Committee Reports::Report No. 03 - B&I Line plc::12 July, 1988::Report

1.The B&I Line, which was formerly known as the British and Irish Steam Packet Company Limited, is incorporated under the Companies Acts and its entire share capital is held by the Minister for Finance. The Company is responsible to the Minister for Tourism and Transport and it is governed by the B+I Line Acts, 1965 to 1988. A number of amendments to the Principal Act have dealt principally with increasing the Company’s share capital - from £1.6m in 1965 to £100m in 1988.

2.The Company changed its name in July, 1986, and re-registered as a public limited company - B+I Line plc - under the Companies (Amendment) Act, 1983.

3.A previous Joint Committee examined B+I Line in 1978/79 and it reported to the Houses on its examination of the Company in March, 1979 (prl. 8063). The immediate predecessor of the present Joint Committee initiated a further examination of the Company in October, 1986, but that Committee had not formulated a report to the Houses when it ceased to function on the dissolution of the Dáil in January, 1987.

4.Following its appointment in June, 1987, the present Joint Committee decided to up-date and complete the examination initiated by its predecessor and in that connection it took oral evidence from B+I management and from union representatives in October, 1987.

5.This report deals with developments in the Company in the period 1978-88 and, in particular, with the series of proposals relating to the restructuring of the Company which have been discussed by management and union representatives in recent years.

BACKGROUND

6.In reviewing the Company’s operations in the period 1978 - 1988, inclusive, it is difficult to quantify the specific adverse impact of each of a number of developments in the period on the Company’s financial position. However, the overall decline in the Company’s position can be attributed to a number of developments which can be summarised as follows:-

-over-expansion in the late 1970’s resulting in increased financial charges and over-staffing,

-substantial fuel price increases from 1979 onwards which particularly affected operators on long cross channel sea routes (Dublin/Liverpool and Cork/Pembroke),

-depressed market conditions up to 1985 and intensive competition and price cutting,

-service disruption because of industrial disputes, mainly in the United Kingdom, in the late 1970’s and early 1980’s,

7.For the twelve year period 1966 - 1977, inclusive, the Company generated an aggregate loss of £207,000 on an aggregate turnover of £153.277m. The operation, therefore, reflected a financial position marginally below breakeven. In a commercial organisation aggregate financial results over such a lengthy period either reflect the commercial realities of the business or are related to high cost structures, inadequate marketing, poor management and/or intensity of competition. Because of its past profitability record the Company in the future would be extremely susceptible to any developments likely to adversely impact on its costs and/or sales volume. The Company should, therefore, only have moved forward with extreme caution.

8.The national economy continued to recover in 1978 and in that year B+I achieved its highest ever annual profit - £1.353m-equivalent to a ratio of profits to sales of 3.2%. While the level of profits may have been comparatively substantial, the profit to sales ratio was not exceptional for a commercial organisation.

9.The Company embarked on expansion plans in 1978 and staff numbers were increased. The MV Connacht, which was ordered in 1976 from Verolme Cork Dockyard, was delivered to the Company in 1979 at a cost of £16.5m. The Board of the company put forward proposals in December, 1978, for the purchase of the car ferry MV Leinster for £20m and in May, 1979, the Government agreed that it could be constructed at Verolme Cork Dockyard. It is understood that both of these vessels could have been bought at a substantially lower figure elsewhere and that the Company received an Exchequer equity injection of £20m per vessel as compensation for the purchase of the vessels at VCD. These vessels, because of their high costs, attracted high depreciation charges which inevitably had an adverse impact on the Company’s financial fortunes.

10.While the Company’s turnover in 1979 increased by almost 17% compared with 1978, it recorded a loss of £1.148m for 1979 and long term loans increased by £5.2m. These losses were attributed to strikes and stoppages in the United Kingdom which were a direct cost of £2.3m to the Company. Tourist numbers from the UK declined by nearly 3% due to communications difficulties and petrol shortages and fuel prices during the year increased within a range of 69% to 96%. The Company, therefore, had the dual problem of a declining market and increased costs.

11.In 1980 the ratio of borrowings to shareholders funds increased from 51% to 75%, reflecting the long term loans raised in respect of the MV Leinster which came into operation in 1981. Finance charges increased by £3m and fuel prices by 23%. A strike by port employees at Liverpool cost the company £1m and it also had to carry the additional costs of the introduction of the Rosslare/Pembroke service and Jetfoil. While turnover increased in 1980 by an impressive 34%, the Company returned a loss of £2.807m, notwithstanding a surplus of £1.4m on the disposal of assets.

12.During 1981 the economic recession deepened. A strike at Fleetwood cost the Company £2.6m and fuel costs increased by 40%, on average, during the year. The Company increased its borrowings by £10m and finance charges increased by £2m. While turnover increased by 11% on the previous year, the Company, nevertheless, recorded a loss of £7.54m for 1981 and price cutting was a feature of that year.

13.In 1981 an Interdepartmental Committee was set up to examine the financial and operating performance of the Company over a five year period, and to review its role and recommend any changes in policy necessary to secure the most effective contribution by the Company to the Irish economy. That committee reported back in January, 1982, but its report was not published. While it appreciates the necessity, for commercial reasons, for confidentiality in relation to some aspects of the Company’s operations, the Joint Committee believes that there should be greater public disclosure of the findings of such reports insofar as they are likely to involve a requirement for further Exchequer funding.

14. During 1982 an operating plan, referred to later in this report, was introduced by the Company to control costs, maintain revenues and reorganise services. Turnover increased in 1982 by 9% and the trading profit of £5.5m was more than double the figure for the previous year despite costs of disruption of £1.9m. When depreciation of £4.54m plus financial charges of £7.774m and other costs were accounted for, the Company showed a loss of £8.581m. During the year the MV Munster and the Jetfoil were withdrawn from service.

15.The Company’s trading profits in 1983 were less than its depreciation provision. Costs associated with finance charges and extraordinary items and other costs resulted in the Company generating losses of £10.28m for the year and the numbers employed had been reduced to 1,747 as compared with 2,131 in 1979. According to the Company the travel tax, which had been introduced the previous September, and the reduction in duty free allowances, added £2.3m to its losses and the blockade of Dublin port during 1983 cost it £1.6m. The Cork/Pembroke service was suspended in February 1983 but a Summer service was operated on the route with a £500,000 subvention from Government.

16.The Company generated operating losses of £9.19m in 1984 and a provision of £18m was also made for extraordinary items, resulting in a total loss of £27.664m for the year. These losses reflected a negative sum of £6.087m in shareholders funds and current liabilities of almost £12m. The Company was, therefore, in an extremely difficult financial position.

17.In May, 1985, a new chairman and managing director was appointed. While the operating loss of £6.5m for 1985 represented a reduction of 28% compared with the previous year, the Company recorded a massive loss of £29.601m, having made provision of £23m for extraordinary items.

18.In February, 1986, proposals by the Board for the restructuring of the Company were accepted by the Minister for Communications, and the Company was reorganised. The re-organisation involved

19.Airfares deregulation was introduced in July, 1986, and new proposals were considered to enable the Company to compete effectively in the new low cost market environment.

20.In May, 1987, the Minister for Tourism requested the Board of the Company to submit to him as soon as possible a radical plan to restore the Company to viability which would have across-the-board support of the workforce. In December, 1987, the Government, having noted the Company’s Plan of Action, agreed to provide the Company with up to £11m in Exchequer equity in 1988 and the necessary legislation was enacted in March, 1988.

21.When a previous Joint Committee reported on B&I in March, 1979, it drew attention to the Company’s over-riding social obligations to the community apart from its primary commercial role. While accepting the need for the Company to achieve and maintain commercial viability, the present Joint Committee believes that the importance of having a State-owned Irish company operating passenger and cargo services on cross-channel sea routes is not only strategically essential but also socially desirable. It believes that both these considerations should not be overlooked in the event of any future evaluation of the Company. Where non-commercial factors are considered, they should, as far as possible, be clearly identified, and quantified and due consideration should be given to their impact on the commercial operation of the Company.

FINANCIAL RESULTS

22.In the period 1978-1987, inclusive, B+I Line recorded a profit only in 1978 and the Company’s group trading profit, before depreciation, for the period amounted to £32.943m. Finance charges, including both lease costs (£21.954m) and loan interest (£38.067m) totalled £60.021m and the loss, before extraordinary items, of £62.024m almost equated with the finance charges. If the Company had not incurred finance charges, it would have shown an almost breakeven position before extraordinary items (See Appendices I, II and III).

23.There was a gain of £1.981m from extraordinary items in the first four years of the period and a loss of £63.337m in the following six years. The aggregate loss for the ten years was £123.470m with finance charges plus extraordinary items accounting for £121.467m.

24.Operating losses of £9.19m and £6.59m, after depreciation and finance charges, were incurred in 1984 and 1985, respectively, and, in addition, provision for extraordinary items totalling £41.484m for both years was included in the accounts. The extraordinary items in the 1984 accounts included provision for additional depreciation costs of £15.6m on vessels and £2.884m costs arising in connection with the disposal of Jetfoil. In relation to the 1985 accounts provision was made for severance scheme costs amounting to £10m and a deferred liability of £8m in respect of certain future commitments to Milford Haven Conservancy Board. There was also a provision of £5m for freight reorganisation.

25.The 1986 Group Profit and Loss Account disclosed an operating loss of £6.792m and an extraordinary item provision amounting to £8.6m for depreciation to reflect a reduction in the carrying values of vessels at 31 December, 1986. It can be seen, therefore, that in the period 1984-1986, inclusive, there was a total provision of £24.2m for additional depreciation on vessels either owned or leased by the Company, reflecting the severe adverse impact of the worldwide recession in shipping activity on the market value of ships. The treatment of depreciation of vessels related to market value is, in the Joint Committee’s view, more realistic than applying depreciation on a historic cost basis. The net book value of vessels as at 31 December, 1986 was £19.447m.

26.The State, by way of acquisition of increased share capital has invested £72.928m in the Company in the period 1978-1987, inclusive (Appendix IV), and £31m (or 42.5%) of this amount was invested during 1986 and 1987. The Company forecast an operating loss of £15m approximately for 1987 but, as a result of intensive marketing efforts and lower interest rates, the loss was £10.735m. In addition, the Company will have to consider making an extraordinary provision of £9.216m in connection with the Plan of Action which is being implemented through 1988.

27.The Company’s Group Balance Sheet for 1987 disclosed a deficit in shareholder’s funds of £34.997m and there are net current liabilities of £15.394m. The Balance Sheet is, therefore, insolvent.

28.The Company’s Annual Report, 1987, includes the following statement by the chairman of the Company:

“The Balance Sheet of the Company is still weak. A consolidated bank agreement is nearing completion with our Bankers. The additional equity recommended under the Plan of Action if it is forthcoming from Government, together with the achievement of operational profitability, will mean that the Balance Sheet will be restructured on a phased basis over the next five years.’

29.The adverse affect of the losses generated is reflected in the following comparison between capital employed (total assets minus current liabilities), loan capital and shareholder’s funds.

Thus, the State investment of £90.5 million in the Company at 31 December, 1987, had been completely consumed by accumulated losses of £125.497m, resulting in negative shareholder’s funds of £34.997m. This reflects the degree of insolvency of the Company.

30.The B&I Line Act, 1988, enabled the Minister for Finance to provide the Company with up to £11m in Exchequer equity in 1988. The Company projects a trading loss of £1.7m (before interest and similar charges) in 1988 and therefore, the insolvency problem will not be resolved. In the Company’s Annual Report, 1987, the auditors state in relation to the Basis of Financial Statements, that “On the basis of continued support forthcoming from the Government, the financial statements have been prepared on a going concern basis”.

31.In the light of the Company’s continuing losses the question arises as to why more positive corrective action was not taken earlier by the Board of the Company. It is the responsibility of the Board of Directors to ensure the effective management and control of the Company and to monitor its progress. Having regard to the Company’s present financial position the effectiveness of the stewardship of the previous Boards of the Company must be called into question. The sponsoring Department must also share responsibility for the situation that was allowed develop in the Company and for the continued investment of additional share capital.

32.In circumstances where continual losses are generated a company’s balance sheet invariably becomes ‘waterlogged’ in debt because of the associated high debt/equity ratio situation. It is clear that the continued injection of Exchequer funds into B&I did not solve the fundamental problems that affected the Company. It may have been that, because of an expectation that Exchequer funds would continue to be made available to the Company indefinitely, there was a reluctance to become involved in a head-on confrontation with problems which would have necessitated substantial restructuring. Where a company’s level and quality of profits are suspect or nonexistent, it becomes imperative that fundamental and major changes are made. Invariably, such changes mean that significant “surgery” has to take place.

33.The depletion of shareholder’s funds and the level of borrowings reflect the substantial under-capitalisation of the Company. It is understandable, in the circumstances, that as the gearing factor (i.e. the debt/equity ratio) became excessively high, the Company became vulnerable to even the slighest economic downturn. The intensive competition in the cross-channel market resulting from the deregulation of airfares exacerbated the Company’s financial position.

34.It is mandatory for publicly quoted companies on the Irish Stock Exchange to publish an interim statement and a previous Joint Committee recommended that commercial State-sponsored bodies be required to do likewise. The interim statement would incorporate a summary of the positive or negative variances against budget for the first six months and an assessment of the expected results for the remainder of the year. The past experience in B+I only serves to highlight the necessity for commercial State-sponsored enterprises to be subjected to this discipline. The Committee is pleased to note that the Company has announced that its results for the first quarter of 1988 are £0.7m ahead of the targets set in the Plan of Action (See Appendix V).

35.It is appreciated that a company may not be in a position to comply with this proposal in circumstances where the financial position becomes extremely difficult, as in the case of B+I Line. The chairman of the Company commented, as follows, on this problem in the Annual Report, 1987:

“Because of the restructuring and the ‘going concern’ aspects which had to be resolved, it was not possible for the Board to approve the Annual Accounts for 1986 and 1987 until now (i.e. 27 April, 1988)”.

This situation gives rise to difficulty for the shareholder in relation to the proposal to rectify the Company’s problem because of constraint on the amount of information that can be disclosed publicly.

SCHEDULE OF EVENTS

36.During the period 1978 - 1985 a number of programmes were implemented to rectify the Company’s financial problems. At the annual general meeting of the Company in 1981 the chairman referred to a comprehensive programme of cost reduction which had been devised for implementation throughout all sections of the Company.

37.In May, 1982 the chairman’s statement on the results for the year ended 31 December, 1981, disclosed details, as follows, about an operating Plan for 1982.

“The Plan is designed to reduce permanently B&I cost structures, maximise the use of operating assets and realise saleable assets to alleviate cash difficulties. The main features of the Plan are as follows:

(i)The commencement of a daily short-sea service between Dublin/Holyhead in conjunction with a Dubin/Liverpool nightly service.

(ii)The operation of a forked service from Pembroke, servicing Cork and Rosslare with one ship.

(iii)The cessation of groupage services in Cork and the sale of surplus assets involved.

(viii)Endeavour to raise base revenue for tourism and freight to more economic levels.

(ix)Implement a cost reduction programme to cover all aspects of B+I’s operations.

Following discussions with personnel and all other interested parties involved implementation of this Plan is now underway”.

38.Notwithstanding the earlier programmes, the Company’s underlying problem of viability was not corrected and when Mr. Alex Spain was appointed Chairman and Managing Director in May, 1985, his immediate task was to return the Company to profitabiliy. The accounts for the year ended 31 December, 1983 had disclosed a loss, including extraordinary items, of £11.5m, equivalent to 13% of turnover. Proposals to re-structure the Company were approved by the Board and submitted to the Department of Communications in December, 1985, and the Minister for Communications announced acceptance of the proposals in February, 1986.

39.The re-structuring proposals, which are set out in (Appendix VI) had a substantial impact on the Company’s accounts for 1984 and 1985. The major objective was to reduce costs associated with the car ferry operations and corporate overheads and to improve services to customers. The proposals adverted to the necessity for further reorganisation of freight services which, in 1985, accounted for 58% of the total revenue of £100m and a provision of £5 million for costs associated with freight reorganisation was provided for in the 1985 annual accounts.

40.The proposals, as formulated by the Company, sought an immediate equity injection of £43m, of which £20m would be utilised to implement the changes required and the balance to rectify the Company’s adverse balance sheet position. The proposals, as agreed by Government, undertook to provide the Company with additional equity of £38 million over the period to the end of 1989. It was stipulated that £20 million of the total amount would be allocated to the Company in 1986 and a further £6 million in each of the following three years and that the equity injections of £6 million in 1988 and 1989, would be conditional on the Company’s achieving profitability in 1987 and 1988. It was also stipulated that there should be an eighteen month pay freeze.

41.The proposals, as approved by Government, were described by the Minister for Communications at the time as presenting “challenging” targets for the Company. According to the Company the amended proposals had the effect of requiring an increased profit of £2.5 million in 1987 and this was different to what the Company suggested could be done. The Company also claimed that if the requested £43m equity had been invested in January, 1986, it was possible that B&I would be turned round to profitability in the first full year of change.

42.The Government’s undertaking to provide equity funding to the Company necessitated the enactment of the British & Irish Steam Packet Company Limited (Acquisition) (Amendment) Bill, 1986. That legislation was debated in the Dáil and Seanad in June, 1986, and at that time the latest published B+I accounts were in respect of the financial year ended 31 December, 1983. The delay in publishing the annual accounts for 1984 and 1985 was occasioned by the fact that the Company was insolvent and the accounts were not approved by the Board until 28 May, 1986, following the Government undertaking to provide the Company with additional equity.

43.This raises the question of the adequacy of the information available to the Dail and Seanad when the allocation of substantial Exchequer funding to B+I was approved by the Houses. There had been significant developments in the Company since publication of the 1983 accounts and while the Government, acting as shareholder, would have had available to it the Company’s draft accounts for 1984 and 1985, the Dáil and Seanad did not have access to such information.

44.While the reason for the delay in publication of the accounts for 1984 and 1985 is appreciated in view of the need to resolve the “going concern” requirements, it seems to the Joint Committee that, in a situation where the Houses are asked to consider a proposal for the allocation of substantial Exchequer funding to B&I or to any other commercial State enterprise, there is an onus on the sponsoring Department to make available such information as would enable Members to assess the commercial justification for the investment on the basis of the fullest possible information on the company’s financial position.

45.In accepting the Company’s Plan of Action in December, 1987, the Government gave a commitment to provide the Company with up to £11m in Exchequer equity in 1988. When the legislation giving effect to this commitment came before the Houses in March, 1988, it was debated in the absence of the published Annual Report and Accounts of the Company for 1986 and 1987. While the Department of Tourism and Transport would have had available to it the Company’s draft accounts, the only published information available on the financial status of the Company was more than two years out of date.

46. In July, 1986, a very significant change took place in the cross-channel passenger movement market following the commencement of Ryanair services and the introduction of significantly reduced airfares by Aer Lingus and British Airways on the Dublin/London routes. According to the Company this resulted in the transfer of 276,000 passengers from sea to air, resulting in a serious reduction in the expected revenues for 1986. The Company informed the Joint Committee that there was a huge shift in the market conditions and that a differential of £40 in favour of surface, sea and rail in the London-Dublin route in January had been eliminated completely by July.

47.The sea carriers responded to the new competition with the introduction of a wide range of promotional and incentive fare packages for car and foot passenger traffic. Nevertheless, B+I car movements in 1986 were 31,300 fewer than in 1985, and passenger movements showed a reduction of 168,000 on 1985 (See Appendix VII). The decline continued in 1987 although at a reduced rate, with reductions of 10,000 car movements and 73,400 passenger movements. These figures reflect the adverse market changes and the suspension of B&I’s Rosslare/Pembroke service in 1985 arising from the two year agreement with Sealink to operate jointly on the Rosslare/Fishguard route.

48.The deregulation of airfares and its impact on B+I was commented on, as follows, by union representatives when giving evidence to the Committee in October, 1987:

“The major reason the [1986] plan was not successful was because of the full impact of airfares deregulation. There is no doubt about that, in fairness to Mr. Spain and to everybody else concerned. It is worth recording a point we did not make so far, which is that after airfares deregulation, we met the then Minister for Transport in the previous Administration and he accepted, and subsequently went public on this, that allowance should have been made for the impact of airfares deregulation and that that notionally should be included in the balance sheet. The facts of the matter are that it is the same Minister and the same Department who introduced the new competition from airfares that had the effect of transferring surface transport foot passengers in particular, on to air transport. It seems to me that it is absurd for the same Minister to make that decision and have the effect of putting seven or eight hundred people out of work in surface transport and make no allowance for it in the calculation of why the plan went wrong. Allowance has to be made for it”.

49.The introduction of deregulation of airfares so soon after approval for the provision of additional funding for B&I calls into question the role of the Department of Tourism and Transport and the rationale behind its decisions. It should, surely, have been obvious to the Department that the decisions would impact on each other and that they were not mutually exclusive. In a high fixed cost structured operation the Company’s profit sensitivity to volume movements was critical and, therefore, any reduction in traffic was likely to have significant adverse financial implications. The Joint Committee understands that B&I management was not aware of the imminent decision to deregulate airfares and, accordingly, no provision was made for its likely adverse impact on the Company’s restructuring proposals.

50.When Company representatives appeared before the Committee in November, 1986, they presented, in abbreviated form, the Company’s balance sheet as at 30 September, 1986 (Appendix VIII). This revealed borrowings of £52 million and negative shareholder’s funds at £16 million, clearly underlining the weakness of the balance sheet. In order to rectify this situation, a substantial turnaround in profit performance would have to be achieved in addition to an equity input by the shareholder.

51.The Company informed the Joint Committee that, arising out of the December, 1985, proposals, the following integrated package of measures interdependent on one another had been implemented:

52.The cost of implementing these changes was £16 million, 50% of which was allocated for capital items, and the balance to finance the cost of redundancies. The cost of refurbishing the M.V. Leinster and M.V. Connacht was £7.4 million, i.e. £1.4 million in excess of the amount provided for in the restructuring proposals. However, the significant factor was that a permanent reduction in annual operating costs of £5.5 million was achieved without affecting the revenue earning potential of the Company. Staff numbers, which totalled 1,829 at the end of 1985, were reduced during 1986 to 1,464 and changes in work practices were agreed with staff both ashore and afloat.

53.The Company forecast that there would be intensification of air price competition in 1987 with further increased capacity as well as continued intensive price competition and over-capacity in the freight market. In November, 1986, the Company disclosed to the Joint Committee that, in order to deal with this situation, the Board of B+I was considering action, as follows:-

(iii)Major initiatives to cope actively with low cost competition in all markets; and

54.The December, 1985 proposals, which were implemented during 1986, were significant, involving rationalisation of surplus shipping capacity, improvements in services, and staff and overhead costs reductions. It was envisaged that having implemented these proposals, further proposals would be formulated for the development of freight operations. Because of the developments in July, 1986, which led to intensified competition in cross-channel passenger movements and also the continued over-capacity in the freight business to the UK and to the Continent, the Company had to consider more radical proposals to meet the objectives already agreed with Government. In the course of oral evidence given by representatives of the Company it was stated that the Company was looking for “something like another £10m” of cost savings to add to the £5.5m savings which were achieved in 1986. The Company also disclosed that the number of job losses under discussion with the unions, arising out of the new proposals, was approximately 370.

55.When union representatives appeared before the Joint Committee in November, 1986, they expressed serious concern about the new proposals. They also highlighted the serious undercapitalization of the Company by the shareholder and stated that they believed that the profit targets set by the Government were completely unreasonable, particularly if it was expected that they would be achieved within the specified timespan.

56.B&I has had a unique record of peaceful industrial relations as evidenced by the fact that in the period 1968 - 1985 only fourteen days were lost because of industrial disputes. The B+I Policy Group of Unions, in their response to the Company’s reorganisation plans of December, 1985, accepted the need for change, committed themselves to support the advance towards efficiency and profitability, and recommended all staff to work towards those objectives. However, the group rejected the proposed level of job losses as outlined in the December, 1985, plans and the timescale to turn the Company around and it submitted counter-proposals to the Company which maintained that a three year rationalisation plan would be more effective and would save money for the Company and the State.

57.Late in 1986 the Company entered into discussions with the unions on the action the Board proposed to take and the unions were made aware of the likely effect of the new competitive environment on future revenues. It was recognised that in an environment of low cost competition, the future survival of the Company as a viable commercial entity would depend on its ability to adapt to low cost operations and that in order to effectively compete in a static market situation, the Company would have to reduce its high fixed cost structure.

58.Discussions were also initiated with Sealink as to how the major surface carriers should adapt their operations to the new competitive environment. A joint working party of the two companies recommended an optimum operating strategy which would involve the extension of the existing co-operation agreement, further reduction in capacity, and concentration on short sea routes. This was recognised as the best strategy, but it was not possible for B&I to agree acceptable operating and flag-sharing arrangements. It decided, therefore, to plan independent cost effective operations to be implemented on the expiry of the agreement with Sealink in December, 1987. As far as freight operations were concerned, it was contemplated that there would also be a change in emphasis from door-to-door trailer operations to driver accompanied traffic on the Ireland/UK routes. In this connection, the Company entered into discussions with Pandoro (a P&O company) about revised operating arrangements.

59.The results for 1986 disclosed that the passenger market had changed fundamentally following airfares deregulation in July of that year. Furthermore, revenues had been affected by the introduction of the new Cork/Swansea ferry service. Door-to-door freight declined in volume and price over the previous two years and volume and price were continuously affected by the degree of interruption and uncertainty over the reliability of service, intensive competition and a growing movement away from a door-to-door service to driver accompanied port-to-port service.

60.Intensive additional marketing efforts and cost reduction measures taken by the Company during 1986 reduced somewhat the effects of these new factors, but the loss for the year before extraordinary items was £6.8 million, i.e. £1.8 million off target for that year. Extraordinary items in 1986 were provided for in the accounts at £8.6 million and the loss for 1986 was £15.356 m.

61.In December, 1986, there was an industrial dispute in the Company involving maintenance craftsmen. The basis of this dispute was the non-acceptance by the craftsmen of the Company’s pay offer in respect of the 25th wage round which had been accepted by 1,440 of the 1,490 employees. In January, 1987, there was a further industrial dispute involving marine officers arising from the Company’s desire to discuss further changes of conditions in line with its plans for low cost operations. It is estimated that these strikes, both of which were resolved in February, 1987, resulted in a net loss to the Company of approximately £5m.

62.Discussion of the November, 1986, proposals, were suspended in order to deal with the industrial disputes. However, further adverse developments necessitated a total re-examination of the situation.

63.Following the resumption of normal operations, the Board of the Company made a request to the Minister for Tourism and Transport in May, 1987, for additional funds to enable the Company to continue to trade until the end of October, 1987, during which time an action plan for the future viability of the Company would be prepared. The Minister, in agreeing to this request, instructed the Board to come forward with radical proposals for viability - which would have across-the-board support of the workforce - for consideration by Government. The Minister also stated that the Government wished to make a decision by the end of October, 1987.

64.On 22 May, 1987, the Minister for Tourism and Transport announced that the Government had decided to make available to the Company from the Exchequer up to £8 million in the period to the end of October, 1987, and that £6 million of this amount would represent an advance payment of the equity allocation for the Company for 1988 proposed by the previous Government. The Minister also disclosed that the Company was forecasting losses for 1987 which would be more than double the 1986 loss of £6.8 million and that he had told the Company that this situation was totally unacceptable to the Government. The text of the statement made by the Minister when announcing the Government decision is set out in Appendix IX.

65.From June, 1987, the Company was in discussion with the unions on an action plan for viability. The Company informed the Committee that it met with the unions twice in June and that “out of these meetings a process had emerged for discussion, consultation and examination of all the options open for the future between the trade unions and the Company.” The Joint Committee understands that in the course of these discussions many suggestions were put forward by the unions which were jointly examined and that throughout this process the Company’s entire commercial database of information was made available to the unions for their use.

66.Proposals to achieve the commercial viability of the Company were approved by the Board of B&I and were sent to the Irish Congress of Trade Unions on 9 September, 1987. These proposals involved the following major changes:

(i)Substantial reduction of staff;

(ii)Sale of car ferry with the closure of Dublin/Liverpool service;

(iii)A settlement with P&O involving termination of the MV Tipperary lease, termination of the Fleetwood Port obligations, sale of equipment to P&O and withdrawal from the UK door/door freight operations;

(iv)Closure of road transport maintenance and non-essential offices; and

(v)Changes in salary scales and work practices.

It was proposed that, as far as possible, severance would be on a voluntary basis; that an operating company could be set up for the new operations; and that existing corporate loans and corporate interest would be paid from a holding company.

67.The unions commented, as follows, on their position in relation to the proposals, when they appeared before the Committee in October, 1987:-

“We appreciate that in the light of airfares deregulation and the Company’s difficulties, we too will have to make major sacrifices to preserve B&I. We have already publicly made clear our willingness to do so. Painful as it is, we will agree to the dismantling of the unprofitable sections of the Company’s operations”

“Therefore, what we are saying, and it is probably important that it goes on the record, is that over a three-year period we are prepared to give a three-year pay stance on top of the two years’ pay pause already; that we are prepared to sign an industrial peace clause for the duration of that three-year plan; that we are prepared to tolerate redundancies up to 550 and that we are prepared to make substantial concessions on long established conditions involving all sections of the workforce in the Company. That amounts to a hell of a package on our side and would not be saleable only that we are in the present dilemma.”

68.Following protracted negotiations, all the unions, with the exception of the Federated Workers Union of Ireland, representing the marine officers, reached agreement on proposals which incorporated a number of amendments. The Labour Court intervened on a number of occasions and it formulated proposals for a settlement. However, the marine officers overwhelmingly rejected the Labour Court proposals and on 30 November, 1987, the Board of the Company submitted to the Department of Tourism and Transport its final proposals subject to the condition that the changes in pay and conditions incorporated in the Plan would be accepted by all the workforce.

69.The Government’s response was made known in the following statement issued by the Government Information Services on 3 December, 1987:

“The Government are not prepared to consider a B&I Plan of Action which has not secured across-the-board support of the Company’s workforce. Seven days are being allowed by the Government from today’s date after which a decision will be made by the Government on the future of B&I.”

70.Following intervention by the Irish Congress of Trade Unions, the Labour Court, and the Minister for Labour, settlement was reached with all the unions representing the workforce on 11 December, 1987, and the B&I board recommended the Plan of Action to the Government for support.

71.On the basis of the Plan of Action the Government agreed to provide the Company with up to £11 million in Exchequer equity in 1988 and it decided that it would review the performance of the Company against its forecasts not later than Autumn, 1988 (Appendix X). The Government’s approval of the Company’s plan and the decision to provide continued support was welcomed by the Board of B&I (Appendix XI).

72.Part of the Plan of Action was to create an operating company capable of financing the costs of the assets utilised in the business and making a contribution towards the Company’s borrowings. The major area of concentration for management was cash flow and reducing the Company’s substantial level of liabilities. It was envisaged that the net costs of implementing the changes taking into account the severance scheme, sale of assets etc. would amount to £2 million. The Plan reflected the Company’s determination to establish itself as a major operator on short cross channel sea routes, i.e., the central and southern corridors, and thereby achieve greater asset utilisation. The major components of the Plan of Action were (a) Holding/Operating Company, (b) Car Ferry Operations, (c) Freight Operations and (d) Staff Numbers.

(a) Holding/Operating Company

73.The Plan proposed that the Company be divided into an operating and holding company (Appendix XII) and that the existing bank loans of £37.6 million (of which £17.9m is secured by Government guarantee, the balance unsecured) and commitments of £8.4 million, be transferred to the holding company. The average annual cost of servicing these loans over the five-year period would be £7 million per annum approximately, and the profits generated by the operating company would be available as a contribution towards these annual commitments of the holding company. In order to sustain the company, the new equity requirement for the period 1988-1992 would be £35 million, to meet interest and repayment commitments on present loans outstanding, of which the Government has agreed to provide £11 million in 1988. The operating company is forecast to show a loss of £1.7 million in 1988, but for the remaining four years is expected to generate small profits each year to give a cumulative amount of £2 million for the four years.

74.At the end of the five-year Plan of Action in 1992, the current level of loans and commitments will be reduced by £21 million to £25 million. The balance sheet of the holding company in 1991, while reflecting the reduction in borrowings will, nevertheless, be extremely weak and it is estimated that it will have a projected deficit in shareholder’s funds of approximately £14 million.

75.While the Government has deferred a decision on the proposal in the Plan for a holding company, the Joint Committee believes that there is considerable merit in having an operating and a holding company. It should have the effect of focussing greater concentration on the generation of profits from the operating company and also enable a clearer analysis of its operating results. It is to be hoped that the operating company concept would have the effect of boosting the morale of the general workforce which has a valuable contribution to make to the viability of the Company.

76.The shareholder (i.e. the Exchequer) indirectly is expected to service the debt burden which, basically, has been incurred because of historic losses. The operating company, therefore, has an opportunity to prove that it can operate profitably without further State subsidies.

77.In the course of the debate in the Dáil on the Second Stage of the B&I Line Bill, 1988, the Minister for Tourism and Transport commented as follows on a suggestion put by a former Minister to the Department of Finance that it should take care of the debts accrued by the Company and that the Company should be allowed a plain sea to operate on and prove that they could make a profit:

“One of the difficulties about that is that the moneys are not available as of now. It is not the responsibility of the State to look after debts incurred by B+I except insofar as the State guaranteed those debts and I do not intend to depart from that position”.

In the debate on the Bill in the Seanad the Minister stated that the servicing of the debt was a substantial draw on the funds of the Company and that this would have to be considered “in the light of the achievement of the Company under the new plan by the Autumn”. The Committee awaits with interest the Minister’s decision in relation to the Company’s proposals to establish a holding and operating company.

(b) Car Ferry Operations

78.The Dublin-Liverpool service was terminated on 6 January, 1988, and the Company introduced a twice-daily service between Dublin and Holyhead providing two round trips a day and utilising the M.V. Leinster. The closure of the Liverpool service necessitated the sale of the M.V. Connacht and the income derived is included in the cost of change calculations at a net cost of £2 million.

79.During the period 1966 - 1968 B&I developed plans for the operation of car ferry services on Irish sea routes. Following the announcement of these proposals, British Railways, which controlled Fishguard Port and which was concerned with protecting its market on the route, indicated that facilities would no longer be available there for B+I services. Consequently, B&I entered into an agreement with the Swansea Port Authority and began operating on the Cork-Swansea route.

80.As passenger, car and cargo traffic developed, the Company examined other British ports which would enable it to reduce its port-to-port travelling time and achieve its objective of operation on short cross-channel routes. It terminated its Swansea service in May, 1979, on completion of its agreement with Swansea Port Authority.

81.Following agreement with Milford Haven Port Authority and CIE, the Company began operations between Rosslare and Pembroke in 1979. It suspended this service in 1985 and began joint operations with Sealink on the Rosslare-Fishguard route. The agreement with Sealink was for a two year period but when the Company found it impossible to reach an acceptable operating and flag sharing agreement with Sealink it decided to return to the Rosslare-Pembroke service on the expiry of the agreement in December, 1987.

82.While multi-berth facilities are available at Rosslare there is only a single berth facility at Fishguard. It would, accordingly, be necessary to provide extra berthing facilities to accommodate two passenger/cargo ships at Fishguard. While Pembroke does not provide a direct rail link, the Company considers it suitable for its passenger, car and cargo markets.

83.The Company resumed the Rosslare-Pembroke service, concentrating on tourism traffic in the peak periods and freight movement in off-peak periods. It proposes to charter a suitable vessel which will provide for flexible operation of either transport or freight traffic services. It is understood that, because of its configuration, the M.V. Connacht would not be a suitable vessel in the long term to cope with the demand pattern on this route.

84.The Company has terminated its involvement in the door-to-door trailer service which it had operated jointly with Pandoro on the Dublin-Fleetwood route. The cumulative effect, taking into account the cost penalty associated with the early termination of the lease on the M.V. Tipperary, the sale of equipment to P&O, and the settlement with the Port Authorities at Fleetwood, is a net yield of approximately £1.5m which amount has been incorporated into the cost of change calculations.

85.The Company has entered into a new agreement with Pandoro for the operation of a joint freight service using two ships on the Dublin-Liverpool route. While Pandoro will provide both ships, one vessel will be on a lease arrangement to B&I who will be responsible for operating and crewing it.

86.The Company will operate the M.V. Wicklow and the M.V. Kilkenny, on its Continental container services on the following routes: Dublin/Cork/Le Havre/Antwerp/Rotterdam. While it is proposed that there will be some reduction in staff numbers and operating costs, there will be no change in routes or vessel configuration.

(d) Staff Numbers

87.It was proposed to reduce the numbers employed both on shore and afloat by way of 585 voluntary redundancies. The total employed in the Company would then be 879, as compared with 1,829 in 1985. To-date, considerable progress has been made in achieving this objective. The trade unions, in agreeing to the staff reductions, gave a guarantee of industrial peace until the end of 1990. They also accepted on behalf of their members a 5% reduction in pay for all staff, together with a pay freeze until June, 1989.

88.The Joint Committee appreciates the difficulties which the current management and unions have had to confront in the course of the protracted negotiations to reach an agreement on the action plan proposals. It compliments both parties on reaching what it would regard as a historic agreement which reflects the reality of the Company’s very difficult situation and the commitment of all the staff to secure its future.

OTHER ISSUES

(i) UK Berthing Facilities

89.It is generally recognised that B&I is not given equitable treatment as regards berthing facilities at Holyhead. On the other hand, the Office of Public Works, as controller of Dún Laoghaire harbour, provides almost unrestricted facilities there for Sealink. According to B&I, Sealink’s control of Holyhead and Fishguard is important in that it dominates the routes and jealously guards the key sailing times for its vessels on those routes. While there are two terminals at Holyhead, B+I frequently has to use the terminal at Salt Island which it considers inadequate. The Joint Committee understands that B&I’s quoted costs of operating in and out of Holyhead are very much in excess of the corresponding charges which Sealink has to pay at Dún Laoghaire, where facilities are considerably better.

90.Fishguard is, effectively, owned and controlled by Sealink, while CIE has management responsibility for the port of Rosslare. The Fishguard and Rosslare Railway Company technically owns both ports and its shareholding is 50% held by CIE and Sealink. It seems to the Joint Committee inequitable that a foreign shipping company which appears to have been very favourably accommodated in the ports of Dún Laoghaire and Rosslare does not reciprocate such facilities to an Irish company at its ports in Holyhead and Fishguard. Despite assurances given to the Minister for Tourism and Transport by Sealink, B+I have not been able to reach agreement with Sealink on berthing facilities at Holyhead which would enable them to compete on equal terms.

91.The Joint Committee believes that the Government should strongly support B+I’s case for more equitable berthing facilities and more reasonable port costs at Holyhead. It is unrealistic to expect the Exchequer to continue to finance the B+I in circumstances where it is forced to compete, under unfavourable terms, with a competitor company which is afforded very favourable facilities at Dún Laoghaire which are also financed by the Exchequer.

92.The Minister for Tourism and Transport commented as follows on this matter in the Dáil in the course of the debate on the Second Stage of the B&I Line Bill, 1988:

“With regard to Sealink and the ports I accept that we need to pressurise the Sealink company which owns Holyhead to get better slots for B&I to work out of. We have reasonable control in that the Office of Public Works own and control Dún Laoghaire harbour and we are working on that in the interests of B&I and in the interests of an even playing field for them in this particular regard”.

(ii) Management of Port Facilities at Dublin, Dún Laoghaire and Rosslare

93.Aer Rianta manages the facilities provided at Dublin, Cork and Shannon airports. The provision of corresponding facilities for sea passenger and freight movement at Dublin, Dún Laoghaire and Rosslare, the three major ports concerned with short sea routes, involves four bodies, namely B&I, Dublin Port & Docks Board, Office of Public Works, and CIE. Each of these bodies is directly or indirectly financed by way of Exchequer funding. The Joint Committee believes that in order to provide for greater coordination of the development of the facilities at the three ports, a cost benefit analysis should be undertaken to establish whether there is any merit in having the facilities controlled by a single authority. It believes that, in any event, there should be an open port policy, provided acceptable reciprocal arrangements are available at British ports. If the facilities were managed by a single authority B+I would not have responsibility for capital expenditure on port facilities and it could, possibly, operate on the basis of an arrangement similar to that which applies between Aer Lingus and Aer Rianta. In such an eventuality B&I could concentrate its efforts exclusively on the operation of a transport company.

(iii) Travel Tax

94.A flat rate travel tax of £2 on outward bound adult and children passengers travelling by sea and air was introduced in 1982. This was increased to IR£5 in the 1983 Budget. It is estimated that Exchequer revenue derived from this tax yields approx. £1.7m per annum from cross-channel sea passengers. While the flat rate tax of IR£5 has remained unchanged, its relative percentage of travel costs, particularly on short sea crossings, has substantially increased primarily due to the introduction of an intensive competitive pricing strategy by operators, reflecting reduced fares.

95.The combined effect of the travel tax and the restriction of duty free allowanes has practically eliminated daily return excursion traffic from Irish ports on cross-channel routes. For many families it was a relatively inexpensive opportunity to experience sea travel and visit another country, albeit for a brief period. From the cross-channel operations viewpoint it was welcome marginal income received during off peak periods, and also introduced a new market segment to sea travel.

96.The Joint Committee believes that the imposition of the travel tax on short sea routes, particularly in circumstances where it equates to a substantial proportion of the total travel cost, should be reviewed by the Minister for Finance, having consulted with the operators. It believes that some alleviation could be introduced which would have the effect of increasing the revenue earning capacity of cross-channel sea operators while at the same time ensuring that Exchequer revenue from this source is not completely eliminated.

Conclusion

97.The Joint Committee appreciates the contribution that B&I has made in terms of tourism and in the provision of freight services and employment. It also makes a significant annual contribution by way of various dues - £3m approx. - to the revenue of Dublin Port & Docks Board and is its single largest customer.

98.The Joint Committee believes that the Plan of Action is a very pragmatic approach to the solution of the Company’s problems. The Plan is not, however, a panacea for all the problems of the Company and it leaves little room for manoeuvre in the event of adverse developments. High cost structured companies have an acute profit sensitivity to volume movements and such movements are themselves sensitive to competitive pricing strategies. However, in the Plan of Action the cost base of the Company is being changed from one containing a high level of fixed costs to one focussing on variable costs. This should enable the Company to adopt a more flexible approach to market conditions. The further deregulation of air fares could result in intensified competition for the Company and the overcapacity in freight is unlikely to disappear overnight.

99.The Joint Committee endorses the support given by the Government to the Plan of Action and it hopes that the targets set in the Plan will be achieved, although it does not underestimate the magnitude of this task. It acknowledges the strategic importance of the Company to the nation and the substantial restructuring which has taken place. The Plan of Action reflects the significant cost to the Company of servicing accumulated losses of previous years, which are carried forward in the Balance Sheet, and at the end of the 5 year period the Company will have a deficit in shareholders funds. In the final analysis it must be accepted that the taxpayer cannot continue indefinitely to finance B&I losses.

The Joint Committee appointed Mr. Michael A. Kehoe, Management Consultant, to assist it in this inquiry. It wishes to express its thanks to Mr. Kehoe for the help and advice he has afforded it.

MEMBERS OF JOINT COMMITTEE

THIRD REPORT

B&I LINE plc

INTRODUCTION