By R. Bruce Striegler

A new CEO takes on the challenges

A year ago, Canadian Sailings published an in-depth profile of BC Ferries, the financially-troubled Crown Corporation whose fleet of 35 vessels connects British Columbia’s coastal communities on 25 routes, carrying 20.2 million passengers and 7.8 million vehicles in 2012.

Appointed to replace an early-retiring CEO, Mike Corrigan took over January 1st, 2012. During a recent interview we asked how his first year as the newly-appointed CEO had been.

Acknowledging the service’s various difficulties he said, “We knew what the challenges were when I accepted the position and I looked forward to it. From my standpoint, operationally we continue to run a very safe and efficient business. Our customer satisfaction numbers continue to trend well, as do on-time performance and operational efficiencies. Most importantly, from a safety standpoint we’ve had an absolutely fantastic year. Those are the things I can focus on and that I ask my team to focus on each and every day.”

At the time of last year’s article, the ferry corporation was experiencing dramatically falling passenger and vehicle counts and a loss projected at $20 million. (In its year-end statement issued in June 2012, the actual loss came in at $16.5 million.) Eight years of progressively escalating fares and fuel surcharges, an increasingly angry public and a steady stream of news reports of high executive compensation forced the B.C. Government to call for an immediate review of operations and, as 2011 ended, the ferry corporation saw the early retirement of its CEO, abrupt implementation of significant cost-cutting including reduction of executive compensation, hiring and wage freezes, and the ferry company floated a trial balloon regarding likely service cuts.

“Capacity utilization and number of sailings is always going to be set by government.” Corrigan explains that there are three parties making up BC Ferries: the ferry company, the government and the Ferry Commissioner. “Our job at BC Ferries is to run the business as safely and efficiently as we can. The government determines policies around ferries on matters such as the level of service that they would like us to provide and what they’re willing to pay for that service, which is actually a contract with the company.” He says that based on the government’s commitment for service and service level funding, the Commissioner sets the fares for the next term.

Dealing with financial reality and service cuts

Many of BC Ferries’ financial problems are historical. Formed as a highly subsidized Crown Corporation in the 1960’s, the service has gone through numerous reorganizations under successive governments, all trying to find different ways to off-set or off-load the cost of the system. The most recent reshuffle in 2003 was perhaps the first to emphasize market-based user-pay fees, reflecting a free market business ethic rather than total government subsidization. The approach has been controversial from the start, running counter to the widely-held belief that the ferry operation is merely an extension of the Province’s highway system and as such, exorbitant ferry fees were outrageous and unwarranted.

Corrigan says, “I’m happy with our efforts to date, there’s always more that we have to do in terms of cost-cutting, but there is a delicate line you can’t cross from a safety standpoint, and we’re quickly approaching that at BC Ferries in terms of finding more efficiencies.”

He noted that following the B.C. Ferry Commissioner’s review, the government initiated a public consultation to get people’s ideas on a long term vision for BC Ferries as well as thoughts on potential service level cuts. “As you can imagine that is not being received all that well. People like the idea in principle of a more efficient ferry system and taking out capacity where it makes sense, but once you start talking about specific routes, it becomes more difficult.”

Mr. Corrigan says that when the B.C. Ferry Commissioner-set fare structure was decided during the latest review process, the government committed to $30 million worth of service reductions over four years, which it said it would find in consultation with communities. He noted that on the front-end there was already a commitment of four million dollars’ worth of reductions from Duke Point and some of the other major routes where capacity could be removed, and those service adjustments have been made.

While not as stark a problem as the reduced traffic, BC Ferries has been embroiled in legal action over the issue of drop trailers. Some private barge operators complained to the B.C. Ferry Commissioner over what they suspected were government subsidies. The drop trailer service allows freight companies to ship trailers only by dropping them off at one terminal and picking them up at the destination terminal, thus not having to pay for tractors and drivers travelling aboard a vessel.

In April 2011, the B.C. Ferry Commissioner concluded that BC Ferries was charging its drop trailer customers less than the appropriate level and had an unfair competitive advantage due to the price cap regulatory framework under which it operates and also because of its exemption from corporate income tax. The Commissioner then fixed a minimum average tariff that BC Ferries must charge for drop trailers on its major routes. Documents released as part of a consultation process on cutting service levels indicated that on the Duke Point to Tsawassen route, which carries 42 percent of commercial traffic, BC Ferries required a $29.86 million annual subsidy to break even.

Corrigan says, “We continue to grow the business and compete very aggressively with SeaSpan. As I understand it, there is a legal challenge as to whether or not we should be in the drop trailer business, but it has not been ruled upon. We are very confident that we should be there. In fact, we’re doing a service to the entire economy by providing competition, otherwise the only player would be SeaSpan.”

The B.C. Ferry Commissioner’s Review of the Coastal Ferry Act

Released in January 2012, the B.C. Ferry Commissioner’s 90-page review of the Coastal Ferry Act contained 24 recommendations. The review concluded that in spite of the problems it faces, overall BC Ferries was well run and relatively efficient, but that the challenges which the ferry service is facing will only get larger. The Commissioner pointed out that ferry users find further fare increases unaffordable, that BC Ferries is perceived to be unaccountable to users and in fact, the B.C. Ferry Act does not give consideration to ferry users.

Referencing fares, his review noted that future price cap increases should be held to the rate of inflation. It also called for better capacity utilization of the fleet, that the provincial government should increase financial support for the system and cushion at least a portion of the fuel price volatility as it does on the Northern routes. It further stated that municipal and regional governments ought to have a role in keeping fares affordable and increasing ridership. The recommendations included a call for increased accountability on BC Ferries’ capital plans and acquisitions, and that the Commissioner himself required improved tools for setting price caps to better consider ferry users.

In his assessment, the Ferry Commissioner found that BC Ferries must focus more on cost control and new sources of revenue, adding that ferry users too must be receptive to changes in how service and service levels are delivered. He was unequivocal about the need for the Province to define a vision for the future of ferry services and provide additional financial support to ensure the system’s sustainability.

The government response: more money and a public consultation

In May 2012, the government responded, introducing amendments the Coastal Ferry Act and announced it was providing BC Ferries an extra $79.5 million over four years. The amendments also gave the Ferry Commissioner more flexibility to determine the amount of revenue required to sustain operations and support ongoing investment. The Commissioner was also granted additional responsibility to oversee the costs of providing ferry service.

The Government ordered the ferry service to continue seeking efficiencies to reduce operating costs and advised the public to expect significant adjustments to service levels. The Ministry of Transportation and Infrastructure said it would seek discussions with communities about trade-offs among service adjustments, fare increases and potential community contributions. And they announced they would seek a broad-based public consultation around these issues.

The eight-week consultation began in early November 2012 with 40 public events in 30 coastal communities reporting high levels of public participation. The consultation summary report will be completed in February this year, made available to the public and according to the Ministry of Transportation and Infrastructure will play an important role in deliberations on how best to address the problems of the coastal ferry system.

Corrigan says that BC Ferries has committed to find approximately $55 million of savings over the next four years of the current service contract. “We’re looking at everything we can. Short term and longer term we’re looking at things like potentially switching vessels to natural gas and building new ships operating on natural gas. We’ve announced a cable ferry from Buckley Bay to Denman Island which we think is an innovative way to save about $80 million in costs over the 40-year life of the assets.”

New technology can help the bottom line

In spite of the financial challenges, upgrading and maintaining the system can’t be ignored. Corrigan says there will be a lot of work in 2013 around smaller capital projects as the company continues plans to upgrade its fleet and terminals. He says that having completed upgrades at the major terminals last year, improvements at some of the smaller facilities will proceed in 2013. “We’re starting to do some significant terminal work and we’ve started that on our triangle route, Alert Bay, Sointula and Port McNeil between the North Coast and the Northern end of Vancouver Island.”

BC Ferries has an $87 million vessel and terminal capital expenditure program for 2013 and a further $27 million budgeted to support business requirements and improve infrastructure reliability and service delivery by updating reservations, point of sale, payment and card services, as well as improving website and automating terminal operations.

Fleet improvements are also part of the plan, and Mike Corrigan says, “We’re laying the foundation of our next phase of the newbuild program which actually began with the announcement of the cable ferry. We are hard into pre-design work to be ready for tendering of some major vessels as we move forward.”

The new cable ferry will run on the approximately 2 kilometre route between Denman Island in the Strait of Georgia and Buckley Bay on Vancouver Island, currently serviced by a small conventional screw propelled vessel. At 1900 metres, it would be one of the world’s longest cable ferries with a 50-car and 150 passenger capacity operated by a crew of three. Much cheaper to operate, it’s expected into service by the fall of 2014.

Corrigan talked about BC Ferries and the potentials of liquefied natural gas (LNG), saying that he sees it in two components. “On the new construction side we are aggressively looking at LNG technology for all our new vessels. We’re pretty bullish on it and we think we can make it work on any new vessel we put into the system.”

He explains that the use of LNG requires a higher standard of safety over conventional diesel-powered vessels because of the nature of the fuel, and vessels would obviously need different engines. “But the cost savings are significant and we see potential savings of about 60 percent over diesel. The challenge is the capital cost upfront. It’s not that big of a premium when you put LNG in a newbuild, and the paybacks are pretty quick, perhaps less than two years, with natural gas.”

With engine conversions, however, Corrigan says it’s a bit more complicated. “We haven’t yet been able to get the payback we need to make it succeed. We’re working with engine manufacturers and others trying to bring down the cost of conversions so that we could actually start to implement them on existing vessels.”

As the public awaits the B.C. Government’s release of the consultation’s results and outlines its vision for the future, the actual implementation of any new plan may be complicated by politics. At the end of December, B.C.’s Premier Christie Clark told a reporter from Victoria’s Times Colonist newspaper she was uncertain whether her government would have enough time to propose solutions to the ferries problems in the party’s re-election platform this spring. If polls over the past year are any indication, it may be a new government’s vision that influences the issue of ferries and funding.