Some simple economic realities
The economics of vehicle-passenger ferries are really quite simple.
If you are going to transport foot passengers using ferries between
centres of population to connect with other forms of public transport
(e.g. buses and trains) then you have a basic choice between transporting
these foot passengers in a passenger-only vessel or in a vehicle-passenger
Foot passengers typically generate little revenue but they are
high cost to cater for - not just for comfort and shelter reasons
but because most regulatory authorities, including the UK require
high crewing levels for passenger safety reasons and this crewing
level tends to reflect how many foot passengers could use the vessel
(what is it certified to carry), not how much it actually carries
on specific trips.
For these reasons, foot passengers generally require a significant
subsidy if ferry operators are to be induced to offer these services
using a passenger-only vessel on a specific route.
Now suppose instead of using a passenger-only vessel, the operator
could transport those foot passengers using a vehicle-passenger
ferry. This transforms the economics of foot passengers on most
routes (like most of the CalMac network) first because vehicle-related
traffic usually delivers the bulk of revenues on most such routes,
and second because adding vehicles (which generally just need little
more than a flat deck) usually does not add as much to costs as
it does to revenues on such routes. So adding vehicle-carrying services
can help defray some or all of the losses that would have been incurred
if the service was just foot passenger only.
The important point here is that the foot passengers are generally
loss-making activities while if there are commercial profits to
be made on a route it is likely to be from vehicular carryings.
This economics of this was illustrated in the Deloitte Touche report
(2000) on the Gourock-Dunoon ferries published by the Scottish Executive
which calculated that a two-vessel
foot passenger only service on the town centre to town centre
route here would make an operating loss of about £600,000
Using figures supplied by CalMac they calculated that the operating
loss would be turned into a operating surplus of about £600,000
a year if these foot passengers were instead transported between
the two town centres using
two modern bow-and-stern loading vehicle-passenger ferries.
Adding allowances for the capital costs of procuring vessels did
add more to costs in the respective cases, but even then the vehicle-passenger
ferry option still just about broke even in present value terms
implying very little need for subsidy, with profitable vehicle-carrying
just about compensating for costly foot passenger carrying.
By contrast, not only did the foot passenger option offer less
in the way of services, it would make a substantial loss and would
need major amounts of subsidy before any commercial operator would
be persuaded to take it on.
These basic economics are reflected in ferry networks around the
world and not just Gourock-Dunoon or the CalMac network in general.
It is not just economics, it is basic common sense - if a route
can carry vehicles as well as passengers then it usually makes sense
to combine these services in a single vessel than to split them
into separate vessels. Washington State Ferries, which performs
much the same function off the northwest coast of the United States
that CalMac does off the northwest coast of Scotland has recently
what is left of is passenger-only fleet for exactly that reason.
However, bearing in mind that it is the vehicular segment of such
ferry markets that is likely to be commercially profitable, a weak
or non-existent domestic regulatory regime could open up such markets
to cherry picking. What exactly will be cherrypicked may depend
on the market in question, in some routes close to urban centres
it may be mostly commuters in cars, in more agricultural regions
it could be more freight and livestock, but whatever it is it is
likely to be vehicle-related. What the cherry pickers do not want
to do is to encourage walk-on foot passengers for the reasons set
The cherry pickers may be able to exploit locational and frequency
advantages that are not open to (or are restricted for) what is
left of the public ferry service that they are drawing trade from.
The result is that as the public ferry service progressively loses
the vehicle-related segment that had helped defray the costs of
foot passenger carrying, its losses increase and so its corresponding
needs for subsidy increase. If there are any vehicle-related services
still left on the public service, the cherry picker will complain
about unfair competition from the public service and will claim
that subsidy for foot passengers is being used to subsidise the
public service's dwindling vehicle-related traffic and compete unfairly
against the cherrypickers own unsubsidized services.
The reality of course is that the public service's loss of the
vehicle-related traffic is exposing the underlying hard economics
of carrying foot passengers which is why both losses and subsidy
are increasing. For a cherry picker to complain about the public
service's subsidy is a bit like a mugger complaining about its victim's
hospital bills. In the EU, the European Commission gives guides
to help governments avoid or resist such threats through simple
accounting procedures - should the government choose to use them.
But subsidiarity here means it is for national or regional governments
to frame the necessary statutory frameworks and regulatory controls
that will protect the public interest here, it is not the European
Commission's job to do that.
Eventually the public service may lose all its vehicle-related
traffic, whether by attrition or government caving in to pressure
and lobbying. But there is still a need for foot passenger traffic
between the centres of population linking with buses and trains.
The government advertises for and gets a passenger-only service.
This of course will require massive subsidy for the reasons set
So to summarise, if we have weak or non-existent regulatory control
of cherrypicking of segments of ferry services, then we can move
a state where we have a single ferry service offering combined vehicular
and passenger services to one in which there is a private service
mostly for vehicles and another subsidised service for foot passengers
only. There may be no real difference in terms of service that could
otherwise have been developed if there had still been a combined
vehicular and passenger service, but now there is the loss of economies
and the costliness of two parallel services - one a private vehicle-carrying
monopoly being able to set the level of prices and services that
maximizes profits for its shareholders, the other a passenger-only
operator that not only has gets a substantial subsidy from the taxpayers
but has to also make its own profit to persuade it to take on this
While the cherypicker may talk of the benefits of private enterprise,
what we have here is an unregulated monopoly, parallel services
and unnecessary subsidy. It is difficult to imagine a worse, more
inefficient and costly outcome for the users, the taxpayer, the
dependent communities and local economic development.
There will also be assorted consultants, lobbyists and political
interests around to tell the public and policymakers that this outcome
is the best of all worlds. Of course there will be such voices,
there always are in such circumstances, that is what consultants
and lobbyist do and why they are employed, but that does not change
the economics of what has happened.
The good news is that while routes in general and in principle
are open to such degradation, mostly it does not happen. Even a
country based around free markets like the United States knows what
governmental and regulatory weakness of the type I have described
above lead to, and since they have moved well beyond the economics
of the Wild West they generally have statutory frameworks and regulatory
regimes to prevent such degradation of public services, even where
they are operated by private firms.
To find cases like this you have to find weak and incompetent government
and a virtual absence of coherent regulatory standards and controls.
Neil Kay, 25th February 2011