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On a cool and cloudy Friday morning, Victoria’s horizon stretches out in front of Robert Clarke as far as the eye can see. But as he takes his seat at a meeting-room table, the Executive Vice-President and Chief Financial Officer of British Columbia Ferry Services Inc. (BC Ferries) isn’t thinking about the weather. He’s focused on different horizons.
Since taking over as CFO in 1999, Clarke has helped BC Ferries perform a delicate balancing act: delivering a world-class ferry service tying together the province’s major centres and remote communities, while keeping fares in check by chasing new revenue streams and maximizing efficiencies. To that end, the organization has been very successful. Although painful to implement, decreasing the number of annual round trips on certain routes as mandated by the provincial government is expected to deliver almost $23-million in cost reductions through to 2016. With more than 180,000 sailings in the 2014 fiscal year, BC Ferries brought in $800-million by transporting close to 20 million passengers, making it by some measures North America’s biggest ferry operator and one of the largest in the world.
Because the “publicly owned but private-functioning” company is basically a public trust – and must service certain locales, regardless of profitability – striking this balance isn’t easy.
But Clarke insists that running a world-class ferry service isn’t just about cost control. Although reliability and affordability are prime concerns, safety is BC Ferries’ priority. “Cost control is fundamentally important, but it can’t be the exclusive focus. Safety can come with a price tag, as can service reliability,” Clarke notes. “If your bottom line’s the only thing, you start to deteriorate the quality of your world-class service, which in turn will have a negative result for our stakeholders.”
Maintaining superior safety standards can be expensive. Still, safety can provide financial dividends. Take insurance. BC Ferries’ premiums rose after the Queen of the North ran aground in 2006, but the hike was short-term; today, thanks to a softening insurance market (partly due to increased competition among providers) and enhanced safety procedures, the company pays considerably less to insure its fleet than following the tragic accident.
Since the 2007 launch of the SailSafe program, a joint company-union initiative, workplace injuries have declined by 60 per cent. In 2014, BC Ferries received WorkSafeBC’s Certificate of Recognition for the successful implementation of the safety management system. “As a result, the company received a rebate of $600,000 in WorkSafeBC premiums, in addition to the $500,000 in premium savings,” Clarke says. “So when I say there’s a cost to safety, there’s also a business case to be made.”
But pursuing a profitable business case is not BC Ferries’ sole mandate. Unlike most ferry operators, the company is bound to provide three distinctly different services. Minor routes – there are 18 – mainly service inter-island traffic. There are two long-haul northern routes serviced by large vessels capable of navigating stretches of open ocean that separate some remote communities – for example, the non-stop 15-hour journey from Port Hardy to Prince Rupert.
Finally, four major routes connect Metro Vancouver with terminals near Victoria and Nanaimo on Vancouver Island, as well as with the lower Sunshine Coast. The vessels on these well-travelled routes (which help subsidize the less profitable ones) are typically huge ships. Displacing more than 11,000 tonnes, they can carry 2,100 passengers and crew; they offer a variety of on-board amenities, from buffets and self-service restaurants to gift shops and the Seawest Lounge, where, for a fee, guests enjoy newspapers, baked goods and Starbucks coffee in a quieter, more luxurious environment.
Amenities enhance the passenger travel experience, but they’re also a critical revenue source. For some, these value-added offerings are controversial. “There are lots of detractors who say we ‘should not be running cruise ships,’” Clarke notes. “But we make a net margin off of these amenities, which offsets the need to earn revenues from fares to cover our costs. Our fares would be 15 per cent higher if it wasn’t for those ancillary services.”
Other initiatives also help. BC Ferries Vacations provides full holiday packages, from hotel bookings to car rentals; it brought in more than $3.3-million in fiscal 2014, up 12.6 per cent from the previous year.
Another promising innovation is the tractor-trailer “drop service.” Here’s how it works. A truck driver pulls into the ferry terminal and unhooks the semi-trailer from the tractor. BC Ferries then takes over, loading the driverless trailer onto the ferry. At the final destination, another trucker arrives in a tractor cab, hooks up the trailer and drives away. The result? The trucking company saves money on wages and BC Ferries generates cash: with a 14 per cent revenue increase in fiscal 2014, the tractor-trailer drop service is now the company’s fastest-growing market segment.
Looking ahead, Clarke says the organization sees two major directional changes. The first is the gradual switch to dual-fuel engines capable of running on liquefied natural gas (LNG) or diesel, part of a series of vessel upgrades and replacements pegged at roughly $3-billion over the next 12 years.
Although it’s more environmentally friendly at less than half the cost of diesel, the LNG advantage comes down to dollars and cents. “The price differential is huge,” notes Clarke. There will be major capital costs in moving to an LNG-capable fleet (three new dual-fuel ferries currently on order will cost $165-million), but the savings justify the outlay, he adds.
The other big shift is the complete revamp of BC Ferries’ online point-of-sale reservations system. Called the Fare Flexibility and Digital Experience Initiative, it will allow consumers a wide array of travel and pricing options. “Our reservations system today, which was conceived of in the 1990s, is a premium product and an add-on: if you want to reserve [a departure time], you pay a price,” Clarke says. “As a business model, it’s one that’s way past its best-before date.”
The new system will allow for differential pricing on the same route, much like airlines offer today: passengers who take a ferry at a less popular crossing time will pay less than if they opt for a prime-time sailing. Clarke sees it as a big win for the passenger. “Simplistically speaking, you’ve got two kinds of customers,” he explains, “people who are time-sensitive and people who are price-sensitive.” The new initiative is designed for both.
With so much change in the air (or on the seas, rather), the 63-year-old Clarke is also personally testing new waters. On April 1, he’ll step down from his role as EVP and CFO and take on a two-year commitment to oversee the implementation of the company’s new online flexible fare system. And how will he spend his spare time? Appropriately, he’ll be on the ocean in his 36-foot trawler. “My grandfather was the Engineer Commander at the Esquimault naval base,” Clarke says. “I’ve got marine blood in me, all the way.”