5 What have the consequences been for island supply-chain?

Overview

When the Coll, Tiree and Outer Hebrides RET pilot was introduced in 2008, it included all classes of commercial vehicles, defined at that time as any vehicle over 5 metres in length. This led to a significant reduction in fares for hauliers in these islands, but at the same time led to the withdrawal of the Traders Rebate Scheme, a volume-based discount which typically benefitted the larger hauliers. When the RET scheme was made permanent for these islands in April 2012, the decision was taken to:

withdraw RET for commercial vehicles, with a three-year transition back to pre-RET fare levels (note not all routes fully transitioned back to non-RET levels)
with the exception of hay and live shellfish, volume and commodity-related discounts were not reintroduced
the length at which a vehicle is defined as ‘commercial’ was recategorised from 5m to 6m (although height, weight and width restrictions may lead to such vehicles being defined as CVs, but this is the exception rather than the norm), meaning that many vans previously classified as ‘commercial’ were now categorised as cars

The above principles were retained for subsequent roll-outs of RET, albeit volume and commodity related discounts were not withdrawn on other routes.

Island supply-chains and haulage arrangements have evolved over many years, representing both local circumstances and the need to work around a ferry service. The change in the tariff structure associated with RET may have impacted haulage / supply-chains in terms of:

increased volumes of goods being moved stemming from increased consumption on the island as a result of higher visitor numbers and / or
the 6m rule and the associated switch from commercial vehicles to vans charged at the car rate. This chapter explores these potential effects in three parts – it will review the impact of RET on:
- freight volumes
- the structure of the freight market
- vessel capacity

Individual operators had their own specific experiences to share but it was clear that in the time RET has existed, the haulage market has adjusted operations to accommodate new challenges. Each firm consulted had evolved the nature of their businesses due to the continuously evolving nature of the underlying customer demand. Several operators noted that timetable changes had improved service levels available to them, enabling them to operate differently, thus making it more challenging to determine how much change is due to RET and how much is due to better connectivity or generally evolving customer demand and haulier operational response.

Freight volumes

Hauliers’ reported that freight volumes had generally risen since RET has been introduced. Operators on the larger islands considered this to be the result of general economic growth and the continuation of general historical trends, and development of certain sectors - i.e., whisky distilling - rather than attributable to greater on-island consumption due to RET. No haulier indicated a strong causal-link between RET and increased freight volumes.

Where volume has grown, this has not automatically translated into additional freight vehicles moving, as hauliers noted that growth has typically been absorbed into trailer capacity that was not fully utilised (as is common in island communities).

Discrete exceptions were identified, suggesting that there may have been some RET driven growth, albeit unquantifiable. For example, hauliers serving islands with very small populations had observed increases in the movement of consumer goods as a result of additional visitor traffic. This increase may be more noticeable in smaller islands due to the proportion of overall freight volume that relates to retail consumption being greater as there is a lower background level of other freight traffic.

Specialist suppliers of LPG fuel also noted a small (but not very significant) increase in consumption volume over an extended summer period, which was attributed to greater tourism and increased cooking in rental accommodation. The business is seasonal though, with the majority use attributed to heating over winter.

Key point: With limited exceptions, the roll-out of RET has not stimulated a significant increase in freight volumes, at least amongst commercial freight providers.

Structure of the haulage market

Little evidence overall was found to suggest that RET had materially changed the freight supply market or increased outside competition to serve the islands. Increased competition had come from private vehicles carrying more domestic freight, and some businesses choosing to move their own demand, supplies from wholesalers for small retail businesses for example. The sections below explore this issue for route / island groupings.

Short and mid-distance routes (e.g. Mull, Arran, Islay And North Uist)

On the short and mid-distance routes, RET has impacted the haulage market by making the mainland cheaper to access, enabling island residents to increasingly take their own vehicle on the ferry. Freight that would have previously been moved by commercial hauliers on large vehicles was noted as having shifted to the private car. Even larger, bulkier items like furniture and carpets are being moved privately and there were reported to be far more day trips by islanders to shop on the mainland. One operator noted a growth in ‘private car with trailer’ movements (potentially 5m car + 5m trailer able to be charged at the RET car rate, which is significantly less than an equivalent CV of 10m long). For example, taking a 10m commercial vehicle on the Oban - Craignure route would cost £141.60, whilst the equivalent cost for a car plus trailer would be £69.80.

This has diluted the mixed volume of freight available which allows hauliers to maximise the utilisation of their vehicles. Several operators appear to have evolved their business model to reduce their exposure to the high operating costs and asset costs of running a fleet mainly consisting of large HGVs that have become more poorly utilised, towards increasing their operations based around 6m vans. One operator noted that unless fully loaded, running an HGV to the islands is not financially viable and their use is being constrained to large, indivisible loads that cannot be broken down into smaller consignments.

One operator noted that under RET, it is more cost efficient to run four sub-6m vans in substitute to one conventional HGV, which also offers the additional benefit of greater frequency and flexibility to customers. This shift does have a material impact on ferry capacity as 24m of vehicle deck space is then required for freight previously moved on 16m of vehicle deck space. Some operators had attempted to improve their operational efficiency and reduce large HGV haulage rates for pallet-based freight but this had limited success such is the price differential between commercial and RET rates.

Mull and Arran have particularly seen this shift, although Islay does not appear to have seen the same changes. Islay however is dominated by the movement of spirit for the whisky distilleries, the volume of which is significantly influenced by investment and production on the island, not the island population or visitor numbers.

One operator noted that this shifting business model has driven the choice to open a mainland depot in replacement of an island based one. Now, bulk deliveries from mainland suppliers are delivered to the mainland depot and more frequent, lower volume consignment island deliveries are made, based on van movements, to customers. This has improved service levels to customers as previously the operator would have waited until there was sufficient volume to fill an HGV trailer before shipping to the island. This more ‘just in time’ approach has meant even heavy building materials are being shipped in vans in preference to standard HGVs.

Overall freight volume on these routes was considered to have increased in absolute terms but no operator attributed this specifically to increasing island demand as a result of RET. Organic growth in underlying volumes had been a longstanding trend as a result of improving ferry services and access to mainland suppliers via the internet. This overall growth in volume has to some extent mitigated the effect of volume abstraction by private vehicles.

Key point: On shorter, high volume routes, the ‘6m rule’ has led to a reduction in goods moved on conventional commercial vehicles. Consultation suggested that island residents now more readily move goods in their own vehicles (sometimes using a trailer), whilst haulage firms have responded by substituting HGVs for vans less than 6m in length, such is the differential between the commercial and non-commercial tariff levels. It was noted in some cases that this has led to a better level of service for customers, but at the same time has reduced revenue for haulage firms and increased the amount of ferry vehicle deck space used by freight.

Smaller population islands (e.g. Coll And Colonsay)

The RET impact on smaller population islands has been more noticeable. Indeed, a tangible increase in island consumption was noted by hauliers, which is thought to come from increased visitor numbers. Due to the very low overall volume of freight, the proportion related to retail consumables, hotel and hospitality consumption is relatively high.

The overall low volume to these islands historically meant that the majority of their freight was moved in smaller vans, so the increase to 6m has allowed operators a greater fleet choice to absorb this growth. Where these operators are serving multiple islands, the ability to invest in a larger fleet of 6m vans has also given them the flexibility to extend the van services to other, larger islands where large HGV’s were previously being used.

Key point: Smaller population islands have noticed a tangible increase in the volume of goods being moved, which is thought to come from increased visitor numbers, and is more noticeable because the volume of background freight is lower. As these islands have always typically been served by vans, the ‘6m rule’ has actually extended fleet choice, to the benefit of the haulier and customer.

Longer-distance routes (e.g. Outer Hebrides)

For longer distance routes, RET has had a more limited influence on how freight is moved with a less marked switch from customers using commercial haulage to their own personal vehicles. This was thought to be due to the inability to make day- return journeys to the mainland.

Operators had not perceived a marked change in the volume of freight moving but did note that the nature of the market has influenced what is moved. For example, retailer consolidation means that Co-op is now the sole supplier to Uist’s main grocery outlets, where there had previously been two or three retail wholesalers supplying different stores. This has meant greater consolation opportunities, with Co-op vehicles now arriving fuller than before. It could not be determined whether abstraction of general freight had altered the cost of delivery and by consequence driven consolidation efficiencies in the sector.

Key point: The introduction of RET has had little impact on the structure of the freight market on longer routes, primarily due to the inability to make a day-return journey to the Scottish mainland.

Vessel capacity

The haulage sector often works on tight deadlines which can be driven by customer delivery requirements of the perishable nature of the goods being carried. The ability to secure vehicle deck space is therefore essential – capacity and its management is therefore a key issue for the haulage sector.

Securing a booking

All hauliers interviewed observed that getting space on sailings is increasingly difficult with the general exception of the Stornoway - Ullapool route, where the overnight freight sailing is used by the majority of hauliers and was noted as being rarely full. Even without a block booking, one operator regularly had no problem with moving his trailers several nights per week on that service.

On other routes, the growth in passenger traffic following RET has reduced the degree of flexibility available to hauliers. A system of block bookings is used by the ferry operator for larger hauliers, but not for smaller ones. This process allows hauliers to pre-book an agreed amount of capacity on individual sailings, typically over a 3-12 month period to allow hauliers to offer their customers an assurance of capacity.

For relatively stable commodities like LPG, capacity is booked a year in advance. Delivery patterns are consistent, with operators only noting impact where their vehicles are very occasionally ‘bumped’ despite being booked, to accommodate high passenger vehicle demand. Where demand dictates an additional delivery is needed outside of the booked slots, this is booked on a spot basis and it was commented that securing this shorter-notice space is more difficult than it has historically been.

For general hauliers, pre-booked fixed capacity allows them to manage their customers’ fluctuating demand, often at relatively short notice. Where this fluctuating demand could be accommodated within the booked capacity, there were few issues and a degree of cooperation / collaboration between competing hauliers was identified such that if one haulier did not have the booked capacity to move his customer’s volume, the loads are outsourced to a competitor haulier who had space available.

On some routes, higher volume hauliers have the capacity to use stand-by space by placing loads (or empty trailers) at the quayside to take advantage of capacity that can be released as short as 30 minutes before sailing. This capacity becomes available due to either booked passenger vehicles not turning up, or more typically, if the deckspace used for booked passenger cars is less than that the space nominally allocated to those vehicles in the booking and capacity planning system of the operator.

This capability to utilise standby favours the larger operators with more vehicles but operating within a standby ‘buffer’ means an inherent uncertainty of getting on the service and is an additional cost on the business to overcome the risk of stranded trailers.

All hauliers mentioned that block bookings are more tightly managed by the ferry operator today than they have been in the past. Where hauliers’ customer demand is beyond the block booked capacity of the haulier themselves, frustration was noted at the difficulty of getting additional space on the ferry at short notice to satisfy this demand (with the exception of Stornoway - Ullapool). Overall operational flexibility and responsiveness has reduced since the introduction of RET as the ferries are fuller.

Hauliers commented on the nature of additional passenger demand, particularly that RET had increased the propensity for islanders and visitors, especially on shorter crossings, to make day trips, thus on any day utilising capacity on two sailings.

Where this capacity was being used by visitors in large motorhomes or island residents with larger vans or trailers, vessel vehicle deck capacity was being considerably compromised for a perceived limited real value to the island economy and at the expense of freight needing to move to support the on-island economy.

While the network is operating as timetabled, hauliers have organised their business around the constraints, but they have found that the overall greater level of demand on the service has impacted the ability for the service to recover from delay and disruption. One haulier who moves significant freight volume – up to 120 vehicles per week – cited two examples in spring 2019 where it took six days to recover from disruption and return back to his and his customers’ operational schedule. As a business, he has to price in this risk to service resiliency into what he charges his customer.

Hauliers seek to mitigate these risks. One approach identified was to book on the core sailings and avoid block booking on first / last sailings of the day (where multiple crossings are available). They have learned that first / last sailing tend to be the ones that are most likely to be affected by disruption and cancellation first. Core sailings are also in highest demand from non-freight traffic.

Two hauliers said that the uncertainty of getting on sailings and supply-chain risks attached to recovering from disruption has become a barrier to on-island investment by their customers, for example to increase production activity. In effect, growing RET derived passenger vehicle demand and significant challenges to increasing ferry service capacity, resiliency and flexibility is choking off potential for growing on-island business. Hauliers noted that, in several cases, these are large organisations with the choice to place investment in alternative locations or facilities.

Key point: The increase in demand for vehicle-deck space is proving to be a significant challenge for the haulage industry. Whilst block-booking affords a degree of protection, securing space over and above this can be challenging on peak sailings on the busiest routes. Moreover, recovering from disruption and delay has become very challenging. A strong perception emerged through the haulier interviews that vehicle-related capacity constraints on the ferry are choking off growth and productive investment in the islands.

Capacity management

The capacity challenges of the network were recognised by hauliers and there was mixed opinion on the merits of demand / capacity management. It was noted that this is something that is now increasingly discussed where before it was not; a reflection of the challenges faced.

Each freight operator and route was found to have individual needs and perspectives. A common theme was that any demand management should seek to achieve fairness and recognise the value of traffic to the island economy, the lifeline requirement and the source of capacity challenges. Capacity management solutions were offered but were universally thought to need to address the management of passenger demand as much as freight. Examples given included:

Addressing a perceived unfairness in the pricing for large motorhomes which can take as much space as vehicles moving critical supplies like fuel oil. Hauliers perceived that critical freight will receive a lower priority.
Addressing the perceived unfairness of RET being applied to less price sensitive visitors. Several hauliers identified that many islands are not cheap destinations to visit with hotel rooms at £200+ per night in season and are not a ‘fish and chips for a fiver’ market. It was noted that the ferry fare for many is an incidental expense, yet heavily subsidised by the Scottish Government.
It was noted that there should be differentiation between island residents who should benefit from RET and often have short-term travel needs and visitors who are perceived as adding little real economic value and much social disadvantage – especially the growing day-trip market on shorter routes. It is considered that island residents and freight are being frustrated and disadvantaged in their ability to use the ferry services at short notice at the expense of many visitors who are booking vehicle capacity months ahead.
Introducing further overnight freight services on busy routes would be welcomed, but hauliers were clear that this needed to be an all-year-round solution to allow them and their customers to reconfigure extended supply-chains to benefit. Inconsistent and intermittent timetable capacity is not something the industry can properly plan and resource around.
It was further noted that capacity needs to be managed on weight and vehicle deck space as well as length. Several older vessels are limited by their weight carrying capacity. Large motorhomes can weigh 3.5 tonnes, and more if the driver’s license covers the C1 category and allows him or her to drive a leisure vehicle up to 7.5 tonnes. Similarly, larger modern cars are growing in size and weight. Growth in this passenger traffic can limit the ability to carry a freight vehicle before the vehicle deck is full.
It was argued that, when recovering from disruption or delay, there should be a published prioritisation matrix to allow everyone to understand who should be prioritised onto the next available sailing, and why. Hauliers felt that priority should be given to essential supplies, so that these are not left on the quayside in preference for discretionary leisure travellers.

Summary

The haulier depth-interviews identified that freight and haulage companies have been successful at evolving their businesses to adapt to the post RET environment. It has brought opportunity and new challenges, particularly the increased competition from ‘freight’ being conveyed in personal vehicles.

Very little correlation was identified between the introduction of RET and an increase in freight carried by hauliers, although in smaller markets it was evident that there has been some effect; logically, this must also be the case for all islands even if not at a significant or identifiable level.

RET has continued to impact on vehicle-deck capacity, and thus the ability of freight operators to provide high service levels for their customers which, in some cases, is holding back investment opportunities on the islands.

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