We note that the Isle of Man Office of Fair Trading (OFT) has decided
to investigate the prices charged by the Isle of Man Steam Packet Company for Ro-Ro ferry services.
The Company will fully co-operate with the OFT investigation but believes that pricing is
already sufficiently controlled by provisions contained within the User Agreement between
the Company and the Department of Transport. This agreement is a contract which obliges
the Steam Packet to provide certain frequency and capacity of services.
Significant investment targets must also be met – to date this has exceeded £80m.
It also allows government to cap the annual increase in standard passenger fares and freight charges.
We need a certain minimum level of revenue to cover the cost of operating some unprofitable
services. Freight prices provide a considerable subsidy to passenger fares and allow for a frequency
and diversity of service that could not otherwise be provided. If freight prices were significantly
lower, a taxpayer subsidy would be needed to ensure the current level of passenger services continued.
Freight prices are an important factor in the recent Tynwald Select Committee
finding that passenger fares are “very competitive”.
Sharing the cost
Fuel prices have increased at an extraordinary rate in recent years.
Travel operators worldwide have struggled to contain price increases to passengers as a result.
Many have introduced a fuel surcharge, as we have done, which allows some of the additional cost
of fuel to be recouped as a transparent addition to fares. The fuel surcharge mechanism we
negotiated with the Department of Transport does not pass on to passengers or freight the full
extent of the increase in fuel prices. The table below shows the marine fuel costs incurred
by the Company and how much has been recovered by the surcharge.
||Marine fuel costs paid by Steam Packet
||Amount recovered by
||Amount absorbed by Steam Packet
||Proportion absorbed by
As can clearly be seen, the Company has absorbed a significant and increasing
proportion of the rise in fuel costs. Fuel surcharges could have been
considerably higher if we had chosen to pass on more or all of these costs to passengers.
Inflation and price increases
The User Agreement recognises that increases in fares can only be
limited to Manx RPI less one half of a percent, if costs also rise at
a similar rate. The following table shows how fuel prices have risen substantially
in excess of Manx RPI.
|6 month average weighted cost of marine fuel (per tonne)
|What fuel cost would be if increased only by Manx RPI
Fuel is priced in the global market in US Dollars. As has been widely reported, Sterling has weakened significantly in recent months, from a high of more than $2.1 to £1, to a current price of around $1.4 to £1. This weakening of Sterling negates some of the Dollar based fuel cost reduction seen recently.
We could review fuel surcharges on a weekly basis and apply a price increase, or reduction, in line with the real-time movement in the fuel price. However, this would result in fluctuating fares and could mean charging or refunding the surcharge at the time of travel. Passengers would not know the final cost of their fare until the day they travelled.
Incidentally, if we had chosen to do this, fuel surcharges would have increased steadily throughout last summer – as it is they did not rise at all. That is why it is right and fair that these surcharges are still being applied.
Given that the current fuel surcharge agreement does not recover the full additional costs incurred, we were surprised that the Select Committee chose to recommend termination of an agreement which is heavily weighted in favour of passengers and freight and obliges the Company to absorb a significant proportion of additional fuel costs.
Application of the fuel surcharge
The fuel surcharge is reviewed twice a year in March and September. To stabilise fares, it is applied in arrears on the basis of the costs in the previous 6 months. Therefore, there is a time lag before surcharges are raised or reduced. As the price of fuel has fallen, we expect that there will be a decrease in surcharges at the next review in March 2009. Because of the Select Committee recommendation the existing surcharge agreement will end in May. Beyond May higher fuel costs will still need to be recouped either by a new surcharge mechanism or higher fares.
The current fuel surcharge arrangement with Government is intended to provide an element of price stability. The Select Committee recommendation to end it will cause considerable uncertainty for passengers.
An alternative to a fuel surcharge
Unlike other travel operators, we do not have the freedom to change fuel surcharges
when fuel costs fluctuate because we have voluntarily submitted to a government
controlled surcharge agreement. The cancellation of the current agreement will
restore to us the right to impose and/or change surcharges and fares as conditions dictate.
Under the User Agreement, instead of a surcharge, the Steam Packet Company can introduce
a permanent increase in prices reflecting the long term increase in fuel prices in excess of
inflation. This would allow the company to recover the full cost of fuel above
inflationary increases, not just a proportion as is the case with the current surcharge agreement.
If agreement cannot be reached on a new fuel surcharge, the Company may have to permanently
increase fares to reflect the real increases in costs already incurred.
• Freight prices cannot be considered in isolation as they subsidise the “very competitive”
• The current package of freight and passenger fares
enables the provision of a reliable, high frequency service of conventional and fast craft
to multiple destinations. This service exceeds the requirements of the User Agreement.
• An enforced reduction in freight fares would result in a reduction of passenger services
both in frequency, and very likely, in destinations. It would also limit future investment in
fleet and infrastructure. Over the last ten years there has been investment of more
• The full impact of rising fuel prices has not been passed on to passengers or freight.
The Company has absorbed an increasing amount of rising fuel costs year on year.
• The current fuel surcharge agreement provides an element of price stability and provides
the flexibility that avoids permanent price increases as a result of rising fuel costs.
• The fuel surcharge calculation is based on a six-month time lag. While this may
be considered unfair for infrequent travellers, for those who travel frequently over
the longer term, rises and falls in the fuel surcharge are likely to balance out.
• Real-time application of a surcharge is likely to result in uncertainty of cost of travel.
• The Company is surprised with the Tynwald Select Committee recommendation to cancel
the existing surcharge agreement. The Company believes this decision will result in
higher costs and uncertainty for passengers.