Research and Analysis of Options for Ferry Freight Fares

Executive Summary

Transport Scotland's Ferries Plan 2013-2022 recognises the need to develop an overarching policy for freight fares. The aim is to:

  • deliver a new fare structure that is simple, transparent and does not advantage one part of the network over any other part; and
  • balance the wellbeing of communities against the public sector cost.

Building on this, Transport Scotland committed to undertake a comprehensive review of freight fares policy and develop options for future fares strategies.

Research was undertaken to inform the review. The first objective of the research was applied to both Transport Scotland and local authority operated services. This involved undertaking a review of current procedures and charging mechanisms for freight carried by trailers, containers and other means across Scottish Government directly subsidised ferry services and local authority operated services. The second objective of the research applied specifically to Transport Scotland's two tendered ferries networks (the Clyde & Hebridean Ferry Services and the Northern Isles Ferry Services). It should be noted that this review did not consider commercial ferry services. The findings of this research are contained in this report.

It should be noted that the purpose of this research is to propose, analyse and consult on options for revised fares structures. The aim of this exercise is to develop an evidence base which will help to inform Transport Scotland in the review of freight fares policy. The research is not intended to recommend a single option to be taken forward by the Scottish Ministers, rather to develop and consult on a range of options which could form the basis of future freight fares policy. The findings of this research will be used by Transport Scotland to inform the actual review of ferry freight fares.

Current Practice - Commercial Vehicles

In the context of this study, Commercial Vehicles (CVs) are defined as self-propelled vehicles used for the transportation of commercial goods. CVs therefore comprise: vans and rigids (lorries) as well as trailers attached to a cab/tractor unit (e.g. articulated lorries).

The key points with regards to the current charging of CVs are as follows:

  • with the exception of the Corran Ferry, which is charged by weight, CVs on all tendered ferry services in Scotland are charged on the basis of length, with the lane metre being used as the unit of measurement.
  • some operators, such as CalMac, charge on the basis of the incremental half lane metre or lane metre whilst others, such as Shetland Islands Council, charge on the basis of lane metre bandings.
  • CalMac and a number of other operators define a vehicle as a CV when it is longer than a certain length threshold, typically five or six metres. Others, such as Serco NorthLink, charge all commercial traffic as CVs, although judgement is required to determine when a vehicle is on commercial business.
  • fares on the Transport Scotland tendered networks are uplifted annually by CPI inflation. Local authorities tend to increase fares on a similar basis, although any increase is at the discretion of Elected Members.

Current Practice - Non-Commercial Vehicle Freight

In the context of this study, non-CV freight was defined as including unaccompanied traffic (e.g. drop trailers); freight on mafi trailers; agricultural vehicles and equipment (self-powered or towed); specialist industrial plant and equipment (self-powered or towed); loose loaded cargo (e.g. bags and pallets); livestock cassettes; loose livestock; containers (LoLo); abnormal or wide loads; and other goods craned and lifted onto the vessel.

The key points with regards to the current charging of non-CV freight are as follows:

  • the vast majority of non-CV freight carried in Scotland is in fact CV-derived, drop trailers, mafis and wide-loads for example. The basis of the charge is, where practical, generally the lane metre or lane metre equivalent.
  • the market for non-CV freight has been in significant decline in recent years, driven firstly by the growth of the haulage market and latterly by the expansion of the parcel delivery market.
  • on routes not operated by Ro-Ro ferries or where a lane metre based charge is impractical, the basis of the tariff is typically tonnage or defined parcel rates.
  • whilst there is generally a rationale for the charging of non-CV freight, an issue to emerge across all of Scotland's publicly funded ferry networks is the lack of a clear basis for current fare levels. There was very little understanding amongst the majority of operators as to why fares are set at their current rates. In many cases, it appears that the fares charged are based purely on historical precedent and bear little relation to distance or cost of operation. The common practice has been to apply an annual inflationary increase to all fare classes.

International Benchmarking

As part of this research study, a detailed international benchmarking exercise was carried out. The focus was principally on non-CV freight but also covered elements of CV based freight. The key findings of this exercise were:

  • public sector and tendered operators will typically use a single metric as the basis of the fare, whilst larger and more complex commercial operators will use sophisticated matrices combining each of these factors. Whilst height, weight and volume are used as the basis of the fare in a small number of examples, the overall trend is to use the lane metre as the basis of the charge.
  • the fares charged by the majority of ferry operators are for quay-to-quay transport only. This will include the marshalling of the freight onto the ferry, transit and unloading. The majority of operators tend to include berthing and pier dues within the fare. A small number of operators will charge a handling fee for unaccompanied freight (such as drop trailers), whilst some operators will offer optional add-ons such as time charged quayside storage space.
  • the majority of commercial operators will charge a fuel surcharge or bunker adjustment factor to insulate them against future fuel price increase.
  • a number of publicly supported ferry operators in Europe and beyond make use of peak and shoulder-peak pricing to encourage commercial traffic (CV or otherwise) to travel on less busy or dedicated freight services.

Option Development

As well as the need to be consistent with the Ferries Plan and existing policy directives, Transport Scotland set the following criteria for the initial appraisal of fare options:

  • acceptability: Acceptable to the freight industry, island business communities and the wider island community.
  • affordability: Affordable for the Scottish Government, by ensuring any change to the fares structure is sustainable going forward.
  • consistency: Fares are set in a consistent manner, i.e. in a way that involves applying the new fares regime, e.g. distance based or volume based, in a consistent and equal basis across all directly subsidised Scottish ferry routes. Applying the fares regime consistently will remove any perceived anomalies in the setting of freight fares, and will ensure that no part of the network is advantaged relative to another part.
  • sustainability: The level of fares supports the future sustainability of island local economies and communities.
  • transparency and simplicity: Simple for the directly subsidised ferry operators to put in place and operate and transparent so that users can easily understand how fares are set.

The benchmarking research suggested that the basis of the future fare should be the lane metre, or lane metre equivalent. A series of in-principle fares options were developed on this basis. The fares set out for each option were for the average vehicle length on each route and assumed both a position of revenue neutrality and zero demand elasticity. These 7 options are set out in the table below:

Fares Types taken forward for Quantitative Analysis
Distance Based
Route Specific £/Mile 		Distance Based £/Mile Fixed £ ie Flat Fare
(1) Best fit function on current published fares £/mile varies with distance. (4) Constant rate per lane per mile. (6) Flat rate per lane metre.
(2) Fixed charge plus constant rate per lane meter per mile. (5) Constant rate per lane metre per mile within distance band. (7) Flat rate per lane metre within distance band.
(3) Fixed charge plus rate per lane metre per mile based on distance threshold.

Each of the seven options was consulted on with operators, public sector stakeholders and industry bodies. Consultees were given an Options Paper with a series of consultation questions to respond to within an 11 week period. A total of 24 organisations were invited to participate in the consultation of which 15 submitted a formal response. Several key themes emerged during the consultation:

  • there was a majority view that fares should be linked to the distance of the crossing, with the application of one or more distance bandings to ensure that there are no disproportionate fare changes for given route lengths;
  • whilst one or more distance bandings are seen as desirable, consultees stressed the need for a pragmatic and fair approach to allocating routes to each banding, so as to ensure that there are no clear distortions at the margin (although it is acknowledged that this would be a challenging task);
  • there was a broad although not unanimous consensus that there should be a fixed cost element to the fare; and
  • there was a widely held view amongst the majority of stakeholders that at least the Aberdeen - Lerwick route should be contained within its own distance band, given that it is longer by some margin than any other route.

In light of the consultation responses, the following options were rejected from further consideration, principally as a result of their large negative impact on one or more routes (caused by the absence of distance banding).

  • option 2: Fixed Charge plus constant rate per lane metre per mile;
  • option 4: Constant rate per lane metre per mile; and
  • option 6 : Flat Fare per lane metre.

The following options were deemed as worthy of further consideration by consultees (although note that there was not consensus on this):

  • option 1: Best-Fit Function - Variable rate per lane metre per mile; At the 4th Working Group Meeting on 26th February 2015 it was agreed that Option 1 (Best Fit) could be dropped, as it does not resolve existing inconsistencies and lack of rationale, it merely removes the extremes.[1]

The following three options are to be taken forward for further consideration:

  • option 3: Fixed Charge plus rate per lane metre per mile based on distance threshold;
  • option 5: Constant rate per lane metre per mile within distance band; and
  • option 7: Flat Fare per lane metre within distance band.

Each of the above options was seen by stakeholders to be broadly acceptable for further consideration because they retain a clear link to the distance of the crossing, are consistent, transparent and inherently fair.

The following table summarises the key issues for each of the three options based on the quantification analysis exercise and shows the routes that would be more adversely affected by each of these options.

Summary of Fare Options to be Taken Forward for Further Consideration
Option Pros Cons Routes with Most Adverse Impact
Option 3: fixed charge (assumed at £50) plus rate per lane metre per mile based on distance threshold 1) Limits the impact of fares changes on long routes.

2) Includes a fixed cost element aimed at cost recovery.

3) Maintains link between cost and distance 		1) Long routes suffer disproportionately large increases under the example formula.

2) Particularly large increases for the Northern Isles 		1) Lerwick - Aberdeen

2) Kirkwall - Aberdeen
Option 5: constant rate per lane metre per mile within distance band 1) Relatively small fare changes vis a vis the current situation.

2) Maintains a link between cost and distance and minimises the overall change in fares. 		1) Defining distance bands would be challenging and could disadvantage one community over another

2) Lacks a fixed cost element aimed at cost recovery. 		1) Oban - Castlebay / Lochboisdale

2) Uig - Tarbert / Lochmaddy
Option 7: Flat Fare per lane metre within distance band 1) Relatively small fare changes vis a vis the current situation.

2) Maintains a link between cost and distance and minimises the overall change in fares. 		1) Defining distance bands would be challenging and could disadvantage one community over another

2) Lacks a fixed cost element aimed at cost recovery. 		1) Lerwick - Kirkwall

2) Kirkwall - Aberdeen

Discounts, Surcharges and Policy Questions

The research also considered and consulted on issues related to existing discounts, surcharging and wider policy questions. The following key points emerged:

  • there was a majority consensus amongst all stakeholders that the current vehicle surcharging regime is entirely appropriate, in that a surcharge is levied for wide loads only;
  • there was relatively widespread support amongst consultees for the retention of existing drop trailer services and the extension of such operations where there is a demand and it is operationally practical to do so;
  • there were mixed views on whether it is appropriate or otherwise for the operator to include a transparent handling charge for drop trailer units. The issue of applying a handling charge for drop trailers is one which will require further detailed consideration;
  • there was majority support amongst consultees for the implementation of demand management measures, with the key caveat that very few stakeholders support the concept of peak pricing. The consultation suggested that the majority of stakeholders are willing to consider a range of other demand management measures including trough pricing by time of day or day of the week; drop trailers; restriction of high sided vehicles on peak sailings; and improved management of block bookings;
  • it was consistently explained by stakeholders that demand management measures are less appropriate on routes where there were less than three ferry crossings per day;
  • there was not an appetite for a Bunker Adjustment Factor (ie a fuel surcharge) amongst operators, trade bodies and the majority of local authorities. However, a number of stakeholders, including the Northern Isles local authorities, expressed a willingness to explore options related to an enhanced inflation based adjustment to the fuel element of the fare;
  • there was a broad spectrum of opinion and little consensus amongst stakeholders with regards to the appropriateness of different types of discounts. However, what was abundantly clear from the consultation feedback (and a point referenced by a number of stakeholders) was that there lacks a clear body of evidence on how each discount influences patterns of economic activity in the islands and the outcomes at the business, sectoral and island levels;
  • consultees across the board acknowledged that developing an effective definition of a CV is and always will be challenging. Overall, there was broad support for Serco NorthLink's approach of defining any vehicle engaged in a commercial activity as a CV and charging them accordingly. It was acknowledged that this introduces a degree of subjectivity in that ticket staff need to make a professional judgement on whether a van, for example, is being used for commercial purposes;
  • there was a majority consensus amongst all stakeholders that increasing fares to reflect network improvements is an unacceptable option and should not be considered further; and
  • there was a majority consensus amongst stakeholders that where a loose freight operation meets a need that cannot be economically satisfied in any other way, it should be retained. Stakeholders explained that, on islands where a loose freight service runs alongside commercial parcel operations, further research is required to identify the need for such a service and the benefits it brings to the island in question.

Conclusions

There was a majority consensus amongst stakeholders that:

  • the lane metre or lane metre equivalent should be used as the basis of the charge for all freight carried; and
  • fares should bear at least some relationship to distance, with a view that the £/mile fare should decline with distance travelled.

The options that are taken forward for further consideration are the following[2]:

  • option 3: Fixed Charge plus rate per lane metre per mile based on distance threshold;
  • option 5: Constant rate per lane metre per mile within distance band; and
  • option 7: Flat Fare per lane metre within distance band.

The research also considered the full range of issues pertaining to surcharges, discounts and wider policy questions. It found that there was no appetite amongst stakeholders for any major changes to the current surcharging regimes; commercial fuel surcharges; or increased fares to reflect network improvements.

The debate around issues such as drop trailer handling charges, fuel related surcharges and discounts was more nuanced and there was an acknowledgement amongst stakeholders that further research is required on how each of these areas links impacts on individual islands, economic sectors and businesses.