000 • Western Ferries
200,000 •• ClilMac
150,000
100,000
50,000
1992 1993 1994 1995 1996
Source: Western Ferries and CalMac
CalMac clearly has the bulk of the foot.passenger market. However:
•. CalMac experienced a dip in 1994, mainly due to the closure of the rail tunnel at Gourock from October 1993 to March 1995. During this time, a bus service operated between Gourock and <;Jreenock. .This depressed overall traffic, which may have implications for .any options for the future delivery of services involving transporting. foot passengers by bu&;
• Western Femes, meanwhile, has been on an upward trend, albeit from a much lower, base; ,.? '", :y • the total numbers carried have increased from approximately 3'72,000 in .1992 to 471,000 in.1996, an increase of 19%. As a proportion of total passenger traffic, foot 'passengers have remained steady at 30%. However, this figure· included Western Ferries' coach passengers and the operators believe that there has in fact been an underlying decline in foot passengers;
• CalMac's m~ket share haS decreased by 12 percentage points from 83% to 71%.
Figure 5.6 shows the trend in car passengers over the same period.
47 Figure 5.6 Car passengers carried en the GourockIDunoon routes, 1992-96
Car passengers 1992-96
1,000,000
900,000
800,000
700,000
~ 600,000 .g> III Western Ferries •• 500,000 ..•• III CalMac Co '0 400,000 ci I: 300,000
200,000
100,000
0 1992 1993 1994 1995 1996
Source: Western Femes and C~1Mac
..Figure 5.6 shows that the total number of car passengers has increased from approximately 770,000 in. 1992 to 910,000 in 1996, or by 18%. As a proportion of total-passenger traffic, car passengers have remained steady at 62-63%. Over the .period, CalMac's market share has decr~ased by 9 percentage points. The total number of cars carried on the route is shown in Figure 5.7.
Figure 5.7 Cars carried on the Gour~ckIDunoon routes, 1992-98
CaIs carried 1992-1998
6II,OCO
5D,OCO
2!400.0c0 •••5 ~.OCO c g 2X3,OCO 100,OCO o 11m 1004 1005 1!B3 1007 1m:! est.
Source: WestemFemes and CtlMac
,48 Qverall, Western Ferries has benefited from. the fact that it carries a higher proportion of vehicular traffic, while Cal;Mac carries more foot passengers. This may reflect the fact that Western Ferries is more oriented towards the commuter end of the market, which has been the most rapidly growing component, while CalMac draws a higher proportion of its traffic from leisure passengers.
The assumptions used by the two companies vary, and are stated in section 4.3. Western Ferries believes that it carries on average 1.5 passengers per car; CalMac uses a figure of 2.5 throughout its network. It can be seen that if CalMac was to use a ratio of 1.5 passengers per car, the passenger numbers shown in Figure 5.6 would decrease markedly .. However, it is possible that the ratios used by both carriers are correct, if, as seems quite likely, Western Ferries carries more single commuters in cars, while CalMac carries more families.
Coaches and conuD.ercial vehicle passengers make up the remaining 7% of the total traffic· carried anc,lhave not been separately ariaIysed.
49 6. FUTURE INVESTMENT REQUIREMENTS
6.1 Vessel Replacement
CalMac vessels servicing the GourockIDunoon route are either close to, or have passed, their 20 year· design life. Although all are in good condition, they could be considered as technically obsolete. In order to improve the service, it would ,be desirable to replace them.
All modern vehicle ferry vessels are designed on the drive-through (bow and stern loading) principle and all those to wl!J.omwe have spoken during this study consider that any replacement vessels on the GomrocklDunoon route should be designed with this principle in mind. If the replacement vessels used fewer crew than the nine required for CalMac' s existing vessels, costs savings would also be generated.
CalMac is planning its vessel replacement programme for GourockIDunoon on this basis, and its 1996 corporate plan indicates a desired vessel investment programme which would cost £16.5 million over the period 2001-2005 to replace three vessels on the Upper Clyde at a cost of £5.5 million each. In addition, £2 million would be required to fInance improved linkspans a~Dunoon and Rothesay, and·£0.5 million would fund tli.e. demolition of the pi~r 'at Gourock...... '.
· As CalMac is currently not generating an operating profIt, this funding would have to be made available from Scottish Office or other external grants if the programme is to be realised.· Ideally, CalMac' would like .two new ro-ro vessels for the GourockJDunoon route, · at an estimated cost (new) of £3 million each, together with any necessary alterations to
Dunoon Pier to enable. the Pier to take front-loading vessels .. Western' Ferries considers thait ~ts present fIve ships should last, under its existing maintenance regime, for some time to ~ome, but is planning one ship replacement within the next two years, which will add 9% additional deck capacity to its total capacity. This yvill enable Western Ferries to accommodate continuing modest growth in the market, as evidenced by the trends of the early and mid 1990s .discussed in the previous section. This increase in deck capacity could enable Western Ferries to meet the entire market demand.
· Western Ferries is also planning to undertake upgrading at Hunter's Quay and to continue maintaining Mc~oy' s Point.
In summary, the desired vessel replacement programmes of the two operators considered separately would probably exceed £20 million in capital expenditure (including piers) over the next ten years. Even if the programme is cut baCk sigmfIcantly below this level, say, to £14 million, it would still equate to approximately £10 for each of the 1.4 million passengers one way (borne across all traffic types) currently carned by the route each year, or more than twice the currently quoted tariff fur a standard adult return ticket on the route. This suggests thai it is doubtful whether such an investment programme would be affordable using commercial fInance. The fundamental reason for this is that there is too much capacity on
50 the route relative to current and likely future traffic levels, and the capitaJ. expenditure . necessary to sustain this capacity is large.
6.2 Terminal Upgrading and Replacement
In Dunoon, the need to accommodate bow and stem loading ferries can be achieved by various means:
• building a new linkspan to handle stem loading vessels. In order to confirm whether a new linkspan can safely be added to the existing pier structure~ engineering analysis will be required;
• the construction of an,entire new terminal. If such a terminal were situated at Dunoon, it. could either utilise and preserve the existing listed structure, which would probably involve the building of a breakwater, or be an entirely new build;
• development of Hunter's Quay to take all traffic. This alternative is not currently pmctical, due to its restricted space and also on account of the different mooring systems used by CalMac and Western Ferries;
• cievelopment of a new terminal site mid-way between Dunoon and Hunter's. Quay.
Detailed cost estimates of these options have yet to be prepared, but initial estimates suggest that the costs of upgrading Dunoon Pier, and extending· the breakwater to give greater .protection to vessels entering and leaving the harbour,. could be in the region of £4 - £5 million.
The former Strathclyde Regional Councilprodu,cedoutline designs for the existing Dunoon terminal incorporating a stem ramp and a breakwater (Figure 6.1 overleaf). Its unitary successor, Argyll & Bute Council, favour&this option for a number of reasons, not least its wish to attract passengers to Dunoon itself:
It should be noted that if this option is chosen, a bow and stem loading vessel for the Gourock/Dunoon route would not be able to opemte in and out of Rothesay unless this terminal was also.tnodified to allow drive through .. However, this option has been allowed· for in the design of the Rothesay terminal.
The proposals would have to be considered in terms of their effects on traffic congestion in Dunoon.
51 Figure 6.1: Design for new pier at Dunoon
--" ,. I
.-.,.-...-...-.-.-..-.-..,.- •...•..•.~ •....•~...•. ; ....••...--.' _..' P."-~""'*·""· ...... • ,-.'-" ------_.---_I --~------
Du~ ~~l ~et!C11ee.MltJQl__ I..b h.\~\u.$t..rr~1~ Ol~
S~~Wi iks.no Source: Argyll & Rule Council
52 6.3 Conclusions
In deciding which option to pursue for both the tenninal and vessel investment progranunes, key criteria will include the cost-effectiveness and affordE:!bilityof service delivery.
In the next section, we set out a financial analysis to help infonn the options appraisal on these criteria.
53 7. FINANCIAL ANALYSIS
7.1 Methodology
In this section, we analyse the rev~nue and balance sheet perfonnance of the two operators. This' analysis fonns the starting point for the financial assessment of future options for service delivery.
Western Femes operates only one:route and, therefore, analysis of its revenues and costs ,is relatively straightforward.
CalMac accounts for its revenues on a route-by-r,?ute basis. As regards multiple tickets, CalMac allocates revenues :trom 1pultiple ticketing in the same ratio as the relative fares which apply on each of the routes covered by a joint ticket. This is based on the assUmption that buyers will travel on all legs of a Hopscotch ticket. ' \ ., CalMac's costs have traditionally 1J>eenaccrued by vessel and by pier as cost,centres. Where vessels are deployed on' more than one route, the costs and revenues are allocated between them: Costs are allocated in propo1;tionto the operational. hourss~nt on each route .
.We originally adopted this as oUr basis for producing dii:ect ship costs for'the individual route of Gourock ..Dunoon. Howe~er, CalMac concluded that this method of cost allocation overstated costs, as the .operational hours included .non-productive 'time spent by certain vessels which should be allocated across the whole network as a reserve fleet costs. The approach finally adopted was to use:
• average costs per ship multiplied by 1.2 ships, which is the number of ships nominally attached to the Gourock-Dunoon route;
• with the addition of 1/13 of the reserve fleet costs of £1.024 million, since there are 13 routes.
The difference between the two methods of arriving at direct ship costs is a decrease in costs of £561,000 per annum.
hi tenns of indirect shore costs, the correct allocation of head office overheads was also n()t straightforw~d. CalMac's head office overheads are allocated on the basis of whether a route is designated a major or a mitIor route. This definition is a somewhat subjective one, based on a decision by the mana$ement team of what the respective markets will bear. CalMac has a total overhead of £4 rhilIion and could, of course, allocate its overheads in any proportions it chooses to any ofits routes. Gourock-Dunoon is currently designated ~ major route and, therefore, bears overheads of £400,000. Were it to be designated a minor route, the charge would fall to £100,000. 'However, there is a third possibility for the treatment of these overheads: CalMac consider$ that, if it were to withdraw from the Gourock-Dunoon route, its central costs would not reduce, or be recovered on other routes. Head Office overheads would, accordingly, be d~emed sunk costs which should not be taken into account at all in any option appraisal. It can, therefore, be seen that the allocation of overhead is a
54 __------"!'!,I,,
7.2 Cost Structures
Applying this methodology, we have estimated the cost structure 'of the two current operators on the route, which is set out in Figure 7.1 below. The Figure shows that the main differences in service delivery costs are in direct ship costs and indirect shore costs.
The differences in direct ship costs can be ascribed to the different labour costs caused by different manning systems. As has been stated, CalMac operates at a higher level of crew.
With respect to indirect shore costs, it will he seen that the administrative overhead ascribed to CalMac of £400,000 is higher than'Western Ferries' total administration costs of £308,000, made up of:
• administration costs of £205,000; and
• a management charge of £103,000 payable by. Western Ferries to its management company, Stirling ShipnianagementLtd.
,'I'
55 Figure 7.1 Op,erators' costs structures on the Gourock/Dunoon route (1997)
Cost category Ca~ac as% Western as% turnover Ferries turnover Revenue - Passengers 804 48 655 23 (includes OAP income) - Cars 452 27 1,834 66 - Conunercial vehicles 193 12 228 8 - Coaches 38 2 81 3 - Freight 40 2' - Mail contract 31 2 - Catering revenue 7S 4 - Miscellaneous revenue 29 2 - Capital grants 11 1 Total; 16~3 JOO 2,798 100 Ship costs: direct \ - Labour' 81$ ,49 770 28 -O&M 294 18 245 9 (repairs and spares) - Fuel 15$ 9 180 6 - Catering CoS ' " 73 4 0 0 Total 1,337 80 1,195 43 Shore costs: direct: .- - Labour 156 9 240 9 - Repairs 61 4 80 3 ~Catering CoS 9 1 0 0 - Berthing dues 279" 17 0 0 Total • 505; 30 320 11 Ship costs: indirect '- Insurance 63 4 161 6 - Staff-related misc. 73 4 0 0 - Management fee 0 0 103 4 - Port charges 0 0 21 1 - Subscriptions 0 0 1 0 Total 136, 8 286 11 Shore costs: indirect - rent, rates &'services & 68 4 69 3 , miscellaneous 30 1 - reserve fleet costs 79 5 admin. overheads 400 24 205 711 Total 547' 33 304 Total operating costs 2,525 151 ,2,105 75
Sources: CalMac cost centre reports and Western Femes Profit & Loss accounts
L·t:;)- ..- \ ..,
56 The following points may be noted from the above analysis:
• passenger income makes up nearly half CalMac's total revenue and less tha.Uone quarter of Western Ferries';
• Western Ferries' direct ship labour costs are just under half of CalMac's as a proportion oftotaI revenue. CalMac's repair costs are also higher;
• CalMac pays £279,000 in berthing and traffic dues to Argyll anq Bute Council for Dunoon Pier. By contrast, Western Ferries' equivalent charges are incorporated in its rent of £69,000 and its port charges of £21,000, a total of£90,OOO;
• CalMac's results are shown without the benefit of grant income, except for a small £11,000 c(lpital grant. Revenue grant ascribable to this route is calculated at £800,000. If the grant was taken into account, it would turn an £852,000 operating loss into a £524,000 operating loss (before depreciation and interest).
In summary,. the cost differential between the two operators is attributable to differences in: \ • staffing levels and manning agreements;
• ship repair costs;
• pier dues; and .- • administrative overheads ..
By way of comparison, we also analysed the cost structure on CalMac's Wemyss" BayJRothesay route. The ai18lysis indicates .that the cost structure on this,route is broadly similar to CalMac's cost structure on the GourockIDunoon route, although direct shon:: costs represent a slightly lower proportion of turnover, suggesting that the berthing dues payable at Dunoon rePresent an additional burden for CalMac.In addition, depreciation on the Weniyss Bay/ ROthesay route represents a'slightly higher proportion of turnover because Wemyss BayJRothesay has more operating capacity than Gourock/Dunoon. '
. The similarity of the two cost structures suggests that CaIMac's costs on the Gourock/Dunoon crossing reflect its operational standards as set by legisiation and under agreement with unions, rather than any specific or unusual characteristics of the route itself.
While the above analysis relates to the pre-:tax figures, it should be pointed out that Western Ferries generates around £100,000 in tax payments to the Government a year.
7.3 Comparative Financial Analysis
Figure 7.2 overleaf provides key financial data for a sample of eight British ferry operators, including Western Ferries and CalMac. ' .
57 Figure 7.2 Benchmarking costs structures
Source: companies' publighed accounts The eight are very different in their size and structure. The largest-company in the sample is the Stena Line Ltd., the holding company for all Stena group ferry services, which had a turnover of £360 million in 1995. The smallest is Sea Containers (Scotland) Ltd, a subsidiary of Sea Containers, which had a 1995 turnover of £0.4 million. However, despite this wide spread in turnover, certain common themes emerge regarding the financial characteristi~s of British ferry operators:
• they have low gearing. Only two companies in the sample had a debt/equity ratio above unity - Sea Containers (Scotland) Ltd and P&O Scottish Ferries - both of which were regional subsidiaries supported by their parent company's balance sheet; .
• all the companies had low operating margins, with an operating profit of between 0.1% and 16% of turnover;
• all except Sea Containers (Scotland) Ltd and CalMac had ratios of turnover/assets in excess of 100%: i.e. their annual revenues exceeded the capital invested in the company; , , •. most of th~ companies showed modest growth in their activities compared to the preceding year, but their net investment was low or negative. Exceptions included the Isle of Man Steam Packet Company, which ·invested just over £2 million in a SeaCat to meet its service requirements, and Western Ferries which invested approximately £1 million in new capacity to· serve the McInroy~s .PointIHunter' s Quay. route in 1995/96. CalMac was also a net investor .
. . In summary, ferry operations are low marg~ cash generative businesses, operating in a -mature market which exhibits slow growth .. Their profitability depends critically on squeezing high turnover out of their assets. Their free cashflow is' not suffiCient to finance large capital expenditure programmes. Investment is mainly to replace existing capacity rather than to expand capacity, with a number of operators introducing high-speed craft such as SeaCats to replace conventional ferries.' -,
59 I 8. OPTIONS FOR FUTU)m SERVICE DELIVERY
8.1 Introduction
In previous sections of this report, the arrangements for CUlTentservice delivery on the GourockJDunoon route. were a.t1ailysedin detail. In this section, we assess feasible options for future service delivery, by:
• setting out possible options Which were identified .for service delivery in a series of workshops with CalMac, We~tem Ferries and the Scottish Office held on June 30 and July 1 1997;
• assessing the technical requirements of each; and·
• estimating the costs associated ,with each, both for the operators responsible for delivering the service and (where applica1:)le)for the public sector.
8.•2 The Six Feasible Optiol1S:for Service Delivery
The workshops held with the stu4ly sponsors indicated six possible methods by. which the demand for ferry services on theU;pper Clyde could be met, as follows:
• .Optio1.'lA : the status quo. Under: this option, CaIMac arid Western Ferries would carry on running their existing services broadly as at present, except tha.t Western Femes would .. invest £1.5 million in fIunter's Quay and replace one ship with another slightly larger one;
• Option All: restrictions lifiedfrem CalMac. Under this option, CalMac would be ftee to run ves~els as frequently as itc~oo$es to. We have assumed CalMac dedicate two vessels to this service and offer· a half -!hourly service, but would not extend its working day to match Western Ferries. This oPtion is assumed to result in an increased market share for CalMac;
• Option B : an enhanced GouroclrlDun()On service. Under this option, the service operator responsible for the Gourock/DU1jloonfetry service (presently CalMac) would enhance the . level of service delivery by in~oducing front-end loading roll o~-roll off vessels. A slipway would be built near Duncon to accoIIlnlodate these vessels;
• Option C : GourocklDunoon service for foot passengers only. Under this option, the GourockJDunoon ferry service would be limited to foot passengers only, in order to meet the. Secretary of State's 1981 ~ommitment, while the McInroy PointlHunter's .Quay service would continue for car p~sengers;
• Option D : closure of the,GourocklDunoon service. Under this option, the Gourock!Dunoon ferry service would be discontinued and all vehicle and passenger· traffic would use the McInroy PbintIHunter's Quay route. In order to serve passengers
60 travelling between Gourock railway station and DunOOlitown centre, a regular dedicated .bus service would be set up between them;
• Option E : McInroy's Point-Dunoon. Under this option, a single service would operate between McInroy's Point and Dunoon;
• Option F: Gourock-Dunoon only. Under this option, the McInroy's Point-Hunter's Quay operation ceases, leaving the Gourock-Dunoon route as the only operating service. The operator is assUmed to invest in bow and stem loading ships. This option could involve CalMac, as the existing Gourock-Dunoon operator~ in setting up a separate ring-fenced unsubsidised operating subsidiary ~as it has previously suggested. 8.3 . The Financial Assessment of Different Options
In the next section~ we set out the cost implications of each of the feasible options. Our cost estimates hav~ ~een drawn up on the following basis:
• the current ''position of the two operators is taken as the starting-point in assessing the future revenues and costs of operating ferry services in the Upper Clyde;
• no adjustment has been made for inflation. All costs are in constant (1997) prices;_
• the .cost model has been dQne on the basis that.the new.-method of service delivery has been put into place:-i.e. no account is taken-of transitional e.ffects; .
• the Net Present Value (or Net Present Cost, if no revenue is expected to occur) has been calculated for .each option both to an .operatoroffering services between Gourock and Dunoon and a McInroy's Point- Hunter's Quay operator. The model assumes a 15 year . lifetime for the selected method of se~ce delivery~ and applies a 6% discount rate, consistent with Treasury Green Book principles;
• as it has been established that, due to current inflation rates and to its use of internally generated capital, Western Ferries' cost of capital is comparable to·CalMac's, a discount rate of 6% was applied to both operators. ThiS also prevents any bias in the assessment resulting from the use of different rates for both operators. However, if interest rates were to increase, the private sector operator's costs would also increase, although w~ would expect steps to be taken to manage that risk. .. 8.4 The Current Position
The fmancial position of the two service operators in their latest fInancial year is summarised in Table 8.1(a), which sets out their traffic and revenue stn,Icture,and Table 8.1(b), which sets out their cost structure. The current position of the two operatqrs is used as the starting-point for the analysis of the cost implications of continuing with the status quo. It may be summarised as follows:
61 • CalMac is currently genera~g annual revenues of £1.67 million from its service, of
which £1.49 million is from ! tariff revenues and £0.19 million from non-tariff revenues. We calculate the costs associ~ted with the route (excluding depreciation) of £2.5 million, of which £1.3 million are the direct costs of operating ships on the route, £0.4 million , . represents a charge made fqr central management charges, £0.29 million the berthing dues for docking at Dunoon"and £0.79 million the reserve fleet costs attributable to this route;
• Western Ferries is currently:generating annual revenues of £2.8 million, almost all of which is from tariff revenues ...Against this, the operator has cash costs of £2.1 million, of which £1.2m are the direct co~ts of operating ships on the route, £O.lm is its management fee, £0.24m represents shore labour costs, arid £0.56m other expenses.
62 Table 8.1(a) Traffic and revenue structure of the two Inverclyde--Cowal ferry service operators: 1996/97 F41ancial Year
Operator Traffic volume and tariffs CalMac Western Total Ferries Volume of demand,(units) Passengers 642,640 758,761 1,401,401 Cars , 113,605 . 426,551 540,156 Commercial vehicles 8,206 9,400 17,606 ' Buses 980 2,608 3,588 765,431 1,197,320 1,962,751
;, verage tari./!per unit ) Passengers £1.25 £0.86 £1.06 Cars £3.98 £4.51 £4.24 Comm~rci~1 vehicles £23.52 £25.46 £24.49 Buses £38.78 £32.54 £35.66 TarijI reve~'qes Passengers; (GalMac revenue includes SPT 804 588 1,392 OAP cQp.ces~iQn) " Cars 452 1,834 2,286 ' Commercial vehicles 193 228 421 Buses 38. 81 119 Sub~Total 1,487 2,731 4,218 Non-tariff l"~ve:lilles' CateriIJ,~ 75 75 Mis~~I:'~V~1:1Jl¢ 29 29 Roy~ 1vfI,\H " 31 31 SPT (O.AJ?¢9(1c~~~ipn) 66 66 Freight 40 40 Ports c~pitiil~t . 11 o 11 " , .,"','\$.'f!p;,l'Qtal 186 66 252
1,673 2,797 4,470
~'~Ii)and 8.1(b) indicate that the operator of the McInroy's qegenerated a cash surplus of £0.7 million in its latest financial .().f the GourockIDunoon service generated a cash deficit of £0.85
63 Table 8.1(b) The cost structureo~the two Up\per Clyde felTy service operators ·1996/97 Financial Year I Operato r Operating costs CalMac Western Total Ferries Ship costs: direct Labour 815 770 1,585 o & M (repairs & spares) 294 245 539 Fuel 155 180 335 Catering cost of sales 73 0 73 Sub-total: direct ship costs 1,337 1,195 2,532 Ship costs: indirect Insurance 63 161 224 Staff-related miscellaneous 73 0 73 Management fee 0 103 103 ~ort charges 0 21 21 Subscriptions 0 1 1 Sub.:.toial: indirect ship costs 136 286 422 ., Sho.re costs: direct Labour 156 240 396 Repairs '. 61 80 141 Catering cO,stof sales 9 0 9 Berthing dues 279 0 279 Sub-total: direct shore costs 505 320 825 Shore costs: indirect (excl. deprecn)) Rent, rates & services & miscellaneQus' 68 99 167 Reserve fleet costs 79 79 Administrative overhead 400 205 605 Sub-total: indirect shore costs I 547 305 852
Total operating cash costs 2,525 2,105 4,630
Net cash surplus/(deficit) , -852 692 -160 Source: CalMac and Western Femes manag~ent accounts
I
Tables 8.1 (b) also shows that the, operating revenues and costs of the two services, considered jointly, results in a reduced deficit of £160,000before depreciation, but with one operator making a cash surplus and arlother a cash deficit This reflects the fact that:
• Western Ferries has low costs and greater revenue for every type ·of traffic except
passen~~; I
64 • CalMac has a high cost base, because of the technical requirements of its operations analysed earlier; • there is excess capacity on the route; and • if CalMac was released from its service constraint, it could increase capacity on the route albeit with some increase in cost 8.5 Option A: the status quo (the base case)
The status quo assumes that service delivery continues broadly as at present, with two operators providing services between Gourock and Dunoon and McInroy's Point and Hunter's Quay respectively. Non-tariff revenues and the costs of service delivery are assumed to be constant in real terms. Tariff revenues are assumed to grow as follows:
• by 1% per annUm for the Gourock/Dunoon service operator throughout the 15 years of service ope~ation; and
. \' ' • by 3% per annum for the McInroy's PointlHunter's Quay service operator for the first three years of service operation, and thereafter by 1% per annum;
. to reflect a modest growth in underlying demand levels. The more r~pid growth for the McInroy's PointlHunter's Quay service operator in the initial years of 'the period under consideration assumes a continuation of the historical trend, whicn reflects the fact that this service has the majority share of car traffic, the most rapidly growing portion of the market
With respect to investment requirements, the status quo assumes the following:
• for the Gourock/Dunoon route, the expenditure carried out this sUImner by Argyll & Bute .Council, together with budgeted maintenance spend by the Council, will prove sufficient investment in Dunoon Pier to last the 1'5year appraisal period. The 1.2 vessels currently used on· the route will last for the 15 year period, but will require upgrading at a cost of £0.25 million per ship. For the purposes of the evaluation, the bulk of the upgrading is assumed to be carried out in Year 3 and the remainder in Year 6;
• for the McInroy's PointlHunter's Quay route, a total investment of £1.5 million is required in Year 1 to upgrade the lin1 the size of icar-parking, space at Hunter's Quay,. but will, due to the layout of the space,, capacity, will not itself double. The smallest vessel (Sound of Scarba, with a 22-car capacity) will be replaced with a 37-car capacity vessel, at a cost of £1.5 million, which is' incurred in Year 2. The present operator at McInroy'sPointi Hunter's Quay, Western Ferries, believes that its existing vessels can l$.5tthe 15 year appraisal period, within the budgeted annual maintenance spend; The results of the financial simulation of the status quo option are shown in the two tables which follow. In summary, they show that th~ position of the two operators .continues broadly as at present, with the deficit of the Gourock/Dunoon operator falling slightly over 65 time while the surplus ·of the! McInroy's PointIHunter's Quay operator rises as route revenues increase over time. 0rer the fifteen year period under consideration, the NPV of the Gourock/Dunoon service j$ ~ negative £7.8 million applying a 6% discount rate, while the NPV of the McInroy's PointlHunter's Quay service is a positive £7.6 IIlillion. In other words, while considered jointly the revenue of the tWo services just about covers their costs, one (GourockJDunoon) is a~.substantial loss maker, while the other (McInroy's PointIHunter's Quay) is profitabte. 66 Status Quo figs, rOllndedJrom current position spreadsheet 2 1 ~ 2- 4 5 ,6 1 8 9 10 11 12 13 14 15 et seq GourockIDuDoon Service Operator £000 £000 ,rooo £000 £000 £000 £000 £000 £000 £000 rooo £000 £000 £000 £000 £000 Revenues J.5% = market shore Tariff revenues 1,490 1,505 1,520 1,535 1,550 1,566 1,582 1,597 1,613 1,630 1,646 1,662 1,679 1,696 1,713 1,730 Non-tariff revenues 190 190 190 190 190 190 190 190 190 190 190 190 190 190 190 190 Sub-total, operating revenues: 1,680 1,695 1,710 1,725 1,740 1,756 1,772 1,787 1,803 1,820 1,836 1,852 1,869 1,886 1,903 1,920 Costs Direct ship costs 1,340 1,34(') 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340 Indirect ship costs 140 140 140 140 140 140 140 140 140 140 140 140 140 140 140 140 Direct shore costs 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 Indirect shore costs 550 550 550 550 550 550 550 550 550 550. 550 550 550 550 '550 550 Sub-total, operating costs: 2,530 2,530 2,530 2,530 2,530 2,530 2,530 ' 2,530 2,530 2,530 2,530 2,530 2,530 2,530 2,530 2,530 Operating surplus (deficit) -850 -835 -820 -805 -790 -774 -758 -743 -727 -710 -694 -678 -661 -644 -627 -610 Investment Profile Ships OverhaIJI of existing vessels 250 50 Purchase of new vessels " Decommissioning of vessels Sale proceeds from surplus vessels Sub-total. ships: 0 0 0 250 0 0 50 0 0 0 0 0 0 0 0 0 rfjers Gourock - LinkspADS Gourock - Terminals Gourock - Breakwaters Sub-total, Gal/rock Pier: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Linkspans 0 Dunoon - Terminals Dunoon - Breakwaters Sub-total, Dunoon Pier: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total investment requirements 0 0 0 250 0 0 50 0 0 0 0 0 0 0 0 0 Total cashjlow -850 -835 -820 -1,055 -790 -774 -808 ~743 -727 -710 -694 -678 -661 -644 -627 -610 Discount rate 6% Nel Present Value (£7,834) 67 Option A Status Quo figs. roulIIJedfro", curren! positi01J spreadsheet I Q ! £ ;! ~ 2. 6 7 8 9 10 11 12 13 14 15 et sea McInroy's Point I Hunter's Quay Service Operator Revenues £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Tariff revenues 2,730 2811.9 2,896 2,983 3,013 3,043 3,074 3,104 3,135 3,167 3,198 3,230 3,263 3,295 3,328 3,361 Non-tariff revenues 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 Sub-total. operating revenues: 2,790 2,872 2,956 3,043 3,073 3,103 3,134 "3,164 3,195 3,227 3,258 3,290 3,323 3,355 3,388 3,421 Costs Direct ship costs 1;190 1,190 1,190 1,190 1,190 1,190 1,190 1,190 1,190 1,190 .- 1,190 1,190 1,190 1,190 1,190 1,190 Indirect ship costs (incls.£J 03K mgt fi 290 290 290 290 290 290 290 290 290 290 290 290 290 290 290 290 Direct shore costs 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 Indirect shore costs 305 305 305 305 305 305 305 305 305 305 305 305 305 305 305 305 Sub-total. operating costs: 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 2,105 Operating surplus (deficit) 685 767 851 938 968 998 1,029 1,059 1,090 1,122 l,J$3 l,J85 1.218 1,250 1.283 J,316 -- -. ------Inve$tment Profile Shios Overh.aul of existing vessels Purchase of new vessels 1500 Decommissioning of vessels SlIle proceeds from surplus vessels Sub-total, ships: 0 0 1,500 0 0 0 0 0 0 0 0 0 0 0 0 0 Piers Hunter's Quay - Linkspans Hunter's Quay - Terminals 1500 Hunter's Quay - Breakwaters Sub-total, Hunter's Quay Pier: 0 1500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Mcinroy's Point - Linkspans Mcinroy's Point - Terminals Mcinroy's Point - Breakwaters , Sub-totaJ, McInroy's Point: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total investment requirements 0 1,500 1,500 0 0 0 0 0 0 0 0 0 0 0 0 0 Total casJifJow 685 -733 -649 938 968 998 J,029 1,059 1.090 1,122 1,153 1,185 1,218 1,250 1,283 1,316 Discount rate 6% Net Present Value @ 6% £7,614 Net Present Value @ 9% £5,793 Combined market size 4,220 4,317 4,416 4,518 4,563 4,609 4,655 . 4.702 4,749 4,796 4,844 4,893 4,942 4,991 5,041 5,091 Option All: Restrictions lifted on the Gourock/ Dunoon operator At present, the operator on the Gourock/ Dunoon route is restricted to an hourly service, with some additional sailings at peak times. This option assumes that the operator now runs a half-hourly service, using the same vessels, and without extending its overall working day. We have assumed that the factor.ofmore frequent service by itself results in a 3% increase in market share trom CalMac's present 35%. However, this option requires the operator to dedicate two ships full-time to this route, rather than the present 12 s;b.ips,resulting in an increase in direct and indirect ship costs. This also effects the capital costs of upgrading the vessels. Direct shore costs increase by £100,000, due to an increase in berthing dues, but itis assumed that shore labour costs would not increase. Indirect shore costs are also assumed non-variable with the number of ships. The effect is that the Gourock-Dunoon operator has a NPV of minus £17.2 million and, owing to a 3% loss in overall market share, the·McInroy's Point! Hunter's Quay operator's NPV reduces to' £5.2 million. 69 No Restrictions On Calmac Year Q 1 ~ 3 4 5 6 7 ~ 9 10 11 12 .u 14 15 etseq Gourock!Dunoon Service Operat. r £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000. £000 £000 £000 Revenue$ Tariff revenues 1,617 1,640 1,678 1,717 1,734. 1,751 1,769 1,787 1,805 1,823 1,841 1,859 1,878 1,897 1,916 1,935 .. Non-tariffrevenues 190 190 190 190 190 190 190 190 190 190 190 190 190 190 190 190 Sub-total, operating revenue$: 1,807 1,830 1,868 1,907 1,924 1,941 1,959 1,977 1,995 2,013 2,031 2,049 2,068 2,087 2,106 2,125 CO$ts - Direct ship costs 2,233 2,233 2,233 2,233 2,233 2.233 2,233 2,233 2,233 2,233 2,233 2,233 2,233 2,233 2,233 2,233 Indirect ship costs 233 233 233 23] 233 233 ~33 233 233 233 233 . 233 233 233 233 233 Direct shore costs 600 600 600 600 600 600 600 600 600 600 600 600 600 '600. 600 600 Indirect shore costs 550 550 SSO 5S0 550 550 550 .. 550 550 550 550 550 550 550 550 550 Sub-total. operating costs: 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 3,617 Operating surplus (deficit) -1.810 -1,786 -1,749 -1,710 -1.693 -1,675 -1,658 -1,640 -1,622 -1,604 -1,586 -1,567 -1,549 -1,530 -1,511 -1,492 'nvestment Pro(z/e _n_ ------c·----'. ------. S¥iii»--- -~ Overhaul of existing vessels 250 2S0 Purchase ofnew vessels Decommissioning of vessels Sale proceeds trom surplus vessels Sub-total, ships: 0 0 0 250 0 0 250 0 0 0 0 0 0 0 0 0 Piers Gourock - Linkspans Gourock - Terminals !3ourock - Breakwaters - 81th-total, Gouroek Pier: 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Linkspans 0 DUnDOn- Terminals Dunoon - Breakwaters SIth-total, Dunoon Pier: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total investment requirements 0 0 0 250 0 0 250 0 0 0 0 0 0 0 0 0 Total cashjlow -1.810 -1,786 -1,749 -1.960 -1,693 -1,675 -1,908 -1,640 -1,622 -1,604 -1,586 -1,567 -1,549 -1,530 -1,511 -1,492 Discount rate 6% Net Present Value (£17,152) No Restrictions On Cahnac ,;< ,,;.:,:,'.' '" c •• ', ,:; ' "' ,.' ..' '>~T';~'. '. .. '" •...... ',"..", -" '", ....- '~:;H: ' : ' ::: •',looo. tQJio "~,. '<£000 . £000 £000 £000 £000 £000 £000 '>;i'~2;858 "",." ... ,' '2i9;fS 2,9.44 iH74·,., 3,603 3,033 3,064 3,094 3,125 3,157 :60 ••••••••,0 .,,60 :60 60. 60 60 60 60. 60. 60 .-.; $9 };;~:91& , ':2,946' 2;915 3,0.04 3,0.34 3,0.63 3,0.93 3,124 3,154 3,18S 3,217 " tl;l90 1,190. 1,190 1,190. 1,190. 1,190. 1,190 1,190. 1,190. 1,190 1,190. 1,190 .. 290.··· 290. 290. 290. 290 290. 290. 290. 290. 290. 290. 290 290 ... ;320. 320. 320. 320. 320 320. 320 320. 320 320. 320 320 320 ~'" - i;;; 305 3o.S 3aS 30.5 30.5 3o.S 3o.S 305 ;105 30.5 305 305 30.5 30.5 , 5· 2,10.5 2,10.5 2,105 2,105 2,laS 2,10.5 2,105 2,105 2,10.5 2,10.5 2,105 2,105 2,105 2,105 ,i ., ..: 558 631 693 756 784 813 841 870 899 929 958 988 1,019 1,049 1,080 l,ll2 .,,,,,,,.,.'"",,' Iit"iPron/e Shivs .' Overhaul of existing vessels Purchase of new vesselS 1500. 1,0.00. Decommissioning ofvc:ssels Sale proceeds trom surplus vessels . Sub~tota/, ships: a 0. I,SOO 0. 0 a 1,000. 0. 0. 0. 0. a 0. 0. 0 0 Piers J-IlJfiter's Quay - Linkspans Hunter's Quay - Terminals 1500 Hunter's Quay - Breakwaters Sub-total, Hunter's Quay Pier: 0 IS00 0 0. 0 0. 0. 0. 0. 0 0 0 0 0 0. a McInr0Y's Point- Linkspans ." McInroy's Point - Terminals Mclnroy's Point - Breakwaters . Sub~total, McInroy's Point: 0 0 0. 0. 0 0. 0 0 0 0 0 a 0. 0 0 ° Total investment requirements 0 1,500 1,500 0 0 0 1,000 0 0 0 0 0 0 0 0 0 Total cashjlow 558 -869 -807 756 784 813 -159 870 899 929 958 988 1,019 1,049 1,080 1.112 Discount rate 6% Net Present Value £5,152 Net Present Value @ 9% £3,790 Combined market size 4,220 4,317 4,416 4,518 4,563 4,609 4,655 4,702 4,749 4,796 4,844 4,893 4,942 4,991 5,041 5,091 71 .'Option All 8.6 Option B/l: enh~ced Gourock/Dunoon Service This option, which was put fo~ard by CalMac, makes some radical proposals and is at a vel)' early stage of conceptual I develOpment. Accordingly, neither Western Ferries nor Deloitte & Touche are able to co~ent on its feasibility although Western Ferries does have strong reservations about this pr~posal's feasibility. However, it will be seen that the option results in significant savings to ~e public purse, which are worthy of further investigation and the Government have askeq.CalMac to prepare a more detailed arialysis of costs ,and revenues upon which comment~ will be invited from those being consulted about these options. Under this option, the GourocklJj>unoonservice operator would invest in two new bow-and- stem roll-on roll-off vessels to e~ble quicker turnaround times for vehicles on either end of the crossing., These vessels WO Wdbe second-lJand, refur bished vessels, not dissimilar to tho~e presently operated by W' stem Ferries~ The service would also adopt a low cost structure", , very different, from is~ present one. Finally, the Dunoon Pier 'would ,not be refurbished: instead, a low-cost cPncrete slipway would be installed at a suitable location yet to be decided, near to the Pier. This option varies from the statuSquo in the following detailed respects: , I ' , '. I , • as in Option Ail, jilting ofrFstrictions over the Gourock-Dunoon operator is assumed from Year 0, resulting in a sJ:iiftQf market share of 3% as previously.discussed. Costs increaseby a factor of 211.2 as two ships are now dedicated to the route; , - - • £600,000 would be ;"vested ~" concretesJipway, either beside Dunoon Pier, using it as a breakwater, or at a location,rlightly further away, known as the Coal Pier. Both these locations would require a teclUricalfeasibility'study before the capital and revenue costs likely coUldbe 'established~th certainty. According to CalMac, a slipway, unlike a pier, does not require the paYment of berthing dues to Argyll and Bute Council, thus saving £279,000 a year. The ~oUncil may, however, request a consideration for the use of the pier as a breakwater (if1jhisis in fact feasible),.which is not presently included; • Ii rent of around £65,000 pelt annum would be payable to Argyll & Bute Council in , I exchange for rental ofland to serve as a slipway and carpark. Shore costs to the operator would also decrease to one tmrd of present levels, as the new ships would be self- mooring. The proposal assumbs one pierhand per pier per shift, plus one to cover, giving- a total of five pierhands. ~ese :flguresare based on the Cumbrae slip service. The Council's shorecosts would also decrease; , - I . I ' • following the completion of ~e ~frastructural. inve~~ent, the Gourockl Dunoon service operator would buy two new ~hips, or adapt Its eXIStingvessels to accommodate bow- I and-stem loading, at a cost ofl£3.8 million per vessel, both purchased in Year 1. These vessels would have the capacitf for'40 cars and a speed of 12 knots; • £70,000 is received as scrap v~lue for each of the two ships which are replaced; 72 • the number of crew per vessel would decrease from 10 to 4, and a lower level of qualification would be required of crew members, resulting in lower staff costs. There would continue to be a complement of 5 crew for two vessels, as now, to cover leave and sickness; • there would be a redundancy cost, broadly estimlilted at £0.5 million; • the service would run half-,hourly from' 06:30 a.m. to 19:00 p.m., then hourly until :midnight; .:nlaintenance, insurance and fuel costs are based on "streaker" vessels and CalMac c~I1Sidersthe projections to be prudent; • no catering will be offered under this option, to passengers or staff; • re:§~1:Vefleet ,costsof £35,000 a year are included; • ~~~~,,~ffice costs of £250,000 would be allocated to this route (from £400,000); , :'j A •. /~' •• ~ ,<. -,: " : .1W~~sume a "new ship effect" which enables the GourocklDunoon operator to '·'~~tshare from McInroy's PointlHunter's Quay as a result of the introduction of ,.",%~s~~ls.' We have assumed that this, effect is worth 3% of the total market. In >~~g;liit;jJ)J:$,figure, we have considered the following factors: . "-",- ',"- .,< ,.' •• ~.. ,:, , "'~;',~~!p-~Wship effect""is most powerful in a monopoly situation, where tourism is on ",~,,:,>i~%:~\in~~4trend generally, where the ships being replaced are significantly unfit ';';!.·":,iJt~~~~9se or where demand is constrained by available capacity. None of these ;'.:;;2:;,i\~:,,;~~~t9~~·~R~!~here;, , , ·t!!\'~t~~;* 'ld Dunoon operator will not e~end its working day in line with that of ~:s.,point! Hunter's Q~y operator; : punoon operator will offer a half-hourly service, while the ;·'tjHunter'sQuay operator will continue to offer a service of two to :·:p'our.Therefore, it would not be reasonable to expect too large a of the former,' because of the remaining difference in service ':;q :t:hetwo service opera.tors is shown in the tables which follow: and the gain in market share turns the operating deficit of , :.rator to a positive cashflow of £600-900,000 over the 15 ';pw. However, to "achieve this resul~ an investment of £8 '::ier and on new vessels in the first three years of service " .million in redU1jldancycosts is also required. The Net , the period to the Gourock/ Dunoon service operator, ',l1Sequently reduced to £1.8 million (negative). This "',' on the status quo. 73 It should, however~ be stressed that this result may change if any of the assumptions fail to occur as planned. In particular: I . , . • a technical study would be. required to ascertain whether, and at what cost, a pier to one side of the existing Dunoon P~er could be constructed, the ongoing costs of such a pier, such as dredging, and whethir the proposed vessels could technically perform to the I projectedjoumey times; I, I I . • there is also the question of thb economic impact on the. town of Dunoon if the existing pier is not used by the ferry. I~not maintained, the eXisting pier could become an eyesore and, if the Coal Pier site is used, there may be a risk that tourists do not go into Dunoon at I ..• all; r • Western Ferries also believes Ithat the costs of this option have been understated, for example, in areas such as fuel, insurance and back-up; I \ • there may be union dissatisfact~on with the proposed reduction in crew numbers, although this is in line with existing teIIIf and conditions for the proposed type of craft .. It should also'be noted that .this pption is suitable for a stand-alone gr.ant-ftee operation, possibly as a subsidiary of CalMaq. This has been put to CalMac,which has not rejected the idea. The NPV of service delivery ai~o .falls for the McInroy's PointlHunter's Quay service operator. It loses market share and hence revenues but,· on the model assUmptions, is unable to reduce its operating and inve~ent costS compared to the status quo. Consequently; the NPV 'of its operation falls to £5.81 million under this option, or about £2 million less than I . under the status quo. I ' , i I. 74 Enhanced G-D Service £3.8m Ship Year 0 1 ~ 1 4 2 .Q 1 .!l 9 10 11 12 13 14 15 et sea GourocklDunoon Service Operato £000 £000 £000 £000 £000 £000 £000 £0.00 £000 £000 £000 £000 £000 £000 £000 £000 Revenues Tariff revenues 1,617 1,770 1,811 1,853 1,871 1,890 1,909 1,928 1,947 1,966 1,986 2,006 2,026 2,046 2,067 2,087 Non-tariff revenues 190 190 190 190 190 190 190 190 190 190 190 190 190 190 190 190 Sub-total, operating revenues: 1,807 1,960 2,001 2,043 2,061 2,080 2,099 2,118 2,131 "2,156 2,176 2,196 2,216 2,236 2,257 2,277 Costs Direct ship costs 895 895 895 895 895 895 895 895 895 895 895 895 895 895 895 895 Indirect ship costs 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 Direct shore costs 250 250 250 250 250 250 250 250 250 250 250 250 250 250 , 250 250 Indirect shore costs 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 Sub-total. operating costs: 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 Operating swplus (deficit) 302 455 496 538 556 575 594 613 632 651 671 691 711 731 752 772 , Investment Profile . Shivs Overhaul of existing vessels . Purchase of new vessels 7,600 " Decommissioning of vessels " Redundancies among crew and terminal staff 500 Salepro.ce.eds trom suW1us vess,els -140 Sub-total. ships: 0 7,960 0 0 0 0 0 0 0 0 -0 -0 -0 0 0 0 Piers ' , Gourock - Linkspans , , Gourock - Terminals , Gourock - Breakwaters , Sub-total, Gourock Pier: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Linkspans 600 Dunoon - Terminals . Dunoon - Breakwaters Sub-total, Dunoon Pier: 600 0 0 0 0 0 0 0 0 0 0 O· 0 0 0 0 Total investment requirements 600 7,960 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total cashjlow -298 -7,505 496 538 556 575 594 613 632 651 671 691 71 J 731 752 772 Discount rate 6% Net Present Value (£1,810) 75 Option Bfl Enhanced G-D Service £3.8m Ship Mdnroy's Point I Hunter's Quay Service Operator Revenues £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Tariff revenues . 2;603 2,676 2,738 2,801 2,829 2,858 2,886 2,915 2,944 2,974 3,003 3,033 3,064 3,094 2,974 3,004 Non-tJUiff revenues 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 Sub-total, operating revenues: 2,663 2,737 2,800 2,864 2,893 2,923 2,952 2,982 3,012 3,043 3,073 3,104 3,136 3,167 3,048 3,079 CQsts Direct ship QOsts 1,190 1,190 1,190 1,190 1,190 1,190 1,190 1;190 1,190 1,190 1,190 1,190 1,190 1,190 1,190 1,190 Indirect ship costs 290 290 290 290 290 290 290 290 290 290 290 290 290 290 290 290 Direct shore costs 320 320 320 320 320 320 320 320 320 320 ." 320 320 320 320 320 320 Indirect shore costs 305 305 305 305 305 305 305 305 305 305 305 305 305 305 30S 30S Sub-total. operating costs: 2,105 2,10S 2,10S 2,IOS 2,105 2,105 2,105 2,10S 2, !OS 2,IOS 2,lqS 2,1OS 2,105 2,105 2,105 2,105 Operating surplus (deflcit) 558 632 695 759 788 818 847 877 907 938 968 999 1,031 1,062 943 974 . . - I-- Investment Profile - - - f------ShillS -- - -- '---.-- IUVeroaul of existing vessels 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Purchase of new vessels 0 0 1,500 0 0 0 0 0 0 0 0 0 0 0 0 0 , Decommissioning of vessels 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sale proceeds ftom surplus vessels 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 , sub-lotal, ships: 0 0 1,500 0 0 0 0 0 0 0 O. 0 0 0 0 0 Piers ,Hunter's Quay - Linkspans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Hunter's Quay - Terminals 0 1,500 0 0 0 0.' 0 0 0 0 0 0 0 0 0 0 . Hunter's Quay - Breakwaters 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, Hunter's Quay Pier: 0 1,500 0 0 0 0 0 . 0 0 0 0 0 0 0 0 0 McInroy's Point - Linkspans McInroy's Point - Terminals McInroy's Point - Breakwaters Sub-total, McInroy's Point: 0 0 0 0 0 '0 0 0 0 0 0 0 0 0 0 0 Toial investment requirements 0 1,500 1,500 0 0 0 0 0 0 0 0 0 0 0 0 0 TOlal cas/iflow 558 -868 -805 759 788 818 847 877 907 938 968 999 1,031 1,062 943 974 Discount rate .1)% Net Present Value £5,757 Net Present Value @ 9% U,305 r 8.7 Option C: GourockIDunoon service - foot passengers only In CalMac's view, this aptian is nat feasible in the lang-tenn: it feels that lacal cammunities will nat suppart it and will turn to' the vehicle ferry instead. Under this aptian, the Gaurack/Dunaan service is lirnited to' faat passengers anly, in arder to' reduce service casts, while maintainIng the cammitment to' a passenger service between Gaurack and Dunaan, as fallaws: • the service aperatar invests in two' passenger vessels at a cast af appraximately £1.3 millian each. Large hulls are required to' suit Upper Clyde water, but the vessels wauld be fitted aut to' accammodate anly 150 people, which would meet the requirements of passenger traffic an mast days af the year. The service wauld cantinue to be half-haurly and, cansequently, no' new ship effect is assumed; • the service a~ratar sells ane af its existing car ferries far an estimated price af £70,000. The ather· 0.2 af a vessel which currently serves GauracklDunaan is successfully \ redeplayed to' ather rautes; • investment af£O.l millian wauld be required in a new linkspan at Dunaan, as under the status qua, but atherwise this aptian has no' investment implicatians; • the mast significant implicatian. af this aptian is that the revenue streamaf the GauracklDunaan service aperatar waUld be limited to' faat passengers anly ~.which represents appraximately ane third af its current revenue stream, as 50% af passengers are vehicle passengers, rather than faat passengers. It has been assumed that the new vessels cause a ane-off graWth in the market af 7.5% of faat passenger revenue, which accrues to' the. passenger-anly service. The revenue stream is assumed to graw by 1% p.a.; • we also' assume that the aperating casts' af the n.ew GaurackIDunaan vessels wauld be ane third af the existing fleet; .. • we assume that Head Office' aver head allacation to"the GaurocklDunaan. aperatar is reduced fram £400,000 to' £100,000; • berthing dues are also' half af existing levels. The fallawing changes are assumed to' accur in the McInray's PaintlHunter's Quay service under Optian C: .. • th~ se.rv~ce picks up mast but nat all af the vehicular traffic carried an the OQPJ;apk.fpunaan service. Traffic levels are assumed to' fall by 5% campared to' the status qu~•.h.¢¢~1J.Seatthe margin same taurists and residents who' wauld have undertaken the jamm.~y.:~~tg~·~the Upper Clyde wauld decide nat to' travel fallawing the lass af the G:6.W9~~~Qpn Cca;rferry, i.e. thete is assumed to' be a categary of traveller whawauld u.S~:~;~~t¢~ pe~een Gaurack and Dunaan but nat any alternative service; 77 I I " - the McInroy's PointIHunter's ~y service operator accelerates and enhances.its vessel investment programme commi~g £1.5 million in Year 0 and Year 3; I, ' - the operating costs of the se~ce operator are assumed to increase in proportion to its , tariff revenues; 1 I -the service operator also has to linvest £1.5 million in improved traffic managemen~and car parking at Hunter's Quayahd McInroy's Point, and on improving the linkspan and pier at Hunter's Quay, ~ under ~e status quo. , The effect of these changes on the ~o service operators is shown in the tables which follow. In broad terms, the operating deti¢it of the GourocklDunoon service is greatly increased, , I generating a Net Present Cost of ~nus £8.8 million over the IS-year operating period. The operating surplus of the McInroy' s tomtlHunter's Quay service increases to £ 1.2 million by Year 3 arid exceeds £1.5 million by\Year 11. TheNPV of the service is just over £9 million at 6% ovet the IS year evaluation Pfriod. Thisrepresents an increase compared to the status quo of £1.4 million, because the g~n in market share is relatively 'small. I ' Finally, it shoul!i be noted that this II proposal is not.considered to have,l()ng-term prospects by either operator. " ' I 1 I 1 78 Gourock Foot Passenger Set:Vice ,Year Q 1 2 :1 4 5- 6- 7 .8. 2 lQ II 12. U 14. ~ ':GouroekIDunoon,Serviee'Operat £000 £000 , £000 ' £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 ; R~e1iues , . Tarlt'frevenues 402 406 410 414 418 423 427 431 435 440 444 448 453 458 462 467 'GrowthfuipaSsetiger market 7.5% 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 !:iiFreVeuues 100 100 100 100 100 100 100 100 lQO 100 100 100 100 100 100 100 , , ,tiJl/operaiingrevenues: 502 53.6 541 545 549 553 557 561 566 570 575 579 583 588 593 597 ; 'Coits' 't pu-ccfsli/p'costs 744 744 744 744 744 744 744 744 744 744 744 744 744 744 744 744 '•.fud&ect$bip·costs 78 78 78 78 78 78 78 78 78 78 78 78 78 78 78 78 :Direct shore costs 105 105 105 105 105 105 105 105 105 105 ,. 105 105 105 105 105 105 '.'fudirect shore costs 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250 "Sub-total, operating costs: 1,177 1,177 1,177 1,177 1,177 1,177 1,177 '1,177 1,177 1,177 1,177 1,177 1,177 1,177 1,177 1,177 , Operating surplus (defICit) -675 -641 -637 -633 -628 -624 -620 -616 -611 -607 -603 -598 -594 -589 -585 -580 , Investment Prqfile .Ships. Overhaul of existing vessels Purchase of new vessels 2,600 - Decommissioning ofvessets Sale proceeds ftom surplus vessels -70 Sub-towl, ships: 2,531> 0 Q 0 0 0 ·0 0 . () 0 0 G - e- O {} 0 Elm' Gonrock - Linkspans Gourock - Terminals Gourock - :Brealcwaters Sub-total, Gourock Pier: 0 0 0 0 0 0 0 , 0 0 0 0 0 0 0 0 0 Dunoon - Linkspans 100 gangway Dunoon - Terminals ,Dunoon - Breakwaters Sub-wtal, Dunoon Pier: 100 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total i11Vestmentrequirements 2.630 0 0 0 0 0 0 0 0 0 0 0 0 0 -:- 0 0 Total casliflow -3,305 ,-641 -637 -633 -628 -624 -620 -616 -611 -607 -603 -598 -594 -589 -585 -580 Discount rate 6% Net Present Value (£8,760) 79 Option C Gourock Foot Passenger Service I , Year I Q I 1 2- J ~ .2 Q 1 8- 2 1Q li 12. 13. 14 ~ Mdnroy's Point IHunter's Quay Serviee Operator Revenues £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Tariffrevenues 3,627 3,715 3,806 3,899 3,938 ·3,977 4,017 .4,057 4,098 4,139 4,180 4,222 4,264 4,307 4,350 4,393 Non-tariff revenues 60 60 . 60 60 60 . 60 60 60 60 60 60 60 60 60 60 60 Sub-total, o~rating revenues: 3,687 3,775 3,866 3,959 3,998 4,037 4,077 4,117 4,158 4,199 4,24.0 4,282 4,324 4,367 4,410 ~ 4,453 ~ Direct ship costs 1,581 1,581 1,581 1,581 1,581 1,581 1,581 1",581 1,581 1,581 1,58] 1,581 1,581 1,581 1,581 1,581 . ... Indirect ship costs 385 385 385 385 385 385 385 385 385 385 385 385 385 385 385 385 Direct shore costs 425 425 425 425 425 425 425 425 425 425 425 425 425 4.25 425 425 Indirect shore costs 405 405 405 405 405 405 405 405 405 405 405 405 405 405 4.05 405 Sub·tota~ operating costs: 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 2,797 . Operating surplus (deficit) 890 979 1,069 1,162 1,201 1,241 1,280 1,32(J 1,361 1,402 1,443 1,485 1,527 1,570 1,613 1,657 Investment PrQ;file iJ[JJJl3. . Overhaul of existing vessels' - Purchase of new vessels 1500 1,500 Decommissioning of vessels ~ Sale proceeds ftom surplus vessels Su~total, ships: " 0 0 ] ,500 1,500 0 0 0 0 0 0 0 0 0 0 0 0 Piers , Hunter's Quay - Lh1kspatts Hunter's Quay· Terminals 1500 , Hunter's Quay - Breakwaters Sub-total, Hunter's Quay Pier: 0 1500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 McInroy's Point· Linkspans McInroy's Point - Terminals McInroy's roint - Breakwaters Sub-total. McInroy's Point: . 0 0 '0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total investment requirements 0 1,500 1,50(J 1,500 0 0 '0 0 0 0 0 0 0 0 0 0 Total casllflow 890 ·521 -431 -338 1.201 1,241 1,280 1,320 1,361 1,402 1,443 1,485 1,527 1,570 1,613 1,657 Discount rate 6% Net Present Value £9,021 Net Present Value @ 9% £6,824 8.8 Option D: Gourock/Dunoon servi~eclosed Under this option, the Gourock/Dunoon service is closed altogether, leaving the McInroy's PointlHunter's Quay route as the only service across the Upper Clyde. We assume that this option carries the following costs for the GourockIDunoon service operator: • the operator still has to meet some unavoidable ship costs. At present, 1.2 vessels are used on the route, of which oneis dedicated exc11lSivelyto it and 0.2 represents the route's share of a vessel shared with Wemyss Bay I Rothesay. The financial evaluation assumes' that the dedicated vessel is sold for a price of £0.07 million, as under Option C, but that the service operator still has to absorb the laboW"and overhead costs of the 0.2 of a vessel whose costs cannot be spread over two routes as at present. We estimate these unavoidable ,costs at £0.2 million per annum; • the operator also has to absorb some overheads that are cucrently allocated to the Gourock/Dunoon servIce. The administrative overhead cucrently charged to the service is £0.4 million per annum. We assume that some of this can be saved and the remainder can be gradually reduced, but that the service operator will still have to absorb £0.4 million in Year 0, £0.3 million in Year I' aIid £0; 1 millioin throughout the period of appraisal; If, 'should, however, be noted that CalMac considers this overhead co.uld never be n~covered, which would make the position considerably worse, but this seems unduly pessimistic; • the service operator also has to absorb once-off closure and redundancy expenSes associated with the headquarters building at Gourock, estimated at £ 1 million in Year O. There are also an estimated £0.14 million of redundancy co'sts at DunoonPier; • finally, if Gourock remains a "port of refuge", there is an issue over ongoing maintenance costs which would be required. It seems that Gourock is the most suitable "port of refuge", but the costs of maintaining such a "port of refuge" would be met from the routes which benefit. Therefore, no ongoing allowat1.ce for "port of refuge" status has been made in this appraisal. There,are assumed to be no net costs associated willi the mothballing of Dunoon Pier. The pier owner would lose berthing dues of £0.27 million a year, but this loss would be offset by" reductions in pier operation and maintenance costs. We are advised that the cost of demolishing Dunoon Pier, should this become necessary, would be £5 ,million, which would need to be added onto the NPV s calculated here. We make the following assumptions about the fmancial impact of this option on the McInroy's PointlHunter's Quay service operator: • as the only service provider, it gains 100% of the market, but it shrinks by 10% compared ,to the status quo - comprising a loss of approximately 5% each in vehicular traffic (as under Option C) and passenger traffic. This loss of market is based on the same 81 GourockIDunoon ferry who wo d not travel at all if it was no longer available. The present operator believes that this is a conservativeassumption and that there would be no impact on the market if they wer sole operator. A customer survey would establish the likely behaviour of the market; • however, the service gains the oyal Mail and freight contracts, worth approximately £70,000 per annum, increasing its non-tariff revenuesto £130,000 per annum; • the operating costs of the service [increaseproportionately with tariff revenues compared to the status quo; • the investment prome of the o~r is the same as under Option C - i.e. there are no incremental investment costs ass ciated1 directly with the absoxption of additional foot passengersll. This assumption fo lows from the finding that currently only 14% of the service's foot passengers capacity1s currently utilised; . • the service operator also introdu~ a uee bus service between Gourock and Dunoon, linking with the ferry service I114IDngon at least the same frequencies as the current GourockIDunoon ferry service. TIlrisinvolves purchasing two 48":seaterbuses at a cost of £15;000 each in Year 0, and a ~er bus cost~g £75,000 iJ?Yem: 1. Operating costs ~er . lli :d~O~:::~::::and m~t~nance. The huses are sumed:::eto have~5=::m~~:an eight-year lifetime. There::~::may be a working assumptIOnIS two huses~., d two drivers... '. I The implications of the closure of tj,e Gourock:/Dunoonservice on the two operators are shown in the tables which follow labelled Option D. This option has a NPV of negative £4.6 million for the Gourock/ Dunoon se I.ce operator, owing to the ongoing costs which cannot be reallocated, compared to the status quo which was minus £7.8 million. The McInroy's PointIHunter's Quay service increases its NPV to £9.3 million at 6%, an increase on the status quo of £1.7 mil .on.. In principle, therefore, the McInroY' PointIHunter's Quay service provider could be in a position to meet the closure costs of ound £1 million of the GourockIDunoon service from the additional surplus it makes by se ~uring exclusive rights to the route.. It could also meet the costs of a dedicated bus service t~ meet the needs of foot passengers travelling between Gourock and Dunoon. Whether.i~ could, in addition, offer real tariff reductions to passengers compared to the status quo is debateable, since the increased NPV of £1.7 million would, on the face of it, be ~nadequate.However, a private sector operator in a monopoly position might be willing 1d able to take steps to increase revenues. I II this assumption may not be strictly correct, as in racticel it might make sense for the service operator' to provide additional waiting room, catering and other facilities. However, these investments could generate additional revenues, for example n-om franchisees of catering facilities, nel. s vending, etc., so overall they are assumed to be self-financing .... '. I ~ I I I I There is an issue as to whether the service could deal with service peaks. Our analysis suggests that it could. During the period of the bnefCalMac strike in July 1997, the service ahsorbed the additional demands made on it with no queuing delays, although CalMac takes the view that customers chose not to travel durin~ that period. However, the capability of the service to meet rising demand, either through increased deck capacity or through increased service frequency, needs to be confirmed. Western Ferries has confirmed that pre-detennined performance standards were acceptable to it in exchange for a monopoly of the route. J ; I . I ..1 83 Gourock Closure . Year Q 1 2 J. . i ~ Q. 1 .a 2 1Q 11 12 13. 14 ~ GourocklDunoon Service Operator £000 £000 £000 £0()0 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Revenues. , Tariffrevenues - Non-tariffrevenues Sub-total, operating revenues: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Co.s1s. Direct ship costs 200 200 200 200 200 ,200 200 200 200 200 200 200 200 200 200 200 Indirect ship costs Direct shore costs • Indirect shore costs 400 300 200 100 100 100 100 100 100 100 100 100 100 100 100 100 Sub-tota4 operating costs: 600 500 400 300 300 300 300 300 300 300 300 300 300 300 300 300 , Operating surplus (deficit) -600 -500 -400 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 . . SWP3. . Over~aut of existing vessels Purchase of new vessels Decommissioning of vessels Sale proceeds ftol11 surplUs vessels -70 Sub-total, ships: -70 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 l?k1:s. Gourock - Linkspans Gourock - Terminals 1,000redundancies Gourock - Breakwaters Sub-total. Gourock Pier: 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Linkspans . Dunoon - Terminals 140redundancies DunDon - Breakwaters Sub-total, Dunoon Pier: 140 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total investment requirements 1.070 0 0 0 0 0 0 a a a a a a a a Total caslif/ow -1,670 -500 -400 -300 -300 -300 -300 -300 ~300 -300 . -300 -300 -300 -300 -300 -300 Discount rate 6% Net Present Value (£4,586) OptiOli D' Gourock Closure I Year I Q 1 2 J. 1 ~ 2 1 B. 2 .Ul 11 12 .u 11 ~ McInroy's Point I Hunter's Quay Service Ope.rator Revem/es £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Taritfrevenues 3,798 3,885 3,975 4,066 4,107 4,148 4,190 4,232 4,274 4,317 4,360 4,403 4,447 4,492 4,537 4,582 Non-tariff revenues 130 130 130 130 130 130 130 130 130 130 130 130 130 130 130 130 Sub-total. operating revenues: 3,928 4,015 4,105 4,196 4,237 4,2'78 4,320 4,362 4,404 -4,447 4,490 4,533 4,577 4,622 4,667 4,712 CtJlH Directship costs 1,656 1,656 1,656 1,656 1,656 1,656. 1,656 1,656 1,656 1,656 1,656 1,656 1,656 1,656 1,656 1,656 Indirect ship costs 403 403 403 403 403 403. 403 -403 403 403 403 403 403 403 403 403 Direct shore costs 445 445 445 445 445 445 445 445 445 445 445 445 445 445 445 445 Indirect shore costs 405 405 405 405 405 405 405 405 405 405 405 405 405 405 405 405 Sub-total, operating costs: 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 2,909 Operating surplus (deficit) 1,019 1,106 J,195 1,287 1,328 1,369 1,410 1,452 1,494 1,537 1,580 1,624 1,668 1,713 1,757 1,803 Investment PrQjile SbiJN. . Overhaul of existing vessels 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Purchase of new vessels 0 0 1,500 1,500 , 0 0 0 0 0 0 0 0 0 0 0 0 Decommissioning of vessels 0 0 0 0 0 0 0 0 0 0 0 0' 0 0 0 0 Sale proceeds ITom surplus vessels 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, ships: 0 0 1,500 1,500 0 0 0 0 0 0 0 0 0 0 0 0 ·Eifm Hunter's Quay· Linkspans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Hunter's Quay· Terminals 0 1500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Hunter's Quay - Breakwaters 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, Hunter's Quay Pier: 0 1500 0 .0 '0 0 0 0 0 0 0 0 0 0 0 0 McInroy's Point· Linkspans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 McInroy'/! Point - Terminals 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 McInroy's Point - Breakwaters 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, McInroy's Point: 0 0 0 0 0 0 0 0 0 Q 0 0 0 0 0 0 Bus operation 200 ISO 75 '75 75 75 75 75 200 150 75 75 75 75 75 75 Total investment requirements 200 1,650 1,575 1,575 75 75 75 75 200 150 75 75 75 75 75 75 Total cas1if/ow 819 -544 -380 -288 1,253 1,294 1,335 1,377 1,294 1,387 1,505 1,549 1,593 1,638 1,682 1;728 Discount rate 6"10 Net Pres~nt Value £9,298 Net Present Value @ 9% . £7,026 , 85 , Option D 8.9 Option E: MCInroy" poltIDUDoon . This is a theoretical model, shownI, for illustration,which assumes the foll~wing: • there is an external public 4t ftom ensuring that ~ regular feny service continues to the town of Dunoon. This extePtal benefit derives from the expenditure of visitors to the town, which help~ support busihesses andjobs within it and could be lost if there was no ferry service. The existence bf this external benefit is incorporated within a service agreement which requires the ~erry operator to run services to Dunoon, which it would not necessarily do if the servic~was run on pure commerciallines12. Having said that, it may be that the, economic be~efit which presently accrues to Dunoon would simply accrue to sites elsewhere in th~ area, making the net economic impact nil. A detailed economic study would be requi11edto answerthis question fully; .• the s~ce provider must meetl,the investment costs associated with upgrading Dunoon Pier to meet the needs of a bow~and-stemroll on-roll off ferry. The service provider must also meet the investment costs bf purchasing vessels to serve the route. We assume that these investment costs are the_same as those accrued by the GourocklDunoon service - provider under Option B; • the existing service~rovidets- bre prepared' to vest their route rights in a new client -organisation; • the service provider must also pay a premium to the existing service providers to compensate them 'for the los~ of their route rights. The premium paid to 'the GourocklDunoon service providbr is equal to the NPV of its unavoidable costs of closure, , I, • estimated at £4.6 million under,:Option D. The premium paid to the McInroy's PointIHunter's Quay service pr~vider is equal to the NPV of their current route rights, calculated as £7.6 million (at 61) under OptionA; , • a further assumption is that the dperating cost struc~e of the service provider is assumed to lie somewhere between that of the two existing operators, as follows: 0, direct ship costs: 55% ofJrn-revenues; o indirect sbip costs: 10% of Lrevenues; I o direct shore costs: 15% oftJnrrevenues; and o indirect shore costs: 10010 Ofrrevenues. 12 whetherin fact suchan externaleffectexw.. +d if it doeswhatits vaiueis, are questionswhich lie beyondthe scope.fthe presentreport------8-6- \ r it ! i ! i ! I, In return for these outlays, the service provider has the entire market for Upper Clyde ferry services, which is assumed to be 95% of the value of the combined market of the .two operators under the status quo option. The serVice provider also secures £250,000 per annum in non-tariff revenues from catering and the Royal Mail, Strathclyde Passenger Transport and freight contracts. A service provider might also be able to squeeze additional value from other revenue streams - for example, releasing value from the properties it acquires at Gourock, Dunoon and Hunter's Quay, developing on-shore services for travellers, etc. To the extent it could do so, the NP~ would improve. , h Once these investment outlays had been made, the service provider could be expected to generate an operating surplus of approximately £0.7 million per annum over the next 15 years. The result of the financial evaluation indicates th~t the net present cost of a McInroy's PointlDunoon option, before premia are taken into account, would ·bean NPV of minus £627,000, or a ,costof £65,000 per annum. If premi~ are taken into account, the NPV falls to minus £12.8 million, or £1,320 per annum. However, the calculations of premia are probably top pessimistic, for the following reasons: •. no residual payment is assumed for the value of the service or the assets after the 15 year term has been completed; • it as~umesthat the,service provider would pay £7.6 million for new vessels for the route, as well as paying £7 million to buyout the rights and assets of the McInroy's PointIHunter's Quay service provider.. In practice, part of the premium paid to the existing service provider would represent the.purchase cost of its vessels, and the new company could operatethese vessels on the route for a number of years once Di.111oonPier 4ad been upgraded to accommodate bow-and-stem.. roll-on roll-off vessels, thereby mitigating the need to invest £6 million in new ships; • 1,U1 f!i J ., ".. ,.,- :. ~. ';i.,':':,\ ..,";,. ;. 87 McInroy's Pt-Dunoon I Year I j} 1 ~ ;I !I: ~ 2 1 .8. 2 .li! 11 .u .u .l4 ~ Mclnroy's PointIDunoon'Service Operator Ba~ £000 £000 £000 £000 £000 £000 £000 £000 £000 tOOO £000 £000 £000 £000 £000 £000 Tariff revenues 4,009 4,101 4,195 4,292 4,335 4,379 4,422 4,467 4,511 4,556 4,602 4,~48 4,695 4,741 4,789 4,837 Non-tariff revenues 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250 Sub-total, operating revenueS: 4,259 4,351 4,445 4,542 4,585 4,629 4,672 4,717 4,761 4,806 4,852 4,898 4,945 4,991 5,039 5,087 ~ Direct ship costs 2,205 2,256 2,307 2,361 2,384 2,408 2,432 2,457 2,481 2,506 2,531 2,556 2,582 2,608 2,634 2,660 Indirect ship costs 401 410 420 429 434 438 442 447 451 456 460 465 469 474 479 484 Direct shore costs 601 615 629 644 650 657 663 670 677 683 690 697 704 711 718 726 Indirect shore costs 401 410 420 429 434 438 442 447 451 456 460 465 469 474 479 484 Sub-total, operating costs: 3,608 3,691 3,776 .3,863 3,902 3,941 3,980 4,020 4,060 4,101 4,142 4,183 4,225 4,267 4,310 4,353 Operating surplus (deficit) 651 660 670 679 684 688 692 697 701 706 710 715 719 724 729 734 Investment PrQ.file SiJjp.s. Ovp.rl1al,1otexisting-vessel" u u -U 0 0 0 0 0 0 0 0 0 0 0 0 0 Purchase ofn~w vessels 7,600 0 0 ' 0 0 0 0 0 0 0 0 0 0 0 Decommissioning ofve8sels 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sale proceeds from surplus vessels 0 -140 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total. ships: 7,600 -140 0 0 0 0 0 0 0 0 0 0 0 0 0 0 l!m Gourock - Linkspans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Gourock - Tenninals 0 0 0 0 0 0 , 0 0 0 0 0 0 0 p 0 0 Gourock - Breakwaters . 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, Gourock Pier: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Linkspans 600 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Tenninals 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - Breakwaters 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, DunDon Pier: 600 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total il1W!stmentrequirements 8.200 -140 0 0 0 0 0 0 0 0 0 0 0 0 0 Total cashjlow : without premium -7,549 8'00 67'0 679 684 688 692 697 701 706 71'0 715 719 724 729 734 Discount rate 6% Net Present Value without premium (£627) NPV with premia:- (£12,827) PFI Service Charge NPV annuitise U5 £1,321 @9% (£1,685) (£6,271) ...... ", ' Qpti()n ~ , ".'. ' ...... ,:.... <.,·.-c .. ..": •.....•...:;~j~?;W",,0:"0.•..:...•. <;:'.: ..:.,..,:/.:::...... " .. : .... ••... '> .. ' 8.10 Option F : closure ofthe McInroy's PoitttlHunter's Quay service Under Option F, the McInroy's PointlHunter's Quay operation ceases, leaving the Gourock/Dunoon operator as the only service proVider. This could be a stable competitive solution. The market would remain contestable, with other operators able in principle to enter. Howewer, given the size of the market and the limitations in places on total revenues, it might not in practice offer sufficient attractions to induce a new player to attack the established operator, provided that operator was efficient and kept tariffs down. Under this option, we make the following assumptions: • the market contracts by 10% compared to the status quo to reflect a loss of demand resulting frQm lesser choice available to travellers, as under Option D; • non~tariff revenues of the surviving operator increase to £0.25 million per annum, as under Option E; • the surviving operator has the confidence to invest in new operating capacity and expends £11.4.million on three new vessels, more than under Option E, • the surviving operator must invest fully in DunQon Pier to allow its ~ew ships to dock; • by investing in new ships, the surviving operatQr is able to cut operating costs compared to the status quo to levels similar to those achieved under the PFI option: with direct ship costs representing 55% of tariff reveI1:ues,ind,irect ship costs 10% of tariff revenues, direct shore costs 15% of tariff revenues and indirect shore costs 10% of tariff revenues. The surviving operator is able to earn an operating surplus of approximately £0.7 million a year. However, this is irisufficient to enable it to afford three new ships and a full refurbishment of Dunoon Pier. The NPV is minus £4.6 million, excluding any premium which might have to be paid to the McInroy's PQint! Hunter's Quay operator to leave the field open. This would probably be significant. -89 Gourock-Dunoon - Year Q 1 2 3- 4; ~ Q 1 .& 2 .ill 11 12 13. 1.4 ~ Gourock/Dunoon Service Opera to £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 ,Revenues Tariff revenues 3,798 3,885 3,975 4,066 4,107 4,148 4,190 4,232 4,274 4.317 4,360 4,403 4,447 4,492 4,537 4,582 Non-tariff revenues 250 250 250 250 250 250 250 250 250 - ..250 250 250 250 250 250 250 Sub-total. operating revenues: 4,048 4,135 4,225 4,316 4,357 4,398 4,440 4,482 4,524 4,567 4,610 4,653 4,697 4,742 4,787 4,832 QQs!.s. - Dire<;tship costs 2,089 2,137 2,186 2,237 2.259 2,282 2,304 2,327 2,351 2,374 2,398 2,422 2,446 2,471 2,495 2,520 Indirect ship costs 380 389 397 407 411 415 419 423 427 432 436 440 445 449 454 458 Direct shore costs 570 583 596 610 616 622 628 635 641 647 654 661 667 674 681 687 Indirect shore costs 380 389 397 407 411 415 419 423 427 432 436 440 445 449 454 458 Sub-total. operating costs: 3,418 3,497 3,577 3,660 3,696 ·3,733 3.771 3,808 3,847 3,885 3,924 3,963 4,003 4,043 4,083 4,124 Operating surplus (deficit) 630 639 647 657 661 665 669 673 677 682 686 690 695 699 704 708 Investment PrQ,/lle - !J:WJ& , ,. Overhaul of existing vessels Purchase of new vessels 11,400 Decommissioning of vessels . Sale proceeds from surplus vessels Sub-total. ships: .. 1l,4oo 0 0 0 0 0 0' 0 0 0 0 0 0 0 0 0 £1m Gourock - Linkspans 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 Gourock - Terminals 0 0 0 0 0 0 0 .. 0 0 0 0 0 0 0 0 0 Gourock - Breakwaters 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sub-total, Gouroek Pier: 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dunoon - LinkspljIlS 600 0 0 0 0 0 '0 0 0 0 0 0 0 0 0 0 Dunoon - Terminals 0 0 0 0 0 0 () 0 0 0 0 0 0 0 0 0 Dunoon - Breakwaters 0 0 Q 0 0 . 0 0 0 0 0 0 0 0 0 0 0 Sub-total, Dunoon Pier: 600 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total investment requirements 12.000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total cashjlow -} 1,370 639 647 657 661 665 669 673 677 682 686 690 695 699 704 708 Discount rate 6% Net Present Value (£~,572) ...• ...... ,..::. :. , .. .'.:.,' ..:...... OptionF : . .:..,.,...: .....:...:...... - ~'-' :.,.,.:.: ...... _",..',_."..;J.:.c'x,,"_~ ..'.'!~,,~'.,'.~!1:.<';~:'.,,·,.::"'.~,.,,~~'--<"-~~""';:;;"_~,,,;. ,,' ,,,,,,.';"'>'. ·~c;].·:i.",'?~'_""":"c";"':"";;;.·';:":-:',: .. , '0< ',;.!\ he. '"":: ,,,.--~::';""".- "".",.'-'c;,'".- ~... ..;.~:.;.-~.;.,:._~:,","_.:~'•._"_•.~~~:.r.:.~~~~"o~~~\Q-:::1'.'f·.:'jil:..~,~ .•<""',:-.~;.~-';:::~;.'.i;""';,r.l~"".'=4'-';;:".' ... 8.11 PublicExpenditureImplications The public expenditure implications of each of the options are shown in the table and chart which follow. These have been prepared on the assumption that the GourockIDunoon route is operated by a public sector company (CalMac), ~o that any deficit incurred on the route is funded by public expenditure and any surplus can be used to fund other public expenditure (i.e. it represents a net reduction in public expenditure). The Table at Figure 8.2a shows the total Net Present'Value accruing to the Gourock/ Dunoon service under each option, and how it changes compared to the status quo. The total route NPV is shown graphically in Figure 8.2b. 91 , .::~~ '";it " ------" ;'i,. '''V. " Figure 8.2a Total NPV of the GourockIDunoon service under different options Total NPV Change compared to Status Quo Option A (£7,834) £0 Option Nt (£17,152) (£9,318) Option Bll (£1,810) £6,024 Option C (£8,760) (£925) Option D (£4,586) £3,248 Option E (£627) £7,181 Option E with premia (£12,827) (£4,993) Option F (£4,572) £3,263 Discount rate: 6% Source: Deloitte & Touche fmancial model of different future options for the Upper Clyde crossing Figure 8.2b Total NPV oCtile Gourock/Dunoon service under differentoptiQns . ,','''.'.,',. .. PEShTlplit!itionsaf [Jfferent Opti~ for the ~ DUnoon Crossi~ NPVsIn £IJQOs .;:":,,.. £0 (£2, Source: Deloitte & Touche financial model of different future options for the Upper Clyde crossing Option E is clearly the cheapest, but this excludes the premia payable~ Option B is clearly the, next cheapest option of those considered, but there are reservations surrounding it. Option F and Option D (route closure) give similar results, but OptlonF operates on the assumption that the operator of the competing McInroy's PointIHunter's Quay service simply withdraws from the market. In practice, this is most unlikely, and a more realistic scenario for Option F would be a fierce - and extremely costly ~ competitive battle which would leave one operator insolvent and the survivor as the only service operator. There is no guarantee that the eventual winner would be the Gourock/Dunoon operator. 92 .' , 8.12 The Impact on the McInroy's PointlHunter's Quay Service Operator Figure 8.3 shows the fmancial impact on the McInroy's PointIHunter's Quay service operator of the differ~nt options simulatedthrough the route model. It has not been possible to assign a value for' Option F for the reason set out above - that in practice Option F would entail a fierce competitive battle, with a single winner. If that winner was the Gourock/Dunoon operator, the operator of the McInroy's PointIHunter's Quay' service would leave the route. If on the otherhand the Gourock/Dunoonoperator was driven off the route, then the value of the route to the McInroy's PointIHunter's Quay service.operator would be close to the value estimatedJor Option D. Option D is the option which generatesthe highest value for the operator of the McInroy's PointIHunter's Quay service. Figure 8.3 Total NPV &' change in NPV of the McInroy's PointlHunter's Quay service under different options (@ 6% discount rate) , Mclnroy's Pointl Hunter's Quay Crossing: NPVs in £OOOsCompared to the Status QI.\O £10,000 £5,000- to (£5,000) IIITotal NF'If I ••co III Q1ange qoopared to Status Quo • ::: (£10,000) \ (£15,000) (£20,000) (£25,000) options Source: Deloitte & Touche fmancial model of different future options for the Upper Clyde crossing t, 93 9. SUMMARY OF THE STRENGTHS AND WEAKNESSES OF EACH OPTION The following two tables summarise the advantages and disadvantages of each option or family of options. Figure 9.1 Strengths and WeaImesses of the Dual Operator Solutions Advantages Disadvantages A • minimum risk of service •. currently expensIve and likely disruptions to become more so as new • competition keeps fares low investment is required , and maximises choice • structural over-capacity • potentially least contentious option B • -quicker turnaround time for • reinforces and mcrease$ passengers. structura}.overcapacity on this • possible (small) positive route impact ITomnew ship effect • some investment required on • possible. external benefits for piers and ships the town ofDunoon • continuing operational defiCit thereafter • may not be technically feasible c • guarantees continuance of • high investment costs passenger service • Gourock-Dunoon continues to • vessels would deliver a lose money, though less than quicker crossing at present • no traffic congestion in • not considered feasible in the Dunoon long-term • some reduction In surplus capacity - Source: Deloitte & Touche 94 Figure 9.2 Strengths and Weaknesses of the Single Operator Solutions Advantages Disadvantages D • structural overcapacity IS • loss of competition eliminated • possible concerns over • lowest cost option for the passenger commitment public sector • desirable to have a regulatory • possibility of tariff reduction :tramework- but in what form? E • continues service into Dunoon • cost • practicability of a PFI solution F • structural overcapacity IS • more capacity than Option D eliminated • how can it be implemented? I· supenor service quality to • if through· open competition, Option D would the Gourock-Dunoon • continues service into Dunoon service survive? Source: Deloitte & Touche It can be seen :trom the above tables that single operator solutions are economically more favourable than multi-operator solutions .. 95 10. IMPLEMENTATION ISSUES ANDNEXT STEPS 10.1' TheBaseCase The results of the fmanciaI model of future options suggest that the status quo option or "do nothing" alternative is not an inexpensive or easy option, for the following reasons: • the existing vessels which run on the route will not last indefmitely, and both CalMac and Western Femes would like to upgrade their fleets in the medium term; • there is also a need. for refurbishment or complete replacement of the terminals which serve the route; . • however, the tariff revenues generated by the route are insufficient to fund the investment requirements of the two operators; \ • therefore, they can be funded, if at all. only through the injection of additional public money into the route. This would be in addition to the portion of CalMac' s annual Scottish Office, subsidy which is attributable to the company's operating deficit on the .GourocklDunoon route, which on the .basis of CalMac'soWn -management accounts is between £0.85 and £0.45 ·million per annum, depending on whether the central overhead is taken into account or not; • in addition to these fInancial considerations. the regulatory framework applying to the route represents an uneasy compromise between the needs of the travelling public for a reliable service and choice between routes on the one hand, and the desire to ensure that a private operator is not undemiined by potential predatory behaviour by a larger public sector competitor on the other hand. The fundamental problem is that there is currently substantial excess capacity on the route, which would be most cost-effectively served by a single ferry operator. The financial model suggests that it is cheaper to run a service between McInroy's Point and Hunter's Quay than between Gourock and Dunoon, largely because of the investment required to adapt Dunoon to front-end loading roll-on, roll-off femes. However, there may be a corresponding public benefit from developing Dunoon Pier in this way, in order to draw: visitors through the toWn. Whether this is the case; and if so. how great the external benefit is. are questions which lie beyond the remit of this study. 96 .I!f---••------~-. 10.2 The Implementation of Change 10.2.1 The Cost Reduction Option Option B presents issues of both technical and financial feasibility which make it difficult to assess at this stage against other, more concrete, options. Its implementation issues can be summarised as follows: • the availability of suitable vessels on the second-hand market; • the likely union reaction to a perceived reduction in service standards, albeit in line with current tenns and conditions for the type of vessel now envisaged; • whether either suggested option for a new slipway site is feasible; • the, effect on the town of Dunoon if its existing pier is not used and probably not refurbished; • the o~tcome of what would effectively be a price war between two similar operators, no longer differentiated by their services. Each of these is significant and requires iI~vestigation before any definitive opinion on this option could be drawn.' 10.2.2 The Single Operator Options A 'single operator/single route' solution represents the most cost-effective method of service delivery in the medium term, resultfug in savings to the taxpayer of up to £7 million compared to the status quo over a 15 year period on our calculation. If this is accepted, then the next step in the consideration of future service delivery would involve the development of an implementation plan: • combining with CMUCC, the Shipping Services Advisory Committee, AIgyll and Bute Council, Inverc1yde Council and other interested parties to ensure that future services meet their requirements; • developing a regulatory framework to ensure that a single operator would not exploit a monopoly position, e.g. through some form of service charter or service agreement; and .1 • agreeing the process by which a single operator would emerge. We modelled the 'single operator' options: D, E and F. In practice, there may be constraints on the implementation of each of them. 10.2.3 Option D: withdrawal of the GourockIDunoon service Option D might be regarded as a weakening of the Secretary of State's previous commitment to a passenger service between Gourock and Dunoon. Service users would, therefore, need to be consulted before this option could be implemented. It 97 ---.•.•.....------..- would also, under current ownership arra.!?-gements,leave the route in the hands of a private sector operator who would effectively have a monopoly on it. The possible abuse of such a monopoly position was a cause of concern among route users in the early 1980s, and to provide comfort, enforceable assurances would need to be secured that the servige operator would not act in an anti-competitive manner. The question of how this could be done in law rests outside the scope of this study, as does the specification of a detailed service agreement in consultation with service users and other interested parties. 10.2.4 Option E: retention and upgrading ofUunooD Option E involves upgrading Dunoon' Pier to accommodate a ferry service from McInroy's Point (or, under Option F, from Gourock). This is not the least cost option - a ferry terminating at Hunter's Quay would involve significantly lower investment in pier infrastructure. This additional cost can only be justified if there is an external public benefit from routing ferries through Dunoon rather than Hunter's Quay. The calculation of the value of such a benefit lies outside the scope of this . report If an independent .assessmentconcluded that the volume of the external bene.fitwas sufficient, on reasonable assumptions, to outweigh th~ extra costs associated with a -Dunoon option, the next issue would be how such an option could, in practice, be .implemented. There is no way that Western Ferries, as a private sector operator, could be forced to close the McInroy's Point/Hunter's Quay service. It would do so only by agreement. The question is whether, and under what conditions, such agreement would be forthcoming, and what premium·would be fair and reasonable for the purchase of WesternFerries' route rights and assets.. One potential method by which such a solution could be implemented is through a Publici Private Partnership (PPP) service agreement. The PPP makes a distinction between the public sector as a client responsible for commissioning a service, and the private sector concessionaire responsible for its delivery. The Inverclyde-Cowal feri-yservice could be procured under the PPP by. means of an explicit Service Agreement which would set minimum standards for service safety, regularity and quality, and might also ,regulate the tariffs charged to . passengers together with procedures for their adjustrn:ent.13 A private sector, concessionaire would then be selected following a competitive tender and given responsibility for servi<::edesign, financing, investment and operation. A possible framework for such a Service Agreement is set out in Figure 10.1 overleaf. 13 perhaps according to an "RPI-X" formula 98 _~ ••••• '""" .."""•..••.•.•. II!III. I11III.. _.-, Figure 10.1 DELIVERY OF FERRY SERVICES ON THE GOUROCKjDUNOON ROUTE A POSSIBLEPFI MODEL EXISTING SERVICE CLIENT PROVIDERS CONCESSIONAIRE ferry ferry tariffs semas CUSTOMERS - \~' .... ::'~VEliItlG PYELIC"" .. ·~IJ\'.'''';:;;I:;tj'",,;ci';. Source: Deloitte and Touche .. Figure 1O~1 shows that the existing service providers would vest their route rights and assets into a client organisation14 in return for a payment which would reflect their value. The client organisation would then package these rights and assets into a tender for the overall right to operate the route over a period of perhaps 20 - 30 years. The period would have to be of sufficient duration to enable any concessionaire to recoup their invesiment costs on upgrading the vessels and pier infrastructure necessary to meet their service obligations .. If this' method of providing ferry services were selected, then it would only be implemented if the two existing service operators agreed to rest their route rights in a client organisation. Whether, and in what terms, they would be prepared tQ contemplate this are questions which lie outside the scope of this study. :i 14 In principle, the best client organisation would probably be the Scottish Office itself, but other interested parties could be represented on a Steering Group responsible for drawing up a Service Agreement and issuing an Invitation to Negotiate to prospective service providers. If one of the interested parties was itself bidding (as for example could be the case for Western Ferries), they would then have to withdraw fTom the Steering Group to avoid any possible conflict of interest. 99 ~.,------",,"- 10.2.5 Option F : closure of McInroy's PointIHunter'sQuay Option F could be achieved by two methods: • agreement by Western Ferries 'to withdraw its service from McInroy's PointlHunter's Quay. Western Ferries has given no indication whatsoever that it is contemplating withdrawal, and given that its service is currently operating profitably and, on ouf calculations, .has a Net Present Value in excess of £7 million, there is no obvious reason why it should; . • a process of free competition which would lead to the Western Ferries' service becoming loss~mak:ing. In principle, this could follow a decision to liberalise the CalMac service by removing the constraints which currently apply to it so that it could compete with Western Ferries on equal terms. However, the existing restrictions on CalMac's services could be ended only on condition that CalMac set~ up a separate ring-fenced unsubsidised operating subsidiary or spin off the route to a privately owned successor, e.g. through a MEBO. This subsidiary \ would have its own capital structure and assets, pay a full commercial fee for any services provided by, Head Office, and take responsibility for funding any new vessels required to service the route on a fully self-financing basis, in order to ensure that a level playing field existed with any·private operator .. .. . . The alterna~ive,. of allowing .<;;alMacto win a competitive battle against Western Ferries by pumping in .route subsidies so that CalMac could undercut Western Ferries, would be unfair, costly and economically inefficient. The question is whether CalMac could compete with Western Ferries on these terms. If.it could, the likely consequence of complete liberalisation would·be an intep.se competitive War between the two operators to gain dominance on the route. Our route ana1y~is suggests that the market is not big enough to support two operators, so eventually one of them would be driven out or become insolvent. 10.3 Conclusions We were not. required to arrive at a single recommended option, and have not done so. However, the logic of the analysis is clear - namely, that the towns of Gourock and Dunoon could be linked most cost-effectively by a single operator, and·the costs of the status quo are. likely to increase as new investment,to sustain it becomes unavoidable. However, a single service will lose the benefits of consumer choice and competition. For this reason, there may be merit in further examining the more radical option presented by CalMac as Option B from both the technical and commercial aspects. It should also be. noted that none of the options are able to meet the refurbishment of Dunoon Pier to the scale envisaged by Argyll & Bute Council and that work remains to be done on the economic impact on the town of Dunoon of the pier no longer beirig used by CalMac. 100 ------~~~~~".,.,'"'~"",.."--""~,,;")( il i , APPENDIX 1 TERMS OF REFERENCE FUTURE OF GOUROCK-DUNOON FERRY SERVICES 1. This brief sets out the requirements for consultants to consider the future pattern, structure and regulation of ferry services between Gourock and Dunoon. [It is being jointly financed by The Scottish Office, Caledonian MacBrayne and Western Ferries]. It is not the. purpose of the study to make a single recommendation. Rather Its objective is to comprehensively assess the options available, and report the advantages and disadvantages of each in an objective manner. The consultants will however be invited to put forward those options which they see as most viable and deliverable. The scope for using the PFI in any solution involving CalMac ~ill be a core part of the study. 2. Consultants will be given access to information by' each of the 3 clients, and this should be treated.with strictest confidence and should not be relayed or used in any way without the prior ,agreementof the relevant client. Further the consultants will be expected to treat the whole exercise as in confidence and no information on the study should be made available outside the firm. The consultants will be expected to agree a code of conduct for dealing with commercially sensitive information at an early stage. .J. The consultants' are invitedio set out a timet~ble'for the study, which should be compl<:~tedatthe latest by,theend qf August 1997 .. BACKGROUND 4. The sea route from Gourock to Dunoon is currently serviced by 2 operators. The operators do not share the same piers, but the services provided are close enough to indicate direct competition. CalMac .sail from Gourock pier which is serviced by a railhead, to Dunoon pier. Western Ferries sail from McInroy's Point to Hunter's Quay. 5. The 2 operators differ in their frequency of service. CalMac sail-hourly due to restrictions imposed. Western Ferries sail on the half hour and on the quarter at peak time, and provide a service over a longer operating day. Ferry crossing times average around 20 minutes for both CalMac and for WesternFerries. 6. CalMac receive state revenue subsidy on the basis that they provide a sociany _ necessary passenger service. Western Ferries ate a private company and do not receive subsidy. The Scottish Office aCceptthat it is unsatisfactory to provide operating subsidy to a public sector ferry operator to compete with an unsubsidisedprivate sect()roperator. STUDY OBJE~TIVES 7. First Stage The first stage of the study should be a detailed assessmentof the current situation, involving: a description of the services offered by CalMac and Western Ferries. the capacity requirements now and in the future (by desktop methods) on the route, and how this compares to current availability. the revenue raising cl1pabUityon the service, taking into account: actual rates charged net of discount; tariff levels published; optimal revenue for the route; and comparisons with comparable services elsewhere. the profitability of the 2 services. the requirements for replacement capacity as current tonnage becomes obsolete in legislative, mechanical or safety terms. the need for, and specification of, new pier facilities at Dunoon. the role of The Scottish Office in terms of restrictions on CalMac's operations and the provision of public support. 8. The,objectives of the first stage should be to: comprehensively analyse the current situation. provide pointers to the next stage of the study, which will be to assess the options for change. 9. A further requIrement of the first 'stagewill be to consider the inter-relation with the other Clyde routes, particularly the Wemyss Bay-Rothesay route which shares tonnage with the Gourock-I?unoon service." The objective here should be: to consider whether the inclusion of the Wemyss Bay-Rothesay service in the overall consideration is likely to enable a solution to be,found to the Gourock- Dunoon services, or to Judge whether this wider consideration should be included in the next stage or ruled out. A particular concern here is that differing vessel standard requirements may make the inclusion of the Wemyss Bay-Rothesay route infeasible on technical grounds, leading to excessive costs. Consultants should address this issue. 10.. It is anticipated that the first stage could be completed by end-November with a full interim report prepared in mid-November for agreement by the Steering Group. Second Stage 11. The consultants are invited to develop options and comprehensively assess them against the following criteria; the role of the private sector should be maximised, wherever possible. public sector support for shipping services should ideally be limited to that required to meet' the Secretary of States commitment to the provision of passenger services between Gourock and Dunoon. ,._------•• ------,,~ IIJII, I!IIII, .,«._-1111!1 the benefits of competition should be maximised, wherever possible. the harmful effects of any monopoly situation should be controlled in an effective manner, to ensure competition policy is observed. the economic efficiency of the solution should be maximised with the service provided at lowest cost possible. the solutions offered should represent a long term solution to ferry services in the area. 12. The consultants will be encouraged to bring forwarci new ideas and fresh insights. It is suggested, however, that the following core options, in terms of capacity and service specification offered be considered. the "status quo", which would probably involve a broadly like for like replacement of existing CalMac services. the "CalMac minus" option, which would involve the reduction of service on the Gourock-Dunoon service to a passenger only service, with no change in current Western Ferries service . . . the "CaIMac plus" option, which would involve an enhancement of service on the Gourock-Dunoon service .. the "Western Ferries" minus option, which would involved withdrawal of the Western Ferries capacity. the "CaiMac plus/W estern Ferries Blinus" option, which would be as above but balanced by some reductio~ in Western Ferries services. 13. These core options cover the capacity and service specification on the routes, and assume, unless otherwise stated, the continuation of existing Western Ferries services. Within each option, the following sub options should be considered. the case' for operating controls on CalMac services as currently exist and which could be adapted under the other options. the case for price controls on either or both CalMac and Western Ferries services, while maintaining independent, competitive conditions. the scope for a joint venture agreement between CalMac, or an operator on CalMac's behalf, and Western Ferries. This should !l1soinclude ~nsideration of the scope for subcontracting part of the timetable to another operator. the scope for single owner operation of both services, through either ,complete withdrawal of CalMac, and the provision of passenger services by grant support to the private sector, or the provision of all services by CalMac. Again, this should consider the scope for subcontracting. For example, there may be scope for full provision by CalMac, with subcontracting of a part of the timetable to Western Ferries or another private operator, or vice versa. 14. It is envisaged that the core options in paragraph' 12 and the sub-options in paragraph 13 will represent a matrix of possible solutions. It may be that some could be ruled out at an early stage, but the consultants will be required to provide full reasons for suggesting this and Steering Groups agreement will be required. 15. The consultants will then be invited to suggest a range of feasible options for further consideration, which will be addressed by and agreed with the Steering Group. 16. Each of the options are likely to involve some form of vessel replacement. For those options which are agreed to be worthy of further consideration, a full assessment of how the option could be developed using the Private Finance Initiative should be provided .. Final Report " 17. A final r~port covering in detail the assessment of the options and the financial model . prepared to consider them should be prepared for discussion by the Steering Group. SCOTTISH EXECUTIVE DEVELOPMENT DEPARTMENT :1