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Study for BC Ferries Urged Steep Fare Hikes at Busy Times

Report advised way to make more money yet carry fewer, FOI reveals.

By Andrew MacLeod 5 Jan 2012 | TheTyee.ca

Andrew MacLeod is The Tyee's legislative bureau chief in Victoria. Reach him here.

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A BC ferry nears Bowen Island. Photo by ericflexyourhead from Your BC: The Tyee Photo Pool.

A 2007 study produced for British Columbia Ferry Services Inc. found the publicly owned company could maximize its revenues by raising regular fares by 75 per cent, if the province's ferry commissioner would allow such a large hike.

The proposal included charging more at the times when people were most likely to want to travel, and dropping fares at other times. A more recent report suggests that hike could be made without seriously decreasing traffic levels, a finding disputed by critics who say ferry fares are already too high.

The Hamilton, Ontario, company Transportation Economics & Management Systems, Inc. wrote the June 15, 2007 technical report "Revenue Yield for Selected Routes" for BC Ferries (available on sidebar).

The report was released to The Tyee this week without a fee, following the involvement of the BC Information and Privacy Commissioner's office. The Tyee filed the original request, for all reports on ferry fares and price elasticity, in Oct. 2010.

Elasticity is a concept economists use to measure the relationship between demand and price. As the price of a good or service goes up, demand will generally decrease. But, as the report suggests may be the case with BC Ferries, the decrease in demand may not be as dramatic as the jump in price, allowing the company to make more money despite carrying fewer passengers.

Flexible pricing

"The elasticities derived in this study show that there is significant pricing flexibility and that by using time of day, route, trip purpose pricing the overall revenues of BC Ferries can be increased under the caps set by the regulator," the TEMS report said.

"BC Ferries is clearly in a position to begin to increase revenues by using a flexible pricing policy," it said. "The overall potential revenue gain for the seven routes studied from using a flexible pricing system is $21.8 million or an increase of 10.8 per cent over the existing fare structure in 2010."

While BC Ferries provides discount fares on some sailings through its Coast Saver promotions, it is yet to implement the kind of wide scale flexible prices described in the report.

The report was to look at how demand differs during different seasons, by trip type (business, commuter, social, tourist and commercial) and at various times of day. "Results indicate positive opportunity to introduce a flexible pricing system that offers higher fares in congested periods and lower fares for uncongested periods. In addition, the system will offer significant discounts for regular users, and more market based fares for tourists and business travelers."

If not for the commissioner's caps, which keep BC Ferries' increases to set amounts, the company could produce much more revenue, the report said. Referring to a chart included in the report, it said, "It can be easily seen that the unconstrained maximum of the revenue lies approximately at a 75 per cent increase in the premium fare combined to a 25 per cent increase in the discounted fare."

Since 2003, when the Crown corporation was quasi privatized, BC Ferries' fares have gone up by about 70 per cent on the major routes between Vancouver Island and the Lower Mainland and by 80 per cent on the minor routes, according to a chart on the ferry commissioner's website.

By 2007, when the TEMS report was written, fares had already risen significantly.

Fares already high

People who live in ferry dependent communities are already saying the fares are too high and that it is decreasing ridership, said NDP ferry critic Gary Coons.

"It's huge," he said. As fares go up, seniors can't visit their families and people reduce the number of trips they make. Discretionary ferry travel gets cut from people's plans, he said. "The impact is on tourism and business."

The Ferry Advisory Committee Chairs have been arguing for years that rising fares are pushing down traffic levels, he said.

In 2009 the FACC published a six-page report called, "What do you get for $20 million?" It looked at the months starting in 2008 when the provincial government put in enough money to reduce rates by 33 per cent in an attempt to stimulate traffic. The funding was part of then premier Gordon Campbell's response to the growing financial recession.

"In the view of the FACC, it is the inescapable conclusion that the 33 per cent discount substantially stimulated traffic," the group found. "This establishes beyond any doubt that traffic is clearly sensitive to fare discounts and to fare increases."

While many factors affect ridership, the report allowed, it stressed that the dominant one causing the declines "has been and remains the rapid and substantial increase in fares combined with imposing fuel surcharges."

Major transition

In the past, said Coons, BC Ferries' own records have estimated that for every 10 per cent hike in fares, a ridership decline of seven per cent should be expected.

The ferry company's more recent reports suggest the relationship between fares and ridership is not so dramatic.

The report "Performance Term 3 Forecast and Measurement of Demand Elasticity for British Columbia Ferry Services Inc." prepared by InterVISTAS Consulting Inc. and dated May 31, 2011 was released to The Tyee as part of the response to the FOI request this week, though it has been available on the ferry commissioner's website since July, 2011. (It is available on the sidebar.)

The report says the Northern routes are the most price-sensitive and the minor routes the least. A 10 per cent fare hike would cause a 5.6 per cent drop on the Northern routes and a 1.2 per cent drop on the minors.

The major routes and the route between Horseshoe Bay and Langdale are in the middle, where a 10 per cent hike would cause a 2.8 per cent drop in traffic.

InterVISTAS cautioned, however, that BC Ferries traffic appears to be "in the middle of a major transition." Despite high fuel prices and a global recession, BC Ferries traffic was "largely flat" with only a small net decline between 2003 and 2011, it said.

"In the 1990s there appeared to be stable relationships with key drivers such as population and gasoline prices," it said. "Today, however there are major changes underway... What our investigation has found is more ambiguous relationships between traditional traffic drivers and actual BCFS traffic, than were found in the past."

There are, in other words, many unknowns when it comes to predicting ferry traffic and the effect of raising rates.

But the reports on fare pricing highlight a tension between running BC Ferries as a business and as a public service. Raising the rates and flexible pricing are consistent with the course the Liberals put the company on in 2003. But Gerry Coons and other critics of that course argue this may not be the system the public wants or needs.

Ferry commissioner Gord Macatee is reviewing the Coastal Ferry Act and is expected to report his findings at the end of January. He launched the review last May, two weeks after becoming commissioner, in response to public concern over large proposed fare increases and the affect they would have on ferry-dependent communities.  [Tyee]

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