Oft Probe Into Steam Packet Fuel Surcharges

[Sebrof]

It's possible that the SPC completely mis-read the market and hedged 12 months fuel supply or whatever at what looks now like a ridiculously high price.

 

If correct this means you now have to pay for their stupidity...

What it means is we ARE paying for their stupidity.

 

But if they are simply passing on the cost of their own gamble going wrong, then they should be honest and simply incorporate it into the ticket prices, not try to pretend it's due to some mysterious circumstance outside their control, like the price of oil.

If the financial crisis hadn't turned out to be much worse than people expected when they supposedly did their hedging, oil prices would now be over $200 a barrel and we'd all be very grateful.

 

You can't win every time.

Errrr... I'm guessing guys. Wait and see mode.

 

Yes, I know. I'm just a bit tired of all this Racket-bashing.

 

S

[manshimajin]

Woodward makes some good points about the cost of running the service - it isn't subsidised, and many sailings are not economic. They have to be paid for by higher fares at peak periods.

S what I have not seen are any attempts by the Steam Packet Company to reverse the 60%+ under-utilisation of their ship capacity. Mark Woodward seems to be saying that this is a reason for keeping fares up. Mark is paid to manage. In most circumstances if a manager sees that assets are 60% under-utilised he/she would use pricing strategy to increase the numbers using the service. What sort of special offers are the IOMSPC offering to attract additional business? They are not just in the UK-IOM service but are competing against UK-Ireland, UK-Europe and of course package holidays to the sun. I have not seen much sign of creative thinking by them to reverse this negative trend.

 

For example if particular sailings are not economic try offering on those dates family +car rate of £50 each way with a limit of say 50 fares available on each sailing at that rate - with start point for the journey in the UK to bring people over to spend money on the Island. Experiment and see what happens.

 

Others may have seen IOMSPC advertisements in Ireland and NI for the Ireland - IOM services for 2009 but so far I have neither heard nor seen any. Hope that they are out there.

[CEO Steam Packet Company]

Manshimajin (and some others on this forum)

 

Management at the Steam Packet have successfully grown passenger and vehicle numbers over the last decade at a time when much of the UK ferry industry has been in decline.

 

As far as utilisation is concerned, we do operate at some times of the year with acceptable load factors. However for much of the winter period (Nov to Mar) we do not. Offering in excess of 2,500 passenger spaces per day during this period, I do not believe that any amount of clever marketing or demand from an island population of 80,000 will significantly alter load factors to a self supporting level.

 

As can be seen below, our fares have decreased in real terms since 1995 and now over 80% of passengers travel on special offer fares. The finding that our passenger fares are 'very competitive' (Select Committee words not mine) is because freight prices subsidise passenger fares and services that otherwise simply would not be operated.

 

Jan 1995 Aug 2005 Sept 2008 Feb 2009

Average weighted cost of Marine Fuel (per tonne) £100 £315 £597 £512

£100 inflated by Manx RPI £100 £133 £150 £147*

Typical footpassenger fare (ex fuel surcharge) £25 £15 £15 £15

Typical footpassenger fare (inc fuel surcharge) £25 £17 £20 £20

£25 footpax fare inflated by Manx RPI £25 £33.25 £37.50 £36.75*

*Latest RPI data available is to December 2008

 

We have consistently lowered the cost of passenger fares despite also having to deal with record fuel prices in recent years. The table below details actual fuel costs over the last three years:

 

Year Fuel Costs Amount recovered by Surcharge Amount absorbed by Steam Packet Proportion absorbed by Steam Packet

2006 £3.4m £1.8m £1.6m 47%

2007 £4.8m £2.1m £2.7m 56%

2008 £9.4m £3.3m £6.1m 65%

 

 

It is clear that the Steam Packet Company has had to absorb an increasing proportion of the additional cost and has minimised as far as possible the effect on its passenger fares.

 

There has been much debate too about the User Agreement. I think it is worth considering exactly what the User Agreement is and does.

 

The User Agreement is a contract that was sought by the IoM government back in 1995, against a previous background of failed Manxline competition, service disruptions and seafarer strikes. It was intended to secure sea services and provide a frequency and stability of vital lifeline services.

 

We did not seek this agreement but eventually chose to accept an agreement that not only obliged us to use a newly built government linkspan (and also to pay for its construction costs and annual maintenance costs at circa £250k per annum), but also charged us circa £150k a year to continue using our own linkspan in Douglas Harbour. This is in addition to the dues we pay to government of around £3m per year. It also commits us to heavy investment going forward on top of £80m already spent.

 

So under the UA we are paying not just to use the harbour facilities but also the cost of building and maintaining the new government owned linkspan as well as a charge to site our own linkspan in Douglas Harbour. In return for this we were given near exclusive use of the government linkspan.

 

Under the UA approved by Tynwald in 1995 as amended and approved again in 2002 and 2004 our prices were benchmarked. They have only been allowed to increase since at Manx RPI less one half a percent. The weight of challenge under the newly signed agreement was very much on Steam Packet to perform. As well as price controls and charges above, we were also obliged to guarantee minimum frequency and capacity many of which were and still are uneconomic. In a free market many of these services simply would not be operated. They don’t make economic sense.

 

If we had not been successful in growing the market, and our revenues had fallen or not grown as quickly, we would still be obliged to provide the services agreed. We have never failed to provide what is contractually expected of us. Yet now, some feel that a contract with a sovereign government that we have met in every way should be torn up.

 

If it did happen I have little doubt that residents of the island would be left with a poorer and more expensive service not a better one.

 

Whether we like it or not the IoM is a natural monopoly with regard to ferry services (because of its market size and the capital intensive nature of shipping) and we should stop trying to pretend otherwise. At the risk of repeating myself, the simple fact is that we need a certain minimum level of revenue to cover the cost of operating many unprofitable services that we are expected to provide. An Island population of 80,000 people can not otherwise support the level of services we enjoy.

 

 

S what I have not seen are any attempts by the Steam Packet Company to reverse the 60%+ under-utilisation of their ship capacity. Mark Woodward seems to be saying that this is a reason for keeping fares up. Mark is paid to manage. In most circumstances if a manager sees that assets are 60% under-utilised he/she would use pricing strategy to increase the numbers using the service. What sort of special offers are the IOMSPC offering to attract additional business? They are not just in the UK-IOM service but are competing against UK-Ireland, UK-Europe and of course package holidays to the sun. I have not seen much sign of creative thinking by them to reverse this negative trend.

 

For example if particular sailings are not economic try offering on those dates family +car rate of £50 each way with a limit of say 50 fares available on each sailing at that rate - with start point for the journey in the UK to bring people over to spend money on the Island. Experiment and see what happens.

 

Others may have seen IOMSPC advertisements in Ireland and NI for the Ireland - IOM services for 2009 but so far I have neither heard nor seen any. Hope that they are out there.

[manshimajin]

Woodward makes some good points about the cost of running the service - it isn't subsidised, and many sailings are not economic. They have to be paid for by higher fares at peak periods.

S what I have not seen are any attempts by the Steam Packet Company to reverse the 60%+ under-utilisation of their ship capacity. Mark Woodward seems to be saying that this is a reason for keeping fares up. Mark is paid to manage. In most circumstances if a manager sees that assets are 60% under-utilised he/she would use pricing strategy to increase the numbers using the service. What sort of special offers are the IOMSPC offering to attract additional business? They are not just in the UK-IOM service but are competing against UK-Ireland, UK-Europe and of course package holidays to the sun. I have not seen much sign of creative thinking by them to reverse this negative trend.

? If this means that Mark Woodward is reading posts that is excellent.

 

The IOM needs to think creatively about how to grow its tourism. The Steam Packet is part of that process but clearly travel is price sensitive for most people. If we have over half empty ships what can we do to get more people on? Half empty ships is a message that needs to be heeded.

 

PS: When I posted this comment this morning my computer was not showing the extensive comments from Mark Woodward above - for some reason his post was blank. Apologies.

[monasqueen]

How much of the percentage "absorbed by the Steam Packet" is already charged within the normal fare structure?

 

It is to be hoped that the Select Committee makes a thorough review of what is fare and what is fair.

[Sebrof]

Woodward makes some good points about the cost of running the service - it isn't subsidised, and many sailings are not economic. They have to be paid for by higher fares at peak periods.

S what I have not seen are any attempts by the Steam Packet Company to reverse the 60%+ under-utilisation of their ship capacity. Mark Woodward seems to be saying that this is a reason for keeping fares up. Mark is paid to manage. In most circumstances if a manager sees that assets are 60% under-utilised he/she would use pricing strategy to increase the numbers using the service. What sort of special offers are the IOMSPC offering to attract additional business? They are not just in the UK-IOM service but are competing against UK-Ireland, UK-Europe and of course package holidays to the sun. I have not seen much sign of creative thinking by them to reverse this negative trend.

? If this means that Mark Woodward is reading posts that is excellent.

 

The IOM needs to think creatively about how to grow its tourism. The Steam Packet is part of that process but clearly travel is price sensitive for most people. If we have over half empty ships what can we do to get more people on? Half empty ships is a message that needs to be heeded.

 

Half-empty ships is a consequence of the UA. IOMG has decided that it is better to have regular winter services, which are subsidised by high peak-period fares, than to have lower peak-period fares and fewer off-peak services.

 

Personally, I think there is a case to be made for subsidising the peak fares, provided there is still surplus capacity. No point otherwise. A subsidy would reduce the cost of going across for the less well-off, and also for tourists - thus making the IOM a more competitve destination. Scotland massively subsisidies Cally Mac.

 

I find the Racket to offer a pretty good service (and I am a regular user). Staff are always pleasant and helpful, and more "human" than their unhappy counterparts in the airlines. I haven't seen the accounts, so I don't know if they are making excessively high profits - if so, that again is down to the UA.

 

S

[manshimajin]

Thanks for the detailed comments. It is good to see the IOMSPC communicating on these issues. I hope that it is possible for this to be a dialogue with comments that may be worth considering. May I pick up on a number of matters:

 

Winter utilisation will of course be significantly lower than at other times of the year for tourist traffic. To some extent I assume that this is addressed by the big reduction in sailing levels at that time of the year. But I also get the impression from visitor numbers that the IOM volume tourist season is relatively short compared with other destinations. Can the IOMSPC boost inbound tourism numbers in the Spring and Autumn outside the peak? Is full utilisation being achieved during the Summer (outside of the TT period) anyway? These months (rather than the winter) may be times when more competitive marketing ideas can be used to the advantage both of the IOMSPC and the tourism industry on the Island (which suffers the same utilisation problems).

 

On this issue I also sense from numerous statements that the IOMSPC is not really that keen on the Irish service as at present it is a loss maker. Why not concentrate on one port to increase the traffic volumes on the sailings (ie keep the 'Belfast' number of sailings per week and drop the Dublin service)? There are excellent road connections from Dublin to Belfast. In the UK people have to travel long distance to the two ports. For the bulk of the population in Ireland getting to Belfast is less of a problem than for many UK customers getting to Heyshamd and Liverpool. I am still not sure if the IOMSPC or DTL have promoted the IOM in Ireland this year (the UK Midlands have had a big radio campaign).

 

Thank you for the informtion on fuel prices. It seems amazing that with the massive fall off in maritime trade and the massive reduction in the cost of a barrel of oil (even allowing for exchange rate differentials) that the cost of a tonne of marine fuel in 2009 has fallen only by 14% compared with an approximately 70% drop in the price of crude oil. Is this due to buying ahead or to some different economic model operating in the marine fuel market? I can see that if the fall in world energy prices is not reflected in fuel costs for the IOMSPC it is a big problem.

 

The competitiveness of fares is of course a controversial topic in the discussions going on in various places at present. The challenge for the IOMSPC, for customers, Manx business and tourism is that the price of competing travel choices has dropped enormously in real terms over the last decade. Our limited tourism growth (?) means we largely missed out on the very high rates of real growth in outbound tourism from the UK (and elsewhere) over the last decade. In recessionary times in the UK and Ireland price is going to be a key deciding factor in where people go. This is not just an IOMSPC issue, but also relates very much to the cost of air travel to the Island and the expenses once one gets here.

[Freggyragh]

I'd agree with Manshimajin's comments concerning Ireland. I wanted to take a trip to Ireland last year, but I didn't want to take a car. I didn't mind going to either Dublin or Belfast. I didn't bother going because whichever dates I chose, I would have had to arrive at one port and leave at the other.

[Tugger]

The fact is that the User Agreement was poorly negotiated by our representatives, and that it allows the Racket to make eye-popping profits at our expense. Travelling to Liverpool as a foot passenger is now an absolute shocker, with all the fannying around at Birkenhead. The value of the Racket - in the hundreds of millions - is all in the User Agreement. The Racket should be brought back to the negotiating table - there are a number of ways that their profitability could be reduced without breaching it - and told that what WE want is more important than what THEY want

[P.K.]

Manshimajin (and some others on this forum)

 

Management at the Steam Packet have successfully grown passenger and vehicle numbers over the last decade at a time when much of the UK ferry industry has been in decline.

 

As far as utilisation is concerned, we do operate at some times of the year with acceptable load factors. However for much of the winter period (Nov to Mar) we do not. Offering in excess of 2,500 passenger spaces per day during this period, I do not believe that any amount of clever marketing or demand from an island population of 80,000 will significantly alter load factors to a self supporting level.

Sorry Mr CEO SPC (Woodward?) but as an LSS Project Manager I don't buy in to very much of your post. Although at least you made an effort which is laudable in itself.

 

Sure the UK ferry industry has been in decline, but that's because of the words "Channel Tunnel" which actually has little bearing on your operation. You also seem to be doing a classic snow job by being very selective. For example for "acceptable load factors" read "profitability" - what, has "profitability" suddenly become a dirty word not to be used in dealings with Mr Joe Public and why is that I wonder? You also bang on and on about the "Manx RPI" loading factor. So am I supposed to believe that all your running costs are based in Douglas? I don't think so. But the real bollocks is the way you try and justify everything around the lowest possible denominator - the lowly foot passenger.

 

Running a business is all about bottom line. Foot passengers don't even enter into that equation, do they? Because they have no real impact on costs.

 

You imply the business is running at a loss to wit:

"I do not believe that any amount of clever marketing or demand from an island population of 80,000 will significantly alter load factors to a self supporting level"

 

So Mr CEO SPC, no more smoke and mirrors, mouth and money time, let's see your P & L.

[manshimajin]

You imply the business is running at a loss to wit:

"I do not believe that any amount of clever marketing or demand from an island population of 80,000 will significantly alter load factors to a self supporting level"

PK thanks for your post - it was late at night when I got back home and wrote my comments. The quote that you have identified is one that also struck me - but I think I may have rambled about it.

 

Mark Woodward's comments on load factors and marketing IMO do not address two very basic points.

 

Firstly a load factor of 60% empty is not caused solely by the reduced Winter sailing schedule so there is an opportunity to boost utilisation through the Spring, Summer and Autumn periods. This requires a marketing effort (I will not go into details here for brevities sake).

 

Secondly if the IOMSPC is really looking on the 'island population of 80,000' to alter their load factors then they are looking in the wrong direction - which is concerning! There are populations of 60 million+ in the UK and 5.5 million+ on the island of Ireland. Surely if you have half empty ships that is where you must look to boost load factors. That is not 'clever marketing' it is common sense.

 

What MW says sounds suspiciously like 'accountant-speak' to me.

[P.K.]

What MW says sounds suspiciously like 'accountant-speak' to me.

You mean "accountant-squeek" don't you?

 

I'm pretty sure Tinker Airlines will stay in business throughout this recession because of their aggressive fare structuring. The amount of profit loading on winter sailings is readily available to Woodward et al so you would think they could price down deals to fill the hold if they had to. So why don't they?

 

Because, of course, they have a monopoly so they don't have to.

 

They must be operating at a profit as the business was sold as a going concern. So let's see just how much of a profit they are making.

 

Come on in Mr Woodward, your time is up...

[Sebrof]

What MW actually wrote was: "Offering in excess of 2,500 passenger spaces per day during this period, I do not believe that any amount of .........."

 

In other words, he was suggesting that they make a loss during the winter, not all year round.

 

And that is understandable. I am sure if he lowered prices in the summer, he would get more passengers. But he gets plenty then, and he doesn't want to lower prices because that is the time he makes his profits.

 

You guys seem to think that there is a straight line price/demand curve. I rather doubt that it is that simple. But I am impressed by the talent on this forum. People here know better than everybody else how to run the governemnt, the Racket, the DTL, Flybe, you name it. Marvellous; I suppose you are all posting from your yachts in the Caribbean.

 

S

[P.K.]

You guys seem to think that there is a straight line price/demand curve.

Errr... I don't think that because it's not English. A straight line can't be curved you see. Having re-read the piece I think that perhaps you are right about the loss-making statement being confined to the winter sailings.

 

But I also think you are right to be impressed about the talent on this forum. Not so long ago someone posted that you should put your wedge in gold. Of course, in pure ignorance a lot scoffed at this idea. But I found out today that against a basket of currencies over the last three months the value of gold has risen by a massive 20%! What a fantastic return isn't it Mr Sebrof? A TWENTY PERCENT rise in ONLY THREE MONTHS when interest rates are at their lowest for decades. All those detractors must feel really stupid now, wouldn't you agree Mr Sebrof?

 

I don't base anything on anecdotal evidence. With the drop in fuel costs then the Rackets operating costs have dropped similarly. I suspect (until I see the figures I won't know) that they are going to try and justify keeping the fuel surcharge in place because the drop in their operating costs has taken place during their least profitable period. Of course, the fact that their business model is based over the whole year, including their vastly inflated TT and kiddie holiday prices, will probably be fudged with many regrets and much hand-wringing. They're not a charity, they want to make as much money as possible, bau...

[Frances]

They must be operating at a profit as the business was sold as a going concern. So let's see just how much of a profit they are making.

Their profit has been published - I have often pointed out that the Aussies bought the company at a price considerably more than the assets were worth - at least £100M probably nearer £150M of the £225M was entirely due to the user agreement - this 'capital' investment needs to pay its way thus the high monopoly prices we see. I agree that the Island link is pretty close to being a natural monopoly - the Island has no control over the Australians who see us merely as a way of making a high return and will continue to rip us off in any way consistent with the bit of paper giving them the licence to print money - the major blame is due to government. We should adopt the same approach as Shetland - a renegiotiable contract.