8 Sensitivity Tests
8 Sensitivity Tests
8.1.1 Chapter 7 laid out the incremental costs and revenues associated with moving from a foot-passenger ferry service to a passenger and vehicle service operating the same timetable, based on the 'core' set of assumptions detailed in that Chapter - referred to hereafter as the 'Core Findings'. It concluded that a passenger and vehicle service is feasible (ie the incremental revenue was greater that the incremental costs) for a two vessel scenario under route growth scenarios 1, 2 and 3. Only under a declining scenario would the service not be feasible.
8.1.2 It is clear from the analysis that there are some uncertainties with regard to the precise specification of a vessel which any future operator would introduce to operate a service between the two town centres. Changing the assumptions around these uncertainties could have a significant impact on the core findings. Given that the precise specification of the vessel will not be known until the tendering exercise, sensitivity tests have been carried out on a number of the key assumptions and other important drivers of the core net revenue figures to understand how these would impact on the results. These tests are set out in the remainder of this chapter.
8.1.3 The sensitivity tests are carried out separately for each change ie they are not cumulative, and are focussed on four key issues:
- crewing levels;
- gross tonnage (GT) of the passenger and vehicle ferry, and more specifically the differential between the foot-passenger vessel and the passenger and vehicles ferry;
- harbour dues pier / berthing dues payable at Gourock and Dunoon; and
- competitor response - what would Western Ferries do?
8.1.4 Figures are provided for a two-vessel scenario only as we believe this is the most likely vessel scenario under consideration, and this also restricts the number of tables to present for brevity.
8.2.1 It was noted in Section 4.7 that the requirement for an additional crew member to man the passenger and vehicle service (compared to the foot-passenger service) is borderline. This sensitivity test details the impact of an additional crew member on the feasibility of the service.
8.2.2 A crew of four was estimated to cost £400k per annum for each passenger and vehicle vessel, with the figure for a crew of five being £500k per annum. For a two vessel scenario, this implies a 15-year incremental cost increase over the £390k passenger service of £3,300k if an additional crew member is required. Table 8.1 below shows the results of this sensitivity test. The revised costs and revenues are shown together with the headline results (ie the net revenue) from the Core Findings detailed in Chapter 7 - the key change is highlighted in orange.
8.2.3 The additional crew cost does therefore have an impact on the net revenue - reducing it by £3m in each case relative to the Core Findings. Whilst net revenue continues to outweigh net costs for all scenarios, the net revenue figure declines for example from £9.0m to £6.0m over the 15-year period in Scenario 2. . It can also be seen that the 'safety margin' between the forecast market share and the 'tipping point' narrows. For example in Scenario 3 - Growth Trend, the service ceases to be feasible at 40% market share, whereas the Core Findings has an equivalent figure of 35%.
8.3.1 Table 4.1 outlined the range of gross tonnages into which any new vessels would be most likely to fall. The median of these ranges was used in the calculation of berthing dues for the Core Findings. To recap, these gross tonnage ranges are:
- foot-passenger vessel: 190-520GT (median of 355GT); and
- passenger and vehicle vessel: 500-1,100GT (median of 800GT).
8.3.2 Sensitivity tests have been undertaken using the low and high ends of the passenger and vehicle service against the median passenger vessel as follows:
- Test 2a: Foot-passenger GT = 355GT, Passenger and Vehicle GT = 500GT; and
- Test 2b: Foot-passenger GT = 355GT, Passenger and Vehicle GT = 1,100GT; and
Sensitivity Test 2a
8.3.3 The effect of using a GT figure of 500 is to reduce incremental berthing dues over the 15-year period from £9.6m to £3.1m. The results are shown in Table 8.2 below.
8.3.4 This test therefore increases the net revenue from £9.0m to £15.5m over the 15-year period in Scenario 2. It can also be seen that the tipping point percentages reduce, and a two-vessel service would be feasible with 27%-37% of the market depending on the whole route volume scenario.
Sensitivity Test 2b
8.3.5 The effect of using a GT figure of 1,100 is to increase incremental berthing dues over the 15-year period from £9.6m to £16.1m. The results are shown in Table 8.3 below.
8.3.6 This test therefore results in reduced net revenues in the first three scenarios and a negative net revenue in Scenario 4. Under this higher GT assumption, higher market shares (46%-64%) are required to generate the revenue to cover the incremental costs compared to the Core Findings (36% to 48%).
8.3.7 Note that the berthing dues associated with any incremental GT can be calculated on a pro-rata basis using the above figures. Figure 8.1 below shows the relationship implied by the above analysis.
8.4.1 The results in the Core Findings demonstrate that the level of Harbour Dues (Berthing and Pier Dues) set at Gourock and Dunoon harbours is a key issue in determining the financial viability of the passenger and vehicle service.
8.4.2 The dues calculated in the Core Findings are based on the current published tariffs at both harbours. However it is recognised that in principle tariffs could be subject to a commercial negotiation at Dunoon given the high volume of calls implied by any new service. It has also been noted that a discount scheme was in operation at Gourock prior to 01/04/2013, although harbour dues at Gourock are not currently subject to negotiation.
8.4.3 To provide an illustration of the impact of reduced Pier / Traffic Dues on the financial feasibility of the service, a sensitivity test has been run where the previous framework of charging at Gourock was still in place. This means that the discount on berthing dues for the number of vessel calls between 101 and 2,100 calls per annum would remain at 80%, rather than progressively reducing each year by 10% down to 40% under the current framework, and the discount on Pier Dues would be the highest applicable discount on berthing dues (being 95% in this case, given that there would be more than 5,100 vessel calls per annum Gourock), rather than no discount applying to Pier Dues under the current framework.
8.4.4 Transport Scotland provided the following revised figures for Gourock (with the current figures shown in brackets for comparison) (in 1 April 2013 prices). These revised figures have been derived by assuming they would generate broadly the same level of Harbour Dues revenue:
- Berthing Dues (per vessel visit per Gross Tonnage): £1.31 (£0.34);
- Drivers / Passengers: £1.58 (£0.41);
- Cars: £6.97 (£1.81); and
- CVs / Coaches (per metre): £4.12 (£1.07).
8.4.5 No discounts have been included in the sensitivity tests for Dunoon at this time. Argyll and Bute Council has noted that harbour dues are a significant part of the cost of the vehicle ferry service and consequently they would seek to minimise such charges and would be willing to review the basis upon which harbour dues at Dunoon are set in the context of the introduction of any new service. Such a review would be informed by: the facility's operating and staff costs; inspection, maintenance and whole life asset management costs; and any prudential borrowing costs required to fund future shoreside infrastructure associated with the new ferry service.
8.4.6 The results of the Sensitivity Test are shown in Table 8.4 below.
8.4.7 The discounted dues in this test reduces the incremental cost of moving from a foot-passenger to a passenger and vehicle ferry service thus, for example, increasing Net Revenue from £9.0m to £18.8m under Scenario 2. Total dues are reduced from around £39.6m to £29.9m in Scenario 2. Reverting to the previous framework for Harbour Dues also means that there is a shift in the balance between Berthing Dues and Pier Dues, reflecting the fact that the proposed passenger and vehicle service would be entitled to a 95% discount on pier dues.
8.4.8 The market share required to cover the incremental costs reduces to 31-42% depending on the scenario.
8.4.9 In summary, taking Scenario 2 (Gradual Recovery) as an example, the impact of the Sensitivity Tests on Net Revenue is (15-year totals):
- T1 Additional Crew: -£3.0m;
- T2a Low GT: +£6.5m;
- T2b High GT: -£6.5m; and
- T3 Pier / Traffic Dues: +£9.7m.
8.5.1 The core findings and sensitivity tests described above assume that if a new service is introduced on the town centre to town centre crossing there would be no change in the service currently provided by Western Ferries, ie no response from them to new competition.
8.5.2 Clearly, any competitive response to a new town centre ferry service is solely a commercial matter for Western Ferries, but this would be a key risk which any potential operator would have to assess when considering bidding to operate a new town centre service. It is beyond the scope of this study to undertake a detailed commercial analysis of Western Ferries' operations, and as such it is not possible to quantify the capability or likelihood of a competitive response, other than to say that in discussions with representatives of Western Ferries it was made clear that the company would react to the new competition in a way which seeks to protect their market share and commercial operation.
8.5.3 At the request of the Scottish Government and to help understand how a competitive response could impact on the various scenarios, this section therefore considers the sensitivity of the projected Core Findings market share (and hence net revenues) to an illustrative competitive response from Western Ferries. This is based on (i) fares, and (ii) frequency.
What If Test 1 - Fares Reductions
8.5.4 This test considers the potential impact of an illustrative 10% reduction in fares charged by Western Ferries. The modelled impact of this fares change is to reduce the projected market share on the new town centre route from 56% in the Core Findings to 45%.
8.5.5 Table 8.5 below shows the impact of this reduction in market share.
8.5.6 Incremental revenues are therefore reduced in this scenario as are pier dues costs (due to lower volumes), and it can be seen that the service generates reduced but positive net revenues in Scenarios 1 (Static), 2 (Gradual Recovery) and Scenario 3 (Trend Growth). Net revenue is lower than net costs under Scenario 4 (Decline). Net revenues drop by around £5.6m to £7.6m compared to the Core Findings depending on the scenario.
8.5.7 The new operator could of course reduce vehicle-based fares to maintain parity with Western Ferries. In this case, less revenue per passenger / car / CV would be generated - it has been assumed that lower fares across the two services does not lead to a marked increase in total demand, although there may be a small increase in practice. A 56% market share is therefore retained in this case.
8.5.8 The results of this scenario are shown in Table 8.6 below.
8.5.9 In this case revenues are reduced in line with the lower fares but pier dues remain the same as volumes remain unchanged. The overall impact of an operator reducing fares in response to the fare decrease introduced by Western Ferries is therefore to reduce revenues for the same volume of vehicles and passengers carried. This again means that the service generates lower, but positive net revenues under Scenarios 1 (Static), 2 (Gradual Recovery) and Scenario 3 (Trend Growth) and net costs would exceed net revenue in Scenario 4 (Decline). Net revenues are reduced by between £5.4m and £7.2m depending on the scenario compared to the core findings.
What If Test 2 - Western Ferries Vessel Frequency
8.5.10 This test considers the impact of Western Ferries increasing sailing frequency to four sailings per hour in each direction across the day. The modelling suggests that this measure would reduce the projected market share for the town centre service to 48% from the core findings figure of 56%. The results of this test are shown in Table 8.7 below.
8.5.11 This test has the impact of reducing revenue and pier dues payable on the town centre service. The service would however still generate revenue in excess of costs under Scenarios 1, 2 and 3 with negative revenues under Scenario 4 (Decline). Net revenues are reduced relative to the Core Findings by between £4.1m and £5.5m depending on the scenario.
8.5.12 If operating a two vessel service, there would be no potential for an operator to match this level of service frequency on the town centre service - a two vessel scenario is assumed here because under the Core scenario the incremental revenue generated by moving from a two-vessel to three-vessel service is significantly reduced.
8.5.13 A further potential response is that Western Ferries could reduce fares and increase frequency. The impact of this would be to essentially compound the impacts of the 'What If?' tests described above and lead to negative net revenues.
8.5.14 Note that no tests have been included here to quantify the impact of a potential Western Ferries retrenchment. This is because this would not change the fundamental conclusion of feasibility shown in the two-vessel Core Findings. It is self-evident that any diminution of Western Ferries service offering would increase the net revenue associated with the new town centre service. It would of course be for any potential operator to examine the available data sources to determine the likely response of Western Ferries to any new operator on the route.
8.6.1 This chapter has considered a range of sensitivities around the Core Findings assumptions documented in Chapter 7. The key results are summarised in Figure 8.2 below, where the 15-year net revenue figures are shown for the Core Findings and each sensitivity and what if test under Scenarios 2 (Gradual Recovery) and 3 (Trend Growth), both of these trends assuming a varying degree of economic recovery by 2015.
8.6.2 The impact of these changes can be viewed in isolation or cumulatively and there are a wide range of potential permutations in terms of combined sensitivity tests. The two illustrative competitive responses from Western Ferries which have been assessed do show that the choice between the two ferry operators would be finely balanced for many ferry users if the nature of the two services were to converge.
8.6.3 Note that these tests assume that Western Ferries could mount a competitive response. It is also possible that Western Ferries may retrench their operation in the face of a new town centre competitor, leading to a larger market share for the new operator and hence higher net revenues. This study cannot comment on the likelihood of either of these outcomes, other than it was made clear in discussions that Western Ferries would react to the introduction of competition to protect their commercial interests. Any prospective town centre service operator would have to come to their own judgement as to the capability and likelihood of Western Ferries to mount such a competitive response.