B.C. Ferries recently completed our 2015 second-quarter operations and posted a profit for this period. When this happens, people often ask us why, given the positive results, B.C. Ferries doesn’t use the profit to lower fares.
Historically, the ferry corporation generates profits in the first two quarters of the year, posts losses in the third and fourth quarters, and nets out at a modest but positive result at the end of the fiscal year. This is because we have higher traffic volumes in the spring and summer, and much lower volumes in the fall and winter, coupled with the fact that we spend the majority of our vessel refit and maintenance budget during the last six months of the fiscal year when the ships are not as busy.
It’s important that B.C. Ferries generates a profit at the end of the year, because this allows us to access money to build new ships and invest in the company to ensure the long-term sustainability of the service.
In the first two quarters, as an example, we spent $52.7 million on capital projects, including terminal marine structures, vessel upgrades and modifications, information technology, and terminal and building upgrades.
Over the next 12 years, we plan to invest more than $3 billion to replace 18 aging vessels, as well as perform upgrades to terminals and other infrastructure. To do this, we need to have positive earnings so we can build our retained earnings in order to access the capital bond market to borrow money at competitive rates. Historically, 60 per cent of our capital program is funded through cash flow from operations and the remainder comes from bond-market financing.
Any profit we earn (after paying the province an annual $6-million preferred-share dividend) stays within B.C. Ferries to help fund future investments in the company, which benefits everyone. Such investments include the upgrade and purchase of new fuel-efficient vessels and the development of new technology systems, so we can offer customers opportunities for discounted fares for off-peak travel times and the ability to book in advance without a reservation fee.
We know fare affordability is an issue for our customers and we look for efficiencies wherever we can, as well as continue to look for other opportunities to contain costs.
From April 2012 through to March 2016, without compromising safety, we expect to save an additional $20 million in costs beyond the $54-million efficiency target that the ferries commissioner challenged us to find in the operational plan that he approved.
Cost-containment is one side of the coin. Revenue-generation from sources other than the farebox is the other side. We continue to grow other lines of business that make a positive contribution to the overall business. These benefits are spread across the system to help keep fares lower than they otherwise would be.
For example, our catering and retail operation generates $49 million in profit on about $80 million in revenue for the company, which helps keep fares down across the fleet. Other lines of business, such as B.C. Ferries Vacations and Commercial Services, also contribute positive net earnings to help the bottom line.
Maintaining the financial integrity of the company is vital, because we then have enough cash flow and retained earnings to revitalize our fleet, facilities and infrastructure. Keeping fares affordable is a top priority for B.C. Ferries.
I assure you that we are doing everything we can to balance the need to keep fares as low as possible, with the need to spend large amounts of capital to purchase vessels to replace those that are at the end of their lifespan. We need to strike this balance while never losing sight of the need to provide safe, reliable and efficient service that everyone expects.
Mike Corrigan is president and CEO of B.C. Ferries.
