Industry analysis has long formed part of business studies research and teaching. Such analyses usually allows for an in-depth evaluation of the strategies pursued by companies in their effort to compete in an industry.

The shipping industry offers many lessons on how things are done well, and also how things are not done so well. Every industry has its winners, and its losers. The corporate graveyard in shipping is full of companies that got things badly wrong. This includes a host of former state-owned shipping companies which were closed down.

A common feature in many successful private maritime businesses is their modest beginnings and associated family ownership and management. Examples include some of the biggest shipping lines in the world today such as MSC, CMA-CGM, Maersk, Evergreen and Stena.

The ferry sector has many family-run businesses maintaining profitable ferry services in different markets. Here in Scotland two of the most prominent and highly successful private ferry operators are Western Ferries and Pentland Ferries. We may contrast their success with the endless financial and operating problems of Scotland’s state-owned ferry operator CalMac and its associated public agencies CMAL and Transport Scotland.

So what is the secret to successful corporate strategies in the ferry business, and what might it tell us about the travails of public sector ferry operations?

Customer focus

Private ferry operators like Western Ferries and Pentland Ferries tend to offer superior frequency than public ferry services, also maintaining a longer operating day where appropriate. These operators are highly regarded for service reliability and flexibility during adverse weather, including sailing in weather windows. On-board services for a short ferry crossing do not need to include full restaurant offerings as we see on many CalMac ships; a basic drinks and snack facility is all that’s really needed, keeping costs down.

Ticketing and integration can also be simple but effective, without the need for excessive centralised office and management costs, such as we see in state-run operations. Private operators maintain a strong customer-oriented approach, whereas with state-run operations the end user is often viewed as an inconvenience. These matters reflect fundamentally different objectives of private and state-owned organisations.

Ships

On short island ferry routes the customer is basically looking for the equivalent of a rapid bus service that is frequent, reliable, and low cost. For a private ferry operator the ship specification follows in line with these important yet basic user needs. This is usually where things start to go wrong for a state operator like CalMac. The latter opts instead to specify much larger ferries offering full restaurant and catering facilities and needing larger crews who also live on board, all of which is needless for short routes like the less than one hour crossings to Mull and Arran. If we continue with the bus analogy, this is equivalent to placing a restaurant and catering decks above the passenger deck on a bus, followed by even more decks above this containing 30-40 cabins for the crew.

All of a sudden we have a quadruple-deck bus, with quadruple the costs and the same ratio of all round inefficiencies to contend with – hence the enormous subsidies needed for the state-owned operator.

Speed of decision-making

Leaner private ferry operator management structures allow for more rapid decision-making on any matter, including acquiring new vessels. Compare this with the public sector with its multiple agencies, committees, endless stakeholder meetings and “consultations”, lobby groups, plus politicians and Ministers seeking an input to what is already an unwieldy messy bureaucracy with responsibilities obscured. By the time a private ferry company has built a new ship, the public sector will still be debating the internal specification, artworks and name of their next misguided attempt at ordering a “quadruple-decker” floating bus. This explains why private sector operators replace and upgrade their fleets expeditiously with costs contained, whereas the state-owned fleet continues to age, becoming ever more obsolete and costly to maintain and operate.

Financial discipline

Private ferry companies obviously look for the best deal when it comes to making major investments like ship acquisitions. It helps if you don’t needlessly over-specify a ferry, as we see with state-run services. All the extra add-ons such as restaurants and extra decks for crew cabins (both unnecessary on short distance day ferries) increases ship weight/volume leading to far higher displacement resulting in the need for more engine power and hence higher fuel consumption and increased emissions. This also adds up to much higher costs, which explains why a CalMac ferry costs three to four times more to build and operate as the same vehicle-carrying capacity ferries run by Western and Pentland Ferries. Private operators have little option but to be financially viable and are therefore motivated to keep costs down whilst still meeting user needs.

Meantime, the higher-cost state-owned operator always expects to be protected and bailed out by government, no matter the added cost of its operation, hence financial discipline goes out the window.

READ MORE SCOTLAND'S FUTURE

Culture

Senior management and boards of state-owned entities and officials in civil service agencies dealing with ferries often tend to have limited entrepreneurial expertise or in-depth knowledge of the ferry business, which results in significant information and skills gaps. Officials tasked with ferries policy may have come from another quite different departmental area, such as education or health. Moreover, public officials jobs are not on the line when things go wrong, as they inevitably seem to do for state-run ferry organisations. Ultimately, public officials’ salaries and pensions are safe no matter the mess they create or leave behind, as we saw with the “catastrophic failure” of recent decisions. Moreover, those responsible remain in post and simply continue to make the same mistakes over and over again. This will continue as long as politicians sign off officials’ policy decisions.

In the private sector the reality is very different. Privately owned ferry lines tend to be led by people who have helped build up the business themselves, who have a personal stake in making it successful, often together with other members of the same family. Their positions depend on achieving and maintaining effective performance, especially in regard to the financial results of the company. Private ferry lines therefore tend to be managed by people who have a lengthy experience in the business, and have developed insights in the industry. This allows these managers to better anticipate trends and plan accordingly, leading to fewer mistakes being made.

Competition

Private ferry companies function in a competitive environment whereas the public ferry operator is invariably the only (ie monopoly) provider. This means their responses and strategies differ.

Roy Pedersen’s excellent books published by Birlinn on the history and development of both Western Ferries and Pentland Ferries probes and explains this phenomenon. Pedersen reminds us that “the original ambition was that Caledonian MacBrayne would operate as a commercial concern, covering its costs from revenue, but this proved long ago to be a lost cause”. Today, most of CalMac’s costs are covered by subsidy. While the reason for an ever widening funding gap is partly related to keeping fares low, it is also due to the outdated and costly design of ferries specified by the company, and in some cases its sub-optimal routes.

Roy Pedersen also referred to evidence in a letter from a former Scottish Office civil servant which described MacBrayne’s reaction to the prospect of any competition as “pathological”, implying the state ferry operator’s response is to drive competitors out of business by cutting rates, hence resulting in a need for even more subsidy.

Another book, “The Kingdom of MacBrayne” more aligns in rose-tinted fashion with the iconic, even legendary status of CalMac as a symbol of all that is good in maintaining less than economic routes and thus “protecting” island communities from what otherwise might prevail. However, the latter perspective is now increasingly viewed as a myth, the “well protected” state monopoly and related ferry agencies and vested interests are clearly little more than a pampered inept drain on the public purse, now leaving island communities increasingly exposed to the consequences of state-run service decline.

More widely we know that tendering, if done properly rather than simply to protect a dysfunctional monopolistic state-owned operator, can enable private enterprise and innovation to flourish whilst safeguarding the interests of island communities. More effort in that area could rapidly transform our ferry services and the island communities who depend on them, and at much lower cost to the public purse. Who in their right mind needs a quadruple-deck bus anyway!

Alf Baird is Professor of Martime Business at Edinburgh Napier University's Transport Research Institute.