International Journal of Maritime, Trade & Economic Issues pp. 3-49 Volume I, Issue (2), 2013 Cost Assessment of Sea and Air Transport PSO Services: Jason Angelopoulos 1, Constantinos Chlomoudis 2, Panagiotis Christofas 3, Stratos Papadimitriou 4 Abstract: The national Public Service Obligation (PSO) sea and air passenger services of Greece are assessed in a E.U. context, utilizing a coherent approach: This analysis is the first in which both sea and air services are approached at the same time, outside the scope of modal choice. PSO services and routes are described and characterized using essential demand or supply related metrics and key performance indicators, assessing subsidy cost, relative effectiveness and synergy among them. Ferry PSO subsidy costs have risen significantly from 1990 and started declining after 2010, consistently with Greek GDP; however the amount or state resources spent for offering PSO services over so many islands, results to a relatively low level of service. A simple profitability model was developed for ferry PSO services, providing a constrained framework for policy assessment and decision support tool. Individual routes, the entire sea and air PSO networks, and the synergy among them display several inconsistencies, due to a large number of factors. These include high operational complexity, geography induced diversified requirements, effectiveness of lobby groups, demand uncertainty, seasonality and suboptimal network design. Additional research and data are warranted, for a new approach on PSO air routes profitability, as well as overall network design and synergy between sea and air PSO routes. Key Words: Waterborne Passenger Transport, Air Passenger Transport, Ferry, Public Service Obligation (PSO), Key Performance Indicators (KPIs) JEL: 1 Corresponding Author: PhD Researcher, Department of Maritime Studies, University of Piraeus,Greece, Gr. Labraki 21 & Distomou Str, 18533, Email: jang@unipi.gr, jang@hol.gr 2 Professor. Department of Maritime Studies, University of Piraeus,Greece, Gr. Labraki 21 & Distomou Str, 18533. 3 PhD Researcher, Department of Maritime Studies, University of Piraeus,Greece, Gr. Labraki 21 & Distomou Str, 18533. 4 Professor. Department of Maritime Studies, University of Piraeus,Greece, Gr. Labraki 21 & Distomou Str, 18533.
4 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou 1. Introduction Objective of this paper is to provide a coherent assessment of waterborne and air passenger transport services cost in Greece, offered under a Public Service Obligation (PSO) scheme. More specifically, the study attempts to cover the following topics: Assessment of state subsidy cost per PSO route utilizing a set of key performance indicators (KPIs) and profitability analysis criteria. Evaluation of transport PSO relative effectiveness Cost comparison and synergy assessment between waterborne and air PSO services Qualitative assessment of PSO policies and network scheme The study is structured as follows: Chapter 1 includes the study scope and objective and describes the case for PSOs in Greek and E.U insular context, Chapter 2 summarizes a review on the ferry and air transport PSO literature, in Chapter 3 the methodology of the study is developed, in Chapter 4 a cost assessment of Greek ferry and air transport PSO services is presented and in Chapter 5 the study team discusses the main results, findings and proposes for further research on the subject of ferry and air passenger transport PSOs. So far, only a limited number of studies tackled the issue of transport PSOs in Greece. Although PSO in transport has been researched extensively (see chapter 2), only a few studies have focused on waterborne means of passenger transportation and none in both waterborne and air services at the same time, outside the scope of modal choice. 1.1 EU Framework The spatial dimension of social and economic cohesion is one parameter of special importance for development in the European Union. In a consultation paper accompanying the Green paper on territorial cohesion of the European Commission (52008SC2550), the European Parliament, the Committee of the Regions and the European Economic and Social Committee put forth the need for convergence towards a common reference between stakeholders of transportation, i.e public organizations, public services, local authorities and the private sector. The consultation was categorized between three general area types: Remote regions both inside and outside the E.U Island areas 18 special regions with very low population density The development of a common and integrated approach for transportation in island regions is explicitly linked with the spatial dimension of economic and social cohesion. Transport policy is an issue of paramount importance, and is linked with
Cost Assessment of Sea and Air Transport PSO Passenger Services: 5 the need for defining of an acceptable (in volume, quality and cost) amount of required transport services per island and route, according to capabilities for development, requirements for freight and passenger transportation and the preferences of users, taking at the same time into account terms and conditions for market operation and more specifically of the transportation system (efficiency, effectiveness and productivity), Chlomoudis et al, (2007B). Regarding PSOs, Article 4, par.1 of Regulation 3577/92 allows for the Member States to impose and / or assign public service obligation services for lines or sea route to / from islands; but it is necessary to be proven that there is indeed a real requirement for a public service obligation. In Chlomoudis et al (2007) it is stated that a transport service can be documented as PSO if it serves the development process of an island region or area, and it is deemed crucial for the economic sustainability Regarding the definition of an air route PSO, in Williams (2005), it is stated that: PSOs are imposed where adequate provision of air services in terms of regularity of service, capacity and pricing is not possible if carriers are solely taking their own commercial consideration into account. According to the EU {32008R1008} a PSO is an obligation imposed on a carrier to provide a set level of service on a particular route in order to ensure that the service satisfies fixed standards of continuity, regularity, capacity and pricing. 1.1.1 Insularity and the Greek case 3% of the E.U population resides in island regions, many of which face significant access problems; Greece is a prime example of an island nation. In the Green Bible {SEC(2008) 2550/2008}, the notion of insularity describes not only a situation formed by geography, island size and population, but also a series of (positive and / or negative) attributes stemming from the economic and social isolation, the increased cost of living and operating costs for service providers and producers, as well as the specific conditions that develop the islander s identity and the special and sensitive physical and cultural environment of these regions. Insularity is not addressed by a commonly accepted indicator or notion that can describe it s meaning coherently. In general, insularity refers to any area, inhabited throughout the year by 50 or more persons, is surrounded by sea by at least 1 kilometer, is not connected with the mainland with permanent infrastructure, and is not a capital of an E.U member. According to one approach, insularity can be connected with the notion of region, which may be described by surface area, population, and / or economic data (GDP, employment, natural resources), transportation volume etc. Insularity, as a notion contains also positive qualitative elements, which can be linked with essential infrastructure for enhancement economic and social cohesion. In the case of Greece, the peculiarity of the island space is acknowledged also as a value bearing attribute, requiring support both from the Greek State and the E.U. Indeed in the Constitutional Map of the Greek State it is stated that The law-
6 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou maker and public administration have the obligation of taking into account the special state of the island regions (article 101, interpretative clause). The European Commission, as a second pole for the protection of the special conditions for the island regions put forward and action plan for the period 2006 2013 for the development of national waterborne transport in Europe. Historically, the need for protecting island regions is recorded in the Treaty of Amsterdam, which recognizes that such island-related problems are structural in nature and that national legislation should catered for, where required, special measures for the equal inclusion of island regions in the common market, with fair terms. 1.2 PSO in the Greek context 1.2.1 Waterborne Transport PSOs As viewed by the authors, Public Service Obligation Routes (or thin routes) are transport services that are deemed important and / or necessary by the State and which are subsidized by the latter. They include a contractually predetermined level of service, determined by frequency and ship type, between origins and destinations for a given period of time, which have been proven, by the lack of market interest, to be non-viable commercially. The Greek PSO ferry transport system is currently the largest in Europe in network-miles, and at the same time one of the least costly (Baird, 2012), although the last 20 years, the yearly subsidy value has risen from 1,2 MEuros in 1992 to 95,5 MEuros in 2011. The responsibility for Greek waterborne routes PSOs is split between two General Secretariats within the Ministry of Merchant Marine, depending on whether the route connects to mainland Greece or not. The Greek state, responding to perceived essential passenger requirements, offers subsidies under net cost5 Public Service Contracts (PSCs), in order to attract market interest for PSO routes. The Greek State grants the right to provide transport services over a given PSO-designated route to the operator that requests the lowest subsidy for the assigned fare level, whilst offering (at least) the required level of service (number of round trips per year, e.g. twice every week) and also complying with vessel technical specifications. The PSCs group the latter requirements to ship categories ; each category having distinct aggregate characteristics such as ship age range, operating speed, passenger / vehicle capacities and other factors. Freight and trade demand / requirements, including commodities, are not explicitly stated, but are rather offered along as a by-product in the Greek PSCs: Most of the PSO ferry routes are required to be served by Ro-Pax ferries, which comprise the bulk of the Greek island waterborne fleet. It should be also noted that the PSO budget is co-funded by a 3% indirect tax to the fare revenue of all non-pso and PSO ferry routes, so to an extent, all PSO routes are cross-subsidized. 5 Within the net cost type contracts, utilized also in Denmark, (Baird and Wilmsmeier 2011), the operator assumes the revenue risk
Cost Assessment of Sea and Air Transport PSO Passenger Services: 7 Furthermore, some of the PSCs include clauses for either special pricing policy, such as free boardings for small island residents (e.g. route 29 of Appendix A), or incentives for the operator, such as free access bonus to larger ports (e.g. routes 49, 63 of Appendix A). In Baird and Wilmsmeier it was estimated that the crosssubsidy for the Greek ferry system amounted for 35 MEuros in 2008. This amounts for ~50% of the total PSO subsidy budget for the same year. In many Greek ferry PSO routes, served with medium to large vessels, the PSO contractor modifies a (non-pso) route that already operates, in order to satisfy the requirements of the PSO service. That is, either inserting port calls to PSO destinations or, in most cases, join a non-pso route with a PSO designated, making the latter as an addendum to the former. An example would be route 49 of Appendix A. 1.2.2 Air Transport PSOs The Greek PSO air transport system currently consists of 28 routes, which connect 31 airports, 21 of which are located on the Aegean Sea islands. The responsibility for air transport PSO tenders belongs to the Ministry of Development, Infrastructure and Transport and in particular, to the Hellenic Civil Aviation Authority (HCAA), which is a civil service under the Ministry. The tendering process a PSO route consists of two phases. First, the Greek State invites air carriers to operate services that meet capacity and pricing conditions without subsidy. If no operator is willing to offer subsidy-free services, a second tender is issued which invites operators to bid on the basis of receiving a subsidy for their air services. At the second stage, the operator that secures the contract is awarded exclusive rights to operate services (Di Francesco and Pagliari 2012). The selection of the operator is made by public tender at Community level based on the conditions and the requirements set out in Article 16 of the Air Services Regulation 1008/2008. The maximum PSO fare level, the minimum number of round trips and the weekly number of offered seats, on all the routes, both during the summer and the winter scheduling periods, are set by the authorities as a part of the tender requirements. The first ten PSO air transport routes were tendered in 2001, and another tender for an extra nine routes was introduced the following year. The last tenders for 26 air transport PSO routes were announced in 2011, for which the duration of the contracts is four years (2012-2016). 2. Literature Review Compared with other modes of transport, literature on ferry passenger transportation is rather limited. PSO ferry literature is even scarcer. This is not surprising, since waterborne passenger transport, amounts only for a small fraction of national modal splits. European exceptions to this rule include countries / regions with many relatively small islands such as Scotland, Norway, Denmark and Greece.
8 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou In the case of Greece, more than 100 inhabited islands are served by sea using vessels ranging from small passenger boats and water-taxis to large Ro-Pax ferries with capacities up to 1300 passengers. Therefore, a significant portion of ferry PSO literature has been produced by research with reference to the Greek case. On the other hand, literature on air passenger transportation and PSOs in particular is both richer in numbers and breadth in relation with the topics / issues studied. It can be said that waterborne and air travel have more common ground than differences on the topic of PSOs and more similarities between them, than with other transport modes such as rail and surface means. Similarities include the usage of airports / seaports, low service frequencies, long distance intercity connections and low levels of competitiveness between them. Therefore, it can be deemed safe to draw analogies between the two and carefully adapt conclusions and lessons learned from one industry to the other. An additional note would be that the PSO literature rarely focuses on either cost or operations key performance indicators. The majority of the literature reviewed handled the issues of modal choice, market structure and EU regulation / deregulation issues. As mentioned in the introduction no other study has focused both in ferry air transport cost and operational indicators at the same time. With a few exceptions, most of the literature reviewed was useful mostly on helping the research team to draw analogies and facilitate conclusions for the Greek case, based on lessons learned from the past and from other countries. Indicative literature is presented below: In Baird and Wilsmeier a comprehensive review is conducted, focusing solely on ferry PSOs in Europe. One of the major conclusions of the research team regarding the ferry services market was, that subsidized routes were tended to be served by vessels of lower quality and argued that the total subsidy cost was low in comparison with other countries, due to the low level of service. Furthermore, they argued for the benefits of a continuous revision process for ferry procurements strategies, where the EU regulations being an argument securing efficient services through tendering. Another review for the Greek case is that of Giannopoulos and Aifandopoulou-Klimis (2004), which assessed the characteristics of waterborne passenger transportation before the (partial) lift of the cabotage by a law in 2001. The researchers did not focus on PSOs, but rather on the system as a whole, with interesting findings regarding the operating state of Greek waterborne passenger transport system. Along with persistent characteristics of the Greek ferry system, such as high seasonality and the historical network design, Giannopoulos and Aifadopoulou-Klimis analyzed the issues of low capacity utilization of the fleet, low reliability, low levels of service in thin routes, different service characteristics between two directions and the inadequacy of port infrastructure. It can be shown that most of these conclusions are still valid, after almost 10 years, since the study was published.
Cost Assessment of Sea and Air Transport PSO Passenger Services: 9 A popular and contemporary issue for study is that of comparative analysis of the PSO scheme with the U.S, and Australian equivalents EAS and RASS respectively. The issue of the lack of competition is also a frequent conclusion in these studies (see also Santana (2009) and Williams (2005)). Merkert and O Fee (2012) assessed European lessons learned in order to make proposals for the Australian RASS scheme (equivalent of PSOs) in air passenger transport; also noting that the lack of competition is a common feature in both subsidy schemes. Their study assessed the administrative authority point of view. Notable conclusions (op. cit.) include a) that the justification of PSOs is based on single objectives, not common to all authorities and b) the lack of connection of PSCs to benefits for the operator for above-target performance. Furthermore Merkert and O Fee (2012) provided solid recommendations for increasing air transport competition, suggesting that EU could help the process of PSOs by creating a more user-friendly database of current and future tenders listing operators, current aircraft types, number of passenger for each route etc. They also recommend increasing the EC s role as a watchdog to ensure that PSOs are fulfilling the intentions of the 1008/2008 EC Regulation, and also that a central information point for the PSO regime was being developed. The recommendations of Odeck (2008) regarding contractual incentives for ferry efficiency improvements was also a very interesting find. Moreover, literature on air passenger transportation and PSOs focuses on the different air fares policies and the heterogeneity between different regions across Europe in terms of provision of PSO operations. The number of PSO contracts is increasing over the years. In June 2009, PSOs were imposed on 257 routes in thirteen EEA States Di Francesco A. and Pagliari R., (2012). Merkert and Williams, 2010 mention that ten Member States (Finland, France, Germany, Greece, Ireland, Italy, Portugal, Spain, Sweden and the UK) and two European Economic Area countries (Iceland and Norway) currently impose PSOs, with France and Norway accounting for one half of these. Norway has the largest number of PSO routes (61), followed by France (41). Brathen stresses the importance of (air) PSO pricing regimes. If the prices are defined at a maximum level, problems may occur during peak periods, where excess demand may result if the maximum fares are set too low. On the other hand, maximum prices may be too high during off-peak periods. If the fares are set according to a maximum average level, the operator will be able to better carry out some form of peak/off-peak pricing. This can be done on the basis of cost models for different aircraft operations. There is variability across countries / operators in terms of the size of airplanes, distance flow, average subsidy level and other parameters. The share of domestic seats offered under the PSO regime is highest in Portugal (40%) and Ireland (23%). In several other countries like France and Norway the figure is around 10%. The average subsidy level is around 120 per passenger in Germany, 60 per passenger in Norway, Sweden and Scotland, while France and Portugal have subsidies of slightly higher than 20 per passenger (Brathen, 2011). France
10 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou and Portugal have higher traffic volumes and lower unit operating costs. Differences in the aggregate level of subsidy are to a large extent directly correlated to passenger demand and the number of PSO routes (Williams and Pagliari, 2004). Another different parameter is the average seating capacity. The average seating capacity varies between larger 110 70 seats aircraft (Portugal and France) to 50 35 seats aircrafts (Spain, Sweden and Germany), to even smaller 10-15 seats aircraft (Scotland). Norway has 15 seats as the minimum, but most aircraft have 37 seats (Lian et al, 2010). In most European countries, one of the side effects of austerity during the last three years is the increase in research awareness regarding justification of public spending, related benefits and market distortions. It is claimed that public funding of PSO schemes, if planned and implemented effectively, can provide substantial benefits: For example, Smyth et al (2012) mention that the implementation of the Route Development Fund (RFD) in Scotland, generated significant benefits to the Scottish economy, with initial reports suggesting multi-million pound estimates. The same team concludes that nearly all RFD services returned a positive net present value and favorable cost to benefit ratios. An interesting example of market distortion is presented in Fageda et al (2012). Another issue tackled by the current study is the simultaneous service by ferry and airplane of the same islands. On this issue, according to 2011 data, this happens in routes serving Greek islands. Santana (2009), overviewed EU regulations regarding PSO in air transport and mentions that EU Member States may guarantee operation of a PSO route for a given period, when other form of transport cannot ensure an adequate service. Clearly, this is not the case of Greece. Also, comparing with EAS, the U.S air PSO equivalent, Santana (op. cit.) concludes that the latter has been designed to be more efficient than the EU PSO, arguing for a more centralized planning scheme as opposed to the current implementation in EU, separately by each Member State. A similar argument for the centralization of the EU PSO administration is made in Williams and Pagliari (2004) and Williams (2006). One other major theme in related literature to this study, is modal choice, namely between waterborne and air means of transportation. Studies such as Rigas (2009) and Sambracos (2001) provide valuable insight to the relationship of the two modes and the synergies that can be achieved when both are operating in PSO schemes. More specifically, Rigas (2009) studying both ferry and air services concludes that the two modes serve different market segments. However he finds indications of possible grounds for competition. His analysis points that the reduction in airplane prices by 30% would result in a significant (-60%) reduction in ferry passenger demand. Results of his analysis include that the factors of price and time are dominant in modal choice, while comfort and reliability are not. These conclusions are in contrast with the results of Lagoudis et al ; the latter team found that safety was the primary concern of the users, while cost and time were the least affecting factors. But, one also has to take into consideration the study s scope
Cost Assessment of Sea and Air Transport PSO Passenger Services: 11 and sample size. The Rigas (2009) survey is about modal choice and involves 318 ferry and airplane users responses, while the survey of Lagoudis et al studies the issue of weights in a ferry KPI system using AHP over 12 responses of elected representatives of professional and other associations. Sambracos (2001), is one of the few papers that studies both ferries and air transport within the context of modal choice. Arriving at the same conclusion with Rigas (2009), Sambracos found that cost and time are the most influencing factor for passengers, also noting that the former factor is deemed more important for sea passengers and the latter for air passengers. He also notes that there is limited competition between the two modes, since the passengers of each mode have different characteristics and perceptions, due to their income status, concluding that the two modes function rather complimentary. Levy and Panou (2010) on the same issue, conclude that the mode choice decision and the travel decision are affected by different parameters. Other issues related to PSO and ferries are tackled by Chlomoudis et al. (2007): The study focuses on issues relating regional development of the Greek islands in the context of maritime transport. The research team (op. cit) stresses the necessity for the development of universal EU service obligations for sea passenger transport in order to safeguard an adequate level of service provision for the islanders and address a fully defined negotiation platform with the stakeholders. Addressing further the issue of PSOs, Chlomoudis et al focuses on island PSOs and provides a comprehensive framework for a technical consultation of PSOs in island transport services. A more general EU regulatory review, relative to the current study, is provided by Urrutia (2006). 3. Assessment Methodology Sea and air transport PSO services are described and characterized using essential demand or supply related metrics. For the demand side, these include yearly passenger and vehicle boardings and passenger-miles. For the supply side, vehicle-miles, passenger seats and vehicle accommodation capacity; the latter used only for sea transport. The subsidy cost for these PSO services, as well as policy options are evaluated by performance indicators both from demand and supply point of view, by dividing route subsidy cost with the demand or supply metric. This kind of business analysis is deemed appropriate both for relative evaluation between routes for policy decision support and for benchmarking, on an international level. For ferry services since the number of PSO routes is rather large, the metrics are grouped per vessel category, according to their passenger capacity, in order to capture the dimension of cost in ferry operations. This categorization is simpler than the one utilized in Greek PSC clauses (which also includes vessel age, capacity and speed), since a detailed assessment of technical characteristics is outside the scope of this exercise. In any case, passenger capacity, with the exception of large high
12 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou speed vessels, captures to a large extent transport operations cost, which is one of the focus of the current study. The transport metrics, the cost evaluation performance indicators and the ways they may be interpreted under a PSO scheme, are presented below: Ship-miles and aircraft-miles: Yearly scheduled round trips times the round trip distance in nautical miles. Can be utilized for ferry / air route categorization. For air transport PSOs, scheduled round trips can be regarded as the minimum offered, since in some cases, especially during the peak summer period, operators offer an enhanced level of service. Ship passenger miles and air passenger miles: For air routes, passenger miles are readily available, since Greek air PSO routes include only one origin and one destination. Therefore, air passenger miles are the product of passenger boardings times aircraft miles. On the other hand, the majority of ferry PSO routes include several nodes and data per route regarding embarkation / disembarkation per port were not available. In order to assess the average distance per passenger, a simple gravity model was developed, using census data (island population), passengers per port and distances between nodes. Passenger-miles can be used to assess both the volume and the utilization of service levels offered. Routes with passenger-miles well above the mean may be re-examined either in an ad hoc approach (e.g. adjustment of number of port approaches), or as a part of a network-wide rearrangement exercise (e.g. introduction of a hub and spoke scheme). Routes with very low passenger-miles can be reexamined under a transparent and documented framework, taking into account regional development factors, national security issues and other national and local priorities. Passenger seats offered: Planned round trips times the passenger capacity, as the latter is defined by type of vessel / aircraft, safety and technical specifications and contract requirements. They are used of for calculating the capacity utilization index. Subsidy per ship-/ aircraft miles: Yearly budgeted subsidy per planned ship-/ aircraft -miles (and per vessel / aircraft category); a metric for the evaluation of the supplied transport services. Less useful by itself for evaluating individual routes, it encompasses the potential and the view of the supply side of the transport operators market. For waterborne PSOs this index is one of the major factors affecting the bid offer, the other being the route revenues (see passenger-miles). Subsidy per passenger: Budgeted state subsidy divided by ferry / aircraft passengers (10.000 passengers for ferry routes). When
Cost Assessment of Sea and Air Transport PSO Passenger Services: 13 comparing routes, this indicator may be utilized for the assessment of the relative degree of state funding utilization, where a small index value implies greater utilization. However, passenger volume is considered as just one of the few factors that define the eligibility of a route to be included in a PSO scheme. For policy reasons, it would be useful to determine an upper threshold value, over which the retention of the route within the PSO scheme should be justified with pre-determined criteria (regional development, national security etc.). It is noted that for 2011, for some air PSO routes the operator s bids requested zero subsidy, and therefore, this metric is zero. Moreover, this metric is high for routes that include destinations of small remote islands with low traffic volumes. Subsidy per passenger-mile: Yearly budgeted state subsidy per passenger-miles traveled. Relatively low index values may imply low subsidy level for a given level of service and relatively. On the opposite, high values may indicate low market competition. The index is also useful for assessing the consistency of network design and in conjunction with other indices and metadata. May be considered the primary factor that operators take into account before submitting a bid offer, since passengers, and more specifically passenger miles can be converted to route revenue, given a specific vessel / aircraft category. Service capacity utilization (%): Passenger boardings divided by passenger-seats offered. A metric to evaluate the degree of utilization for a given route. Low values may indicate low passenger demand relatively to service capacity offered. On the other hand, high values, may imply high passenger demand with limited level of service, or in extreme cases very low service levels. For ferry passenger transport, since most Greek PSO ferry routes include more than one node, the index value may exceed 100%. For these routes, also a peak-of-thepeak evaluation can be useful for the assessment of service levels and passenger comfort. Apart from the business (performance indicator) analysis, as a demonstrator for policy quantitative assessment, PSO routes may be further analyzed by a simple route profitability model: pi = si + f() r i f( ci) Where pi, si are the profit, subsidy, for a given PSO route i, f ( r i ) = br 1 i f ( c ) and i = b2c i are functions of route revenue and cost respectively, where are route passenger c miles, is route ship-miles (or aircraft-miles) and b, i 1 b 2 are coefficients. r i
14 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou Assuming p = 0 as a virtual profitability boundary, the model can be si = a+ br formulated as 1 i b2c i and the coefficients can be estimated through regression. 4. Cost Assessment of Waterborne and Air Transport PSO Services 4.1 Assessment of Greek PSO Ferry Subsidy Costs 4.1.1 PSO Waterborne Services Characteristics The Greek waterborne PSO services in 2011 include 87 routes under PSCs, out of which 56 are inter-island connections (routes) and 31 connections of islands with mainland Greece. The former are responsibility of the Directorate of Maritime Transport and the latter, of the Directorate of Maritime Public Transport. The routes range from small 2-mile strait crossings, up to 862 miles round trip routes linking the city of Thessaloniki in northern Greece with the island of Rhodes. In general their passenger demand is highly seasonal; 30% to 85% of the annual passengers travel during the summer. The list of PSO ferry routes and essential data for each route are presented in Appendix A. For reasons of parsimony and avoidance of confusion, individual routes will be most of the times referred to by their designated serial number, appointed in Appendix A. The routes are served by five categories of ships, defined by the Greek Ministry, based on vessel type (open / closed Ro-Pax, high speed etc.), vessel age and other factors, described in detail in Giannopoulos and Aifandopoulou-Klimis (2004). Ship categories defined in this study are: A : up to 79 passengers B : up to 149 passengers C : up to 249 passengers D : up to 449 passengers E : more than 449 passengers Service frequencies also range from once a week, up to three times daily; they are presented in Appendix A (see annual scheduled trips) and also summarized in the histogram of Figure 4.1 below:
Cost Assessment of Sea and Air Transport PSO Passenger Services: 15 Figure 4.1. Number of trips of PSO ferry routes Annual scheduled trips 2011 25 Number of PSO Ferry Lines 20 15 10 5 0 Less than 52 52 104 156 260 365 More than 365 Yearly Level of Service It can be seen that the majority of PSO ferry routes have a rather limited level of service; 61 out of 87 routes, where data was available, had a frequency of twice a week or less. The yearly budgeted 6 subsidy of the ferry PSO routes ranged from 0,002 (route 28) to 7,9 MEuros (route 107). With a total of 95,5 MEuros. It is useful to note that: Less than 5% of the PSO routes bear 21% of the annual subsidy cost 20% of the routes bear 58% of the annual subsidy cost 50% of the routes bear only 10% of the subsidy cost The subsidy cost and the subsidy cost as a percentage of GDP is presented in Figure 4.2 below, for a 20-year period (1991-2011): 6 All subsidy and service level figures (frequencies and ship-miles) are in budgeted / planned values, since the majority of actual figures were not available to the study team. Sample data indicate that the actual figures were lower than planned by approx. 10%, due to weather conditions and vessel breakdowns.
16 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou Ferriess PSO Subsidy (in Meuros) 120 100 80 60 40 20 0 Figure 4.2. PSO ferry subsidy budget and subsidy / GDP ratio (1991-2011) 7 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year Subsidy as % of GDP 0,050% 0,045% 0,040% 0,035% 0,030% 0,025% 0,020% 0,015% 0,010% 0,005% 0,000% PSO Subsidy as % of GDP It is shown that the cost of ferry PSOs has risen significantly, consistently with the Greek GDP increase, reaching a peak of 107 MEuros in 2009 and then falling to 95,5 MEuros in 2011. Figure 4.3 presents subsidies per sea route (where data was available) and ship category, based on ship passenger capacity. Annual Subsidy per Route in MEuros - 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 Figure 4.3. PSO ferry subsidy per ship category 1,1 1,5 3,2-1 2 3 4 5 6 Ship Category 7,5 72,6 7 Sources: For 1991 to 2007, Sitzimis, For 2008-2011, authors, Greek GDP figures from Eurostat, 2013
Cost Assessment of Sea and Air Transport PSO Passenger Services: 17 As it would have been expected, there is a positive relationship between ship size and subsidy. Low subsidy routes are served with small vessels and vice versa; also the subsidy budgeted for categories A to C is a small fraction of the total sum There is discrepancy in categories D to E, with some routes appearing to receive very low subsidy for their size, indication that either a) the frequency is low for the given route, b) that the capacity offered is larger than required c) both a) and b), and d) imperfect competition exists. Therefore more detailed assessment is deemed to be required for routes 218, 29, 31 and 50 from category C, routes 39, 45, 54, 47, 41, 9 and 26 from category D and routes 91, 32, 34, 63, 63, 88 and 89 from category E. For categories D and E, with the exception of routes 26 and 47, all other routes mentioned have low service levels (once per week or less). The transport product in ship-miles of PSO ferry routes is summarized in Figure 4.4 for 2009-2011; it follows, as expected, the same pattern with the levels of subsidy. Data from the 37 routes of the Directorate of Maritime Public Transport (abbr. DMPT: mainland island connections) was available only for 2010-2011. Figure 4.4. Ship-miles of PSO ferry routes Ship-miles (in millions 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1-2008 2009 2010 2011 DMT Routes DMPT Routes Passenger and vehicles transported the last 4 years (2008-2011) are following a similar, but not identical pattern with ship-miles offered, as it can be seen in Figure 4.5: they increase up to 2010 and they fall in 2011 due to the Greek economic recession, but still remain substantially higher than 2009, indicating that passengers react more actively to the increase of service levels, than in the opposite case. It should also be noted that 15 of PSO routes are extensions of non-pso routes to PSO destinations and a portion of the annual PSO demand contains also non-pso passengers that cannot be separated from the data. Most of these routes are DMPT administrated, where data on passenger demand was not available. 8 See Appendix A for details per waterborne PSO route
18 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou Figure 4.5. Passenger demand for DMT PSO ferry routes (2008-2011) 1.200.000 Passenger Boardings 1.000.000 800.000 600.000 400.000 200.000-2008 2009 2010 2011 DMT Routes An additional observation would be that the ship miles offered in 2009 were almost the same in 2011, but for a lower subsidy level, indicating that the ferry operators absorbed the reduction of subsidies, retaining the level of service. However, this is not the case with the number of vehicles transported at the same period, as it can be seen in Figure 4.6 below: Figure 4.6. Vehicle demand (in CEU9) transported by PSO ferry routes (2008-2011) 250.000 Car Equivalent Units 200.000 150.000 100.000 50.000-2008 2009 2010 2011 DMT Routes From the figure above, it can be seen that the number of vehicles transported has been declining, indicating a more direct effect of the Greek economic recession 9 Car Equivalent Units, with private cars having weight factor 1,0, trucks / lorries 2,0 and motorcycles 0,5.
Cost Assessment of Sea and Air Transport PSO Passenger Services: 19 from 2009 onwards. Since the categories of road vehicles (private cars, buses, trucks) is not distinguished in the available data, this decline can be attributed to any, or all the above. An additional important note, overlooked by most of the studies, would be that the transport of vehicles and freight in many Greek PSO ferry routes (mostly in ship categories D and E) is carried out by the same PSO fleet along with the transported passengers. With the exception of fuel and water, only a small amount of goods is transferred with dedicated RoRo vessels; the bulk is carried with the PSO Ro-Pax fleet, implying that PSO services, although not explicitly stated, are utilized for covering both passengers and freight demand. 4.1.2 Cost and performance indicator analysis The basic KPI values for years 2008-2010 described in the previous chapter are summarized in Table 4.1 below. Table 4.1. Subsidy Cost Indicators 2008 2009 2010 2011 Subsidy per ship-mile (in )10 N/A N/A 84,8 83,5 Subsidy per ship-mile(in ) 49,2 68,6 71,6 73,3 Subsidy per10.000 passenger-miles (in ) N/A N/A N/A 0,69 Subsidy per passenger (in ) 46,3 55,1 57,8 57,5 Subsidy per CEU (in ) 221,9 262,3 284,0 287,7 It can be derived that there was a visible increase in both subsidy per shipmiles and subsidy per passenger attributed to the 2009 subsidy increase from 70 to 107 MEuros. It is evident that the increased subsidy was accompanied by neither a substantial service level nor by a passenger increase of the same rate. On the other hand, subsidies per CEU steadily increased in the period 2008-2010, an indication of less demand and decreasing utilization of vehicle / freight capacity. Should these trends continue, appropriate policies ought to be considered for enabling some sort of flexibility for the operators in order to adjust vessel capacities and / or frequencies. Focusing in 2011 detailed data, waterborne data and KPIs are addressed in detail in the following paragraphs. Regarding subsidy per ship-mile, the histogram of Figure 4.7 follows roughly the major cost categories, translated to the five ship categories, as per the contractual PSO categorization: 10 For all ferry PSO routes (DMT + DMPT). All other KPIs are for DMT routes only.
20 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou Figure 4.7. Subsidy per ship-mile histogram 14 Number of PSO ferry routes 12 10 8 6 4 2 0 8 30 52 74 96 119 141 163 >163 Subsidy per ship-mile (in ) Figure 4.8. Subsidy per ship-mile per ship category Subsidy per Ship-mile in 200 180 160 140 1,3 5,7 120 71 8,1 65 66 100 1,1 35 48 20 59 80 42 56 15 53 72 68 21 67 60 52 14 22 9 37 18 17 19 76 40 51 47 40 50 30 31 26 24 82 74 75 13 11 41 39 20 46 29 45 43 44 - - 1 2 3 4 5 Vessel Category 32,2 49 55 34 64 33 32 63 4 1 6
Cost Assessment of Sea and Air Transport PSO Passenger Services: 21 Subsidy per ship-mile, per ship category is presented in the above Figure 4.8. The general trend of the data is similar, albeit less defined, to that of Figure 4.3, i.e. there is a positive relationship between subsidy per ship-mile and ship (vessel) category. Nevertheless, routes served with vessel categories B to D are diffused are less defined than categories 1 and 5. Since the competition has declined the recent years (Goulielmos, A. M., & Sitzimis, G., 2013), the fusion of categories B, C and D is a strong indication that the subsidy per ship mile alone (i.e. the cost side of the equation) can only partially describe the ferry PSO scheme. An important factor to be discussed is the route revenue, since operators bid for state subsidy on a net-cost type contract assuming the revenue risk. It can also be safely assumed that the operators target for a reasonable profit and that route - specific peculiarities exist, such as weather conditions, which reduce the annual number of trips; the latter being outside the scope of this study. Nevertheless, an ad hoc assessment of several routes is warranted: Per ship category these include: routes 52, 76 and 30 from category A, routes 48 and 14 from category B, routes 20, 42 and 21 from category C, routes 45, 41, 39 and 26 for category D and routes 17, 18, 19 and 67 from category E. Routes 52, 76 and 30 from category A and 48 and 14 from category B seem to have relatively higher level of service, compared with the rest of the PSO routes. Most of them share the characteristic of joining a smaller (PSO) island with a larger one. Regarding the outliers in category E, most of them (except 67) join northern Greece (Kavala and Thessaloniki) with the North Aegean islands with a low level of service (once per week or less). The diffusion of ship categories C-D can be also seen in Figure 4.7 below, where the relationship between route length and subsidy per ship-mile is presented.
22 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou Figure 4.7. Relationship of subsidy per ship-miles and route length, per ship category 700 600 Route length (in n.m) 500 400 300 200 100 - - 50 100 150 200 Subsidy per Ship-Miles per Vessel Category (in ) E D C B A It can be seen that a relationship exists between route length and subsidy per ship-mile: Vessels of larger categories receive higher subsidy per ship mile and tend to be utilized in longer routes. It is also visible that most of the routes of category E form a distinct group with more uniform characteristics, except of four routes which seem to form an extra-e sub-category. These routes are 19, 4, 1 and 49. The first three are large routes with a medium level of service (52 yearly schedules or less) and route 49 has a high level of service, requiring a more detailed assessment. One explanation for the visible patterns, indicated for illustrative purposes by trend lines for vessel categories E, D and A, would be that for larger routes, operators are probably more willing to bid for fewer subsidies per ship-mile and vice versa. This stands also clearly for Category A and for Categories B and C, which are fused together, indicating that medium capacity sized vessels (249-449 passengers) are probably less diversified cost-wise. The same performance indicator is assessed regarding its relationship with ship-miles, introducing an element of service level (ship-miles), as presented in the following figure:
Cost Assessment of Sea and Air Transport PSO Passenger Services: 23 Figure 4.8. Relationship of ship-miles and subsidy per ship-mile for different ship categories Ship-miles 50.000 45.000 40.000 35.000 30.000 25.000 20.000 15.000 10.000 5.000 - - 50 100 150 200 Subsidy per ship-mile (in ) Ε D C B A Similar results are evident when the relationship between ship-miles (as a metric of the transport product), and subsidy cost per ship-mile is assessed. Compared with Figure 4.7, it can be shown that: Category E seems to be divided in two rough sub-categories. The rightmost extra-e, highlighted by an indicative trend line in red contains five routes with distinct characteristics (routes 35, 66, 1, 4 and 49), and a second, indicated by a blue trend line, containing the rest of the routes, which is the majority. The diffusion pattern of categories C and D is persistent, but the addition of the service level dimension in the Y axis, separates them in two subgroups. The first subgroup lies just above category A, and the second is diffused with category E. The latter are indicated by an ellipse in Figure 4.8, where four routes from category D (37,24,56,53) and two from category C (22,20). The outliers on the right part of the ellipse (53,56 and 20) are indications of limited competition. Category B is represented in a more meaningful way than in figure 4.7, since all three routes (11,14 and 48) provide a relatively
24 International Journal of Maritime, Trade & Economic Issues, I(2)2013 J. Angelopoulos C. Chlomoudis P. Christofas S. Papadimitriou intensive service over short routes, although routes 14 and 48 are also indicative for possible limited competition. Category A follows the same robust pattern with the previous figure. On the demand-side of waterborne PSO lines, in contrast with ship-miles, which concentrated in five distinct categories, passenger miles appear to have a solid concentration to values up to around below 2 million passenger miles, as it can be seen in the table below: Table 4.2. Passenger-mile frequencies of DMT routes Bin Frequency (number of routes) Cumulative % 9.973 1 2,38% 2.777.378 36 88,10% 5.544.782 1 90,48% 8.312.187 2 95,24% 11.079.591 1 97,62% 13.846.996 0 97,62% More 1 100,00% Even if we consider values above 2,7 million passenger miles as outliers the histogram of the rest of the routes indicates a strong concentration in relatively low values below 0,39 million passenger miles as it can be seen in Figure 4.9 below: Figure 4.9. Histogram of waterborne routes below 2,7 million passenger miles 25 20 Frequency 15 10 5 0 9.973 387.495 765.018 1.142.540 1.520.062 1.897.585 More Passenger-miles
Cost Assessment of Sea and Air Transport PSO Passenger Services: 25 This indicates that PSO ferry lines serve a wide variety of passenger demand over a diversified landscape; mainly the Aegean Sea islands. Given the contractual scheme outlined in this study, high values of passenger-miles may indicate that the at least a few routes could be viable without state subsidy. However this would have been visible if for some of the routes the requested subsidy was zero, but this does not happen, whereas in the case of the air transport PSO lines the opposite is true (see section 4.2), despite the fact that PSO air routes are less than half the waterborne ones in number. A large variety of factors may contribute to this result for the waterborne routes including higher operational complexity, diversified requirements due to geography, local population volume, tourist attractiveness and effectiveness of lobby groups, higher uncertainty in demand and data availability, and suboptimal network design. Further analysis is warranted to evaluate if this happens due to an intrinsic network design, supply side capacity concerns / flexibility, or even the design and transparency of the procurement process. On the other hand, as already mentioned the competition in waterborne passenger transport is declining. It is logical to assume that passenger-miles have a high degree of correlation with route fare revenue, which is unavailable as data. Further insight for the routes revenue structure can be derived from Figure 4.10, where the relationship between the ship-miles and passenger-miles is presented. Figure 4.10. Relationship of ship-miles and subsidy per passenger-miles for different ship categories 50.000 45.000 35 40.000 67 35.000 19 66 Shipmiles 30.000 25.000 20.000 15.000 10.000 5.000 17 18 24 56 53 72 49 40 71 2926 14 45 4741 50 59 48 4213 11 55 64 30 74 54 34 76 9 15 33 32 20 68 52 22 39 - - 2,0 4,0 6,0 8,0 10,0 12,0 Subsidy per passenger-mile per Vessel Category (in Euros) E D C B A