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Sydney Ferries Cost ReviewL.E.K. report

L.E.K. Consulting Pty Ltd, Level 36, Aurora Place, 88 Phillip Street, Sydney NSW 2000, Australia T: 61.2.9323.0700 F: 61.2.9323.0600 www.lek.com

13 January 2012


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Sydney Ferries Cost Review (the L.E.K. Report) including any accompanying presentation and commentary (the L.E.K. Commentary).

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Executive summary (1 of 3)

This report presents a benchmark analysis of the cash costs of operating Sydney Ferries’ services and suggests different efficiency improvement scenarios

The bulk of Sydney Ferries’ cash costs are labour costs, with vessel crewing costs alone accounting for more than 35% of total costs. Sydney Ferries has forecast its cash costs ($117 million in FY11) to grow at 3.8% p.a. on a nominal basis to FY16 (i.e. $141 million in FY16), compared to an assumed inflation rate of 2.5% p.a. Cost growth in these forecasts is contained by the use of NSW Government guidelines on labour wage growth (2.5% p.a.); and higher wage growth assumptions would drive faster overall cost growth

These forecasts are based on the premise that Sydney Ferries would continue to operate the current ferry services. The 2012 franchising process is likely to have an impact on the business, but the nature and size of this impact are not clear. This analysis will identify the efficient costs of operating ferry passenger services for the routes currently serviced by Sydney Ferries under the existing service contract

Sydney Ferries’ cash costs have been reviewed against:

- the operational costs of seven domestic and international passenger ferry operators, whose costs were obtained through a survey

- the advice of a technical expert on efficient cost levels. This advice compares outsourced vessel repair & maintenance activities against performance in-house, and also considers the cost impact if partial or total fleet replacement was to occur

Executive summary



Sydney Ferries’ vessel operating costs are higher than those of the benchmark operators- staffing levels are above the benchmark levels, especially on the Inner Harbour- across the entire network, remuneration of vessel crew is high compared to benchmarks

Wharf operations’ costs at Sydney Ferries are also higher than at the domestic and international benchmark operators- this is mostly driven by higher cost per staff

Overhead costs at Sydney Ferries are high, primarily driven by above average non-labour costs (including costs that smaller and less complex operators would not be expected to have e.g. communications infrastructure, IT systems and government compliance costs)

Cost efficiency on the River service is lower than on other services. Combined with lower patronage this results in significantly higher costs per passenger

Cost efficiency in the area of repair & maintenance is also lower than for the benchmark, for two main reasons- labour productivity on the Balmain shipyard is materially below the external benchmark- two classes of vessels (Lady and Freshwater) are particularly expensive to maintain

Full fleet replacement would yield further efficiency improvements but at a capital cost that is projected to negate the benefits

Executive summary



The benchmark review of Sydney Ferries’ costs indicates that, if Sydney Ferries were to operate as efficiently as a selection of its domestic and international peers, lower its repair & maintenance costs to the levels available at external shipyards and partially renew its fleet, up to 24% cost savings could be achieved by FY16, compared to the business-as-usual scenario of $141 million (all costs nominal based on 2011)

- vessel and wharf operating costs could be reduced by $6m through improvements in labour productivity that are not expected to require major industrial relations reform

- a further $13 million in cost reductions would be available through off-peak River service reductions and partial fleet renewal. Partial fleet renewal in the form of the replacement of the Freshwater and Lady class vessels would require an estimated CapEx of $37 million in FY15, which has been annualised over 15 years

- major industrial relations reform bringing vessel, wharf and shipyard labour productivity in line with benchmarks would result in a further cost reduction of $15 million

- Please note that the FY16 savings are indicative of the annual savings available, but that the savings in other years will vary depending primarily on vessel service schedules

To achieve these significant cost reductions would require a strong intent to reform ferry services in Sydney, involving industrial relations reform, some service reductions (along the Parramatta River, where it can be cheaper and faster to use alternative forms of public transport) and material capital investment

Executive summary


Contents

1. Project background and approach

2. Sydney Ferries BAU forecasts

3. Cost benchmarking

3.1 Overview

3.2 Vessel operations

3.3 Wharf operations

3.4 Overheads

3.5 River service

3.6 Repair & maintenance and fleet renewal

4. Efficiency improvement opportunities

6 - 9

10 - 12

13 - 36

13 - 15

16 - 19

20 - 23

24

25 - 30

31 - 36

37 - 42

Pages


Review objectives

In the context of the fare determination process for the services currently provided by Sydney Ferries, IPART requires an estimation of the efficient costs of providing contracted ferry services on the routes operated by Sydney Ferries and a forecast of efficient costs

To achieve this objective, IPART identified three tasks:

- identify causes of cost inefficiency

- identify technical constraints, managerial constraints or Government policy that may prevent Sydney Ferries from achieving efficient costs

- indicate a transition strategy that would enable Sydney Ferries to move toward a more efficient cost structure

Efficiency in operating cost and capital expenditure should be taken from the perspective of least costs over the lifecycle of the assets

The determination made by IPART pertains to the maximum fares which will apply to services operated by Sydney Ferries and remain in force in the event of franchising by the Government



Scope and key assumptions

The cost review has considered the (operating and capital) cash costs required to operate the ferry services currently provided by Sydney Ferries

- depreciation and amortisation have not been included

The efficient costs for each of the five financial years 2011/12 to 2015/16 have been forecasted

- repair & maintenance costs and fleet renewal scenarios have been evaluated on an annualised basis for the 15 financial years 2011/12 to 2025/26

For the purpose of the review, it has been assumed that the timetables and service levels as of 24 October 2011 will remain in place over the review period. Note that service levels are a Government decision, not the operator’s

The current Sydney Ferries projections form the basis for the business-as-usual (BAU) cost forecasts, and their reasonableness has not been evaluated in detail

The review has not considered changing routes or service levels, as this is an indirect cost reduction lever (aimed at improving patronage and thereby reducing cost per passenger but not necessarily total cash costs)

- however, there has been an evaluation of the opportunity to reduce ferry services on the Parramatta River as this presents a clear opportunity to reduce total costs



Approach to determining efficient cash costs

0

5

10

15

20

25

30$m

5 Year Efficient Costs

Current Sydney Ferries Cash Costs

CurrentRatios

BestPractices

EfficientCosts

OpportunityAssessment

& Cost Projections

5 YearEfficient Costs

0

5

10

15

20

25

30

Other costs (e.g., Overheads)

Customer Service(incl wharf operations)

Ferry Operations(incl crewing and fuel)

Current Costs

Annualised FleetLife Cycle Cost

$m

0

5

10

15

20

25

30$m

Efficient Costs

Technical Benchmarks

Operator Benchmarks

Operator Benchmarks

Operator Benchmarks

Sydn

ey F

errie

s co

nsul

tatio

ns, o

ptio

ns d

evel

opm

ent

and

eval

uatio

n, s

hort

term

vs

long

term

ass

essm

ent

Illustrative

$ / Capacity service hour

$ / Passenger$ / Capacity service hour

$ / Capacity service hour

15 year annualised cash costs$ / Capacity service hour



Glossary

Abbreviation Definition

BAU Business-as-usual

BSY Balmain Shipyard

CAGR Compound Annual Growth Rate

CAO Customer Assistance Officers working on wharves

D&A Depreciation & amortisation

EBA Enterprise Bargaining Agreement – a collective labour agreement negotiated by trade unions on behalf of the various groups of employees

ERP Enterprise Resource Planning

FTE Full-time equivalent staff

GPH General Purpose Hand – deck hands working on vessels and wharves

I/H Inner Harbour

IR Industrial Relations

PPI Producer Price Index – a measure of inflation based on a weighted index of prices measured at the wholesale level

PPP Purchasing Power Parity – an adjustment to the exchange rate such that an identical good in two different countries has the same price when expressed in the same currency

R&M Repair & maintenance

RM Regular Maintenance

MPM Major Planned Maintenance

Capacity hour (1 hour operated for revenue passenger services) * (stated vessel capacity)

Capacity km (1km operated for revenue passenger services) * (stated vessel capacity)



More than one-third of Sydney Ferries’ cash costs relate to vessel crewing

Note: Labour costs for vessel operations are based on detailed position descriptions (e.g. GPH, master, etc) by service area in the FY11 payroll. Percentages indicate proportion of total cost; * Cash costs exclude depreciation & amortisation, financing costs and other gains / losses; ** Includes cash costs for major planned maintenance and estimated recurring Cap Ex; ^ Includes professional services fees, electricity costs, rent, taxi fares and security and cleaning costs; ^^ Cap Ex on other items, excluding Ferry Operations and Customer Information System (FOCIS), EFTPOS, Balmain Jetty 1/2/3 upgrade; † The cost of private vessel hire for Inner Harbour and River service areas is split into labour and non-labour components based on the existing division. The labour component, further split into GPHs, masters and engineers, was added to crewing cost while the non-labour component was added to other costsSource: Sydney Ferries P&L and payroll data, maintenance budgets and total asset management plan; L.E.K. analysis

Sydney Ferries cash costs* – operational costs and asset lifecycle costs (FY11)$AUD Millions (Nominal, 2011 base)

P&L

117

Labour

Fuel

Fleet and Other Maint

Other^

Capitalised cashcosts**

120

100

80

60

40

20

117

0By functional / service area

Operational andNon-vessel Asset Costs

Wharf and OperationalOverhead

VesselOperations†

Vessel and Balmain Shipyard (BSY)

Asset Costs

16.6%

45.6%36.5%

9.1%

4.7%

11.9%

74.9%

21.2%

Cap Ex 3.9%


Labour

Non labour

Labour

Non labour

LabourNon labour

Labour

Non labour

Cap Ex^^

5.8%6.9%

8.5%

12.7%

Overhead 12.7%


Sydney Ferries expects its costs to grow at 3.8% p.a. over the next five years, based on labour cost growth guidelines from the NSW government

Note: * For FY16F, operational costs are assumed to increase by 2.5% from FY15F in-line with detailed management forecasts of cost growth for all cost lines from FY13F-15F; ** Includes MPM, Cap Ex, and ongoing capitalised BSY and wharf maintenance. For FY10-16, Cap Ex only includes the estimated “steady-state” costs each year. Forecast R&M and capitalised costs are converted to nominal figures using an annual rate of 2.5%; ^ Labour after recoveries; As forecast costs assume service levels remain constant at FY11 levelsSource: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; L.E.K. analysis

Sydney Ferries forecast business-as-usual (BAU) P&L and capitalised cash costs (FY11 – FY16F)$AUD Millions (Nominal, 2011 base)

FY09FY08FY07

141

Labour^

Fuel

103112 117

160

140

Fleet and other maintenance

FY15F

130

FY14F

136

FY13F

130

FY12F

125120

100

80

0

60

40

20

FY11

117

FY10

Other

FY16F*

Capitalised cash costs**119

CAGR % (FY07-09)

Total 6.5

CAGR % (FY09-11)

(0.1)

CAGR % (FY11-16)

3.8

9.8

5.0

3.0

3.5

2.3

Capitalised cash costs included

Sydney Ferries’ BAU forecast assumes labour growth from 2012 of 2.5% p.a. (per NSW

Government guidelines)



A labour wage growth rate higher than the anticipated 2.5% p.a. could result in significantly faster growth in total costs

0

125

BAU forecast(2.5% p.a.)*

5% p.a.**7.5% p.a.^

FY16F

155

FY15FFY11

117

40

20

160

140

120

100

80

FY12F

60

139

FY14F

140

FY13F

130

Note: * Costs correspond to forecast BAU total P&L and capitalised cash costs. Labour costs grown at 2.5% p.a. from FY13F-16F; ** Labour costs grown at 5% p.a. from FY13F-16F; ^ Labour costs grown at 7.5% p.a. from FY13F-16F Source: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; L.E.K. analysis

CAGR % (FY11-16)

Sydney Ferries forecasted BAU P&L and capitalised cash costs (FY11 – FY16F)$AUD Millions (Nominal, 2011 base)

5.8

4.8

3.8

Labour cost growth scenarios



Sydney Ferries’ costs have been benchmarked against other ferry operators’operational costs, and against market costs for outsourced services for R&M

A total of 7 domestic and international benchmark operators have participated as benchmark operators:

Adjustments have been made to improve comparability with Sydney Ferries

- Inflation adjustments for comparison against FY11 data

- Real exchange rate conversion for non-fuel costs for international operators

- Fuel cost adjustments to normalise for differences in fuel prices

Sydney Ferries carries many more passengers than other ferry operators, however the measures used account for this

Efficient R&M costs (as well as the impact of fleet renewal scenarios) have been provided by Incat Crowther (experts in marine design and naval architecture)

Sydney Ferries AUST AUST AUST AUST INT INT INT

Service type Passenger Passenger Passenger Passenger Passenger Passenger Passenger & vehicle Passenger

Year of data provided for benchmarking FY 2011 FY 2011 FY 2008 FY 2011 FY 2010 FY 2011 FY 2011 FY 2011

Most comparable to Sydney Ferries services - Manly Inner Harbour Inner Harbour Inner Harbour Manly Manly Inner Harbour

Annual passengers ~14m < 1m < 1m < 1m 1m - 5m 1m – 5m > 5m 1m – 5m

Australian and international benchmark operators*

Note: * No comparators for the River service have been included in this studySource: Company data

3.1 Cost benchmarking – Overview


A range of metrics have been used to benchmark the different categories of costs

Cost per Capacity Hour

Cost per Capacity Km

Cost perPassenger

Comparison Metrics

(cost)

(passenger capacity) * (hours operated for revenue services)

(cost)

(passenger capacity) * (km operated for revenue services)

(cost)

(number of passengers)

Most effective metric to adjust for

- vessel size

- service requirements and resulting load factors

- stage lengths / distance between wharfs

- service speed

Although heavily influenced by how full the ferries are, provides additional information

Useful to compare the efficiency of different public transport modes

Most suitable for comparison of fuel costs

Primary comparison metric Secondary comparison metric

Note: “Cost” represents cash costs

Total operating cost Vessel operating cost Vessel crewing cost Wharf labour

Fuel costs Total operating cost Vessel operating cost

Benchmarked Costs

Rationale

Definition



While Sydney Ferries’ operating costs per capacity hour are close to 30% above the average of the benchmark operators, when adjusted for the number of passengers operating costs per passenger for Sydney Ferries are 16% below the benchmarkTotal Operational Costs per Capacity Hour*$AUD / capacity hour

0.56

0.43

0

1

2

3

Sydney Ferries Average Benchmark^

2.68

1.48

+28%

1.69

Note: * Costs represent cash costs and exclude depreciation & amortisation and R&M. Costs have been indexed to FY2011. Foreign benchmark costs have been adjusted based on PPP; ** Fuel costs have been adjusted to equate benchmark operators’ cost per litre to that of Sydney Ferries . All fuel costs exclude rebates; ^^ An arithmetic average calculated of all benchmark operators metricsSource: Sydney Ferries detailed P&L and payroll data; Company data; ABS; RBA; IMF; L.E.K. analysis

Vessel operations**

Wharf operations

Overhead and Other

Excludes depreciation & amortisation and R&M spend

2.10

Std. Dev

0.26

0.36

Total Operational Costs per passenger*$AUD / passenger

1.34

1.01

0

4

8

12

Average Benchmark^

6.40

5.37

Sydney Ferries

4.05

-16% 7.59

0.99

1.22

41.7 34.9Passengers /

Hundred capacity hours

Inner Harbour: 3.63Manly: 3.39River: 8.37

Inner Harbour: 1.66Manly: 1.43River: 2.45



Summary of vessel operations

Sydney Ferries’ vessel operating costs per capacity hour are above the average for the benchmark operators

- this is especially the case for the Inner Harbour service area

- higher than average labour costs are the major driver of this cost efficiency differential

The high labour costs are a result both of higher than average staffing and compensation levels at Sydney Ferries

- staffing levels are especially high on the Inner Harbour, where GPHs and Engineers are the largest sources of over-staffing

- average compensation is at the high end of the industry across service areas and jobs

Efficiency improvement opportunities can be found for vessel operations

- peak service scheduling on Inner Harbour and River service areas provides scope to introduce part-time jobs and thus lift labour productivity

- the nature of the Engineer job on the Inner Harbour is such that a qualified “Mate” could replace it at a lower cost

3.2 Cost benchmarking – Vessel operations


Vessel operating costs* per capacity hour$AUD / capacity hour

Note: * Foreign benchmark costs have been adjusted for based on PPP. Costs have been indexed to FY11 using Australian PPI; ** Fuel costs have been adjusted to equate benchmark operators’ cost per litre to that of Sydney Ferries. All fuel costs exclude rebates; ^ An arithmetic average calculated of all benchmark operators metricsSource:Sydney Ferries detailed P&L and payroll data; Company data; ABS; RBA; IMF; L.E.K. analysis

0.0

0.5

1.0

1.5

2.0

+14%

Inner Harbour benchmark

Manly benchmark

Average Benchmark^

Sydney Ferriesall services

SydneyFerries’cost for service area

Benchmarking data suggests that Sydney Ferries’ vessel operating costs are above average and that vessel labour costs are particularly high

Std. Dev

LabourFuel**OtherAverage total


Sydney Ferries’ vessel operating costs per capacity hour are 14% above the benchmark average, primarily because of high labour costs per capacity hour

The cost differential is especially pronounced on the Inner Harbour service area

- Sydney Ferries’ vessel operating costs per capacity hour for the Inner Harbour service area are 41% above the Inner Harbour benchmark average

Note: not including River service


Vessel labour costs* per capacity hour$AUD / capacity hour

Vessel FTEs* per million capacity hoursFTEs / millions of capacity hours

0.0

0.5

1.0

1.5


Manly benchmark

Average Benchmark**

Sydney Ferries all services

0

5

10

15


Manly benchmark

Average Benchmark**

Sydney Ferries all services

GPHsEngineersMastersOtherAverage total

SydneyFerries’cost for service area

Key drivers of this efficiency gap are both high staffing levels on vessels and high compensation per staff across the network

Vessel crew numbers on Sydney Ferries are above average

- this is especially the case on the Inner Harbour, driven by GPH and Engineer staffing

In addition, vessel labour costs are much higher than those of the benchmark operators because of high vessel crew remuneration per FTE

- Sydney Ferries has identified an opportunity to deploy qualified “Mates” on the Inner Harbour as a more cost efficient alternative to Engineers

Note: * Foreign benchmark costs have been adjusted for based on PPP. Costs have been indexed to FY11 using Australian PPI; ** An arithmetic average calculated of all benchmark operator metricsSource: Sydney Ferries detailed P&L and payroll data; Company data, ABS; RBA; IMF; L.E.K. analysis

Std. Dev





The presence of peak service scheduling on the Inner Harbour and River suggests opportunities for improved labour productivity through the use of more part-time labour

River

Number of services by hour of day – Typical Wednesday

Source: Sydney Ferries Passenger Load Survey 23-29 May 2011; Sydney Ferries timetable; L.E.K. analysis

ManlyInner Harbour

0

5

10

15

20

25

30

35Number of services

0

1

2

3

4

5Number of services

0

2

4

6

8

10Number of services

Peak services

Peak services

6am

9am

12pm 3p

m

6pm

9pm

12am 6a

m

9am

12pm 3p

m

6pm

9pm

12am 6a

m

9am

12pm 3pm

6pm

9pm

12am



Summary of wharf operations

The different wharf operations roles at Sydney Ferries each have their own purpose and the EBAs do not allow for them to be interchanged (even if their tasks and skills potentially allow this)

- largest group is comprised of wharf GPHs

- there is also a significant number of customer service staff including CAOs

Compared to the benchmarks, Sydney Ferries’ wharf costs per capacity hour are high

- higher costs are almost completely driven by high compensation levels, as staffing levels are only slightly above average

Two reform opportunities have been identified

- the planned introduction of electronic ticketing should allow for a reduction in ticketing staff

- an additional cost reduction opportunity, but one requiring IR reform, would be to replace GPHs with more cost efficient CAOs

3.3 Cost benchmarking – Wharf operations


Sydney Ferries has numerous different types of wharf operations FTEs, with clearly defined and non-interchangeable roles

Operations overhead employees include those who perform functions such as scheduling, rostering and are responsible for safety and training

Note: * Number of FTEs is rounded to nearest whole number and includes headcount associated with part-time staffSource: Sydney Ferries FY11 Payroll; Sydney Ferries Enterprise Bargaining Agreements

Ops overhead

Ticketing

Customer service

Wharf GPHs

Other wharf

Ticketing staff include cashiers who sell tickets to customers through sales outlets at Circular Quay and Manly. Also includes revenue supervisors and other revenue administration staff

Includes Customer Assistance Officers (CAOs) who support passengers on wharves by providing information regarding timetables, fare and service types, service status and assist with crowd control

Wharf General Purpose Hands (GPHs) have duties which can range from ticket-selling and customer assistance to vessel handling and assistance of on-board crew

Other wharf staff includes wharf controlling officers

Number of FTEs (FY2011)*

18

20

34

48

12

Total 131

% of total wharf and ops

overhead FTEs

14

15

26

37

9

100



Sydney Ferries’ wharf costs are relatively high, with labour costs being driven by high compensation levels

0.0

0.2

0.4

0.6

Average Benchmark^Sydney Ferries**

+57%

0

1

2

3

4

5

Average Benchmark^Sydney Ferries

Wharf and ops overhead costs* per capacity hour$AUD / capacity hour

Wharf and ops overhead FTEs per million capacity hoursFTEs / millions of capacity hours

Ticketing

Other wharf

Ops overhead

GPH

Customer Service

Note: * Foreign benchmark costs have been adjusted for based on PPP and average wage rates. Costs have been indexed to FY11 using Australian PPI; ** The wharf and ops overhead labour cost per capacity hour for Sydney Ferries is $0.31, of which $0.30 represents full-time staff and $0.01 represents temporary staff; ^ An arithmetic average of all benchmark operatorsSource: Sydney Ferries detailed P&L and payroll data; Company data, ABS; RBA; IMF; L.E.K. analysis

Std. Dev

Non-LabourLabour


Wharf and operational overhead costs per capacity hour at Sydney Ferries are 57% above those of the benchmark operators

- the cost gap almost entirely consists of labour costs

- while staffing levels are above the average, the major source of high labour costs is high remuneration

As the introduction of electronic ticketing is planned for 2012, a cost efficiency opportunity could be to reduce ticketing staff numbers


Sydney Ferries wharf operations full-time staff –Average cost per hour worked

ImpliedAvg. Annual

Employment Cost ($)*

ImpliedAvg. Annual

Hours Worked**

110,705

90,190

104,761

1,880

2,206

1,890

90,093 1,885

Note: * Remuneration also includes on-costs, overtime and recoveries; Costs and FTEs associated with GPH labour on Operations Overhead P&L have been excluded; ** Calculated based on hours worked per year as defined in EBAs. Includes double counting of hours worked on weekends and during holiday periods; ^ Includes staff undertaking specialised functions such as wharf controlling officersSource: Sydney Ferries detailed P&L and payroll data; L.E.K. analysis

Costs of GPHs working in wharf roles is high compared to that of ticketing staff and CAOs

59

48

41

55

0 10 20 30 40 50 60$ AUD / hour worked

GPHs

Customer Service

Ticketing

Other^

Opportunities to replace ticketing and other wharf staff with CAOs

were not considered in more detail


Analysis shows that Sydney Ferries’remuneration for vessel crew is high on a per staff basis across the network

The replacement of GPHs by CAOs has already been pursued to reduce costs, but scope for further improvement remains (subject to agreement on IR reform)


0.00

0.25

0.50

Average Benchmark**Sydney Ferries

+64%

0

1

2

3

4

Average Benchmark**Sydney Ferries

Overhead costs* per capacity hour$AUD / capacity hour

Overhead FTEs per million capacity hoursFTEs / millions of capacity hours

Note: * Foreign benchmark costs have been adjusted for based on PPP and average wage rates. Costs have been indexed to FY11 using Australian PPI; ** An arithmetic average calculated for all benchmark operatorsSource: Company data; ABS; RBA; IMF; L.E.K. Analysis

Sydney Ferries’ high overhead costs compared to the benchmarks appears to be primarily driven by high non-labour costs

Std. Dev of total cost / cap. hour

Std. Dev

Non-LabourLabour - full-timeLabour - temporary

3.4 Cost benchmarking – Overheads

Sydney Ferries’ overhead costs per capacity hour are higher than those of the benchmarks

- due to its size, Sydney Ferries benefits from scale economies

- however, the need for communications infrastructure and complex IT systems plus government compliance requirements drive up costs

While efficiency improvement opportunities through systems outsourcing exist, their size is limited compared to those in other areas


Summary of River service

The River service to Parramatta is unlike most other services, because compared to other public transport options for this destination Sydney Ferries is slower and more expensive than the train

- on other services, ferries are typically faster although more expensive than the bus and/or the train

As a result, patronage of the River service is lower than average, which results in a significantly higher cost per passenger

Cost efficiency could be improved through service reductions of less patronised services on weekdays during off-peak hours

- off-peak services attract few passengers as the River service mostly caters to commuters during the week

- patronage of River services on the up-stream stage between Parramatta and Cabarita is very low in both directions

3.5 Cost benchmarking – River service


For the River service to Parramatta, alternatives to ferries are both cheaper and faster, unlike most other ferry routes

Note: Fares and times calculated are from area surrounding origin wharf to Circular Quay; * Price of the fare is for a single adult ticket; ** For off-peak, train price represents 50% of the fare for an off-peak return ticketSource: Authority websites and timetables; Sydney Ferries data; L.E.K. analysis

Fares and journey times of transport services to CBD*Indexed relative to Sydney Ferries (=100)

0

20

40

60

80

100

120

0 25 50 75 100 125 150 175 200 225 250 275 300 325

Fare (relative to Sydney Ferries)

Journey time (relative to Sydney Ferries)

Neutral Bay

Bus (peak, express)Express

Express

ExpressExpress

Off-peak**PeakSydney FerriesBusTrain

ParramattaManly

Balmain Rose Bay

Sydney Ferries

Sydney Ferries slower and more expensive

Sydney Ferries faster but more expensive

Sydney Ferries faster and cheaper

Sydney Ferries slower but cheaper

Cabarita



Due to their lack of competitiveness, services on the River have low patronage density and are significantly less efficient than in other areas on a per passenger basis

Note: * Labour, fuel and other costs associated with vessel operations; combines River Express and River servicesSource: Sydney Ferries detailed P&L and payroll data; L.E.K. analysis

The low patronage of River services drives a high per passenger service cost relative to the remainder of the Sydney Ferries network

Potential options for achieving efficient costs include (on weekdays and in off-peak hours):

- Further reducing frequency outside peak periods

- Reducing coverage on the upper-river reaches of the service between Parramatta and Cabarita

Sydney Ferries total vessel operating costs per capacity hour, by service area (FY2011)*$AUD / capacity hour

1.431.66

2.45

0

1

2

3

ManlyInner Harbour

River

3.393.61

8.25

0

2

4

6

8

10

ManlyInner HarbourRiver

Sydney Ferries total vessel operating costs per passenger, by service area (FY2011)$AUD / passenger

4246

29

0

20

40

60

ManlyInner Harbour

River

Sydney Ferries passengers per hundred capacity hours, by service area (FY2011)Passengers / hundred capacity hours

Avg. of benchmark operators





Peak services from the city

Passenger load factors on the River service are still considerably lower during off-peak periods

0

200

400

600

800

1,000

1,200

0

5

10

15Number of passengers (bar) Number of services (line)

5pm-7pm3pm-5pm1pm-3pm11am-1pm9am-11am7am-9am5am - 7am 9pm-11pm7pm-9pm

Total patronage on River services to and from the city - Weekday average

Source: Sydney Ferries Passenger Load Survey 23-29 May 2011; L.E.K. analysis

21.9% 32.2% 19.3% 18.3% 17.2% 24.6% 23.3% 5.8% 7.8% Patronage as a % of total capacity

Peak services to the city



Most passengers to the city board the River service at wharves downstream from Cabarita

0

20

40

60

80

100

120

140

160

180

200

Huntleys Point

ChiswickAbbotsfordCabaritaBayview Park

Number of passengers

Inner harbour*

DrummoyneKissing Point

MeadowbankSOPRydalmereParramatta

Total patronage (entries) on River services to the city - Weekday average Bayview Park

SOP

RydalmereParramatta ExpressParramatta

Note: * Cockatoo Island, Woolwich, Greenwich, Birchgrove, Darling Harbour, McMahons Point, Milsons Point and Circular Quay; ** Distances based on an all stops services from Circular Quay. Bayview Park distance is calculated on a service terminating thereSource: Sydney Ferries Passenger Load Survey 23-29 May 2011; L.E.K. analysis

Small number of peak hour

services 7 – 8:30am

Off-peak services departing

before 7am or after 8:30am

Distance from Circular Quay(km)**23 20 17 16 14 12 11 10 9 8.5 7



Most passengers from the city tend to use the River service to access wharves up until Cabarita

0

20

40

60

80

100

120

140

160

SOPMeadowbankKissing Point

Bayview Park

CabaritaAbbotsfordChiswickHuntleys Point

Number of passengers

ParramattaRydalmereDrummoyneInner harbour*

Total patronage (exits) on River services from the city - Weekday average

Note: * Cockatoo Island, Woolwich, Greenwich, Birchgrove, Darling Harbour, McMahons Point, Milsons Point and Circular Quay; ** Distances based on an all stops services from Circular Quay. Bayview Park distance is calculated on a service terminating thereSource: Sydney Ferries Passenger Load Survey 23-29 May 2011; L.E.K. analysis

Bayview ParkSOP

RydalmereParramatta ExpressParramatta

Services 3 - 7pm with a high peak in patronage from

5 – 6pm

Off-peak services

departing city before 3pm or

after 7pm

232017161412111098.57

Distance from Circular Quay(km)**



Summary of R&M and fleet renewal

Sydney Ferries’ vessel lifecycle costs have been benchmarked under four scenarios

- efficient costs with current fleet

- efficient costs with current fleet, including re-engining

- efficient costs with partial fleet renewal (replacing two Lady class vessels with two smaller 24m vessels, and four Freshwater vessels with five smaller 35m vessels)

- efficient costs with total fleet renewal

There is significant scope for efficiency improvement with the current fleet, as labour productivity in R&M is low compared to the benchmark

Cost efficiency could be further optimised through partial fleet renewal, resulting in

- significant R&M cost improvements

- lower fuel consumption

- CapEx requirements and additional labour costs (through addition of extra vessel) that are more than offset by the above savings

3.6 Cost benchmarking – Repair & maintenance and fleet renewal


Four different efficient cost scenarios were considered, each with varying impacts on maintenance, engines and fleet

Source: Incat Crowther

Efficient costs based on outsourcing

Efficient costs with current fleet

Efficient costs based on outsourcingEfficient costs with

current fleet, including re-engining

Efficient costs with partial fleet renewal

Efficient costs with total fleet renewal

No change



Maintenance Engines Fleet

Vessels re-engined with MTU s60 engines:- Lady (2 vessels)- HarbourCat (2 vessels)- RiverCat with CAT engines

(4 vessels)

No change

No change

All new vessels with MTU s60 engines

All new vessels with MTU s60 engines

Vessels replaced by proposed 24m vessels ($3m per vessel):- Lady (2 vessels)

Vessels replaced by proposed 35m vessels ($5.5m per vessel):- Freshwater (4 vessels)

Vessels retained:- First Fleet (9 vessels)- RiverCat (6 vessels)- SuperCat (4 vessels)- HarbourCat (2 vessels)

Vessels replaced by proposed 24m vessels ($3m per vessel):- First Fleet (9 vessels)- Lady (2 vessels)- RiverCat (6 vessels)- SuperCat (4 vessels)- HarbourCat (2 vessels)

Vessels replaced by proposed 35m vessels ($5.5m per vessel):- Freshwater (4 vessels)

a

b

c

d



R&M costs for Sydney Ferries are significantly higher than efficient levels, suggesting low efficiencySydney Ferries vessel R&M (FY12F-26F annualised R&M costs and Cap Ex)$AUD Millions (Real, 2011 base)

Note: * Sydney Ferries’ maintenance cost forecasts have been adjusted downwards to reflect the average level of over-budgeting during FY09-11. An adjustment has been made to both MPM and RM labour and non-labour costs on account of this. The effective total adjustment was (13.8%); ** The split between labour and non labour vessel R&M is calculated on an annualised basis rather than a year-on-year basis; ^ Assumes no disposal value for existing vessels and no terminal value for new vesselsSource: Sydney Ferries detailed P&L and payroll data; Sydney Ferries maintenance and Total Asset Management Plan forecasts; Incat Crowther; L.E.K. analysis

Historic forecasting gap*

a b c d

5.9

7.7

Sydney Ferries BAU forecasts

5.9

9.7

7.3

3.7

30

3.8

20

15

10

5

0Efficient costs with full fleet renewal

3.1

3.3

3.8

6.6

Efficient costs with partial fleet renewal (Freshwater

and Lady class)

3.7

5.2

2.2

Efficient costs with selective re-engining

3.7

25

5.8

7.7

0.2

Efficient costs with current fleet

3.9

Note: Cap Ex annualised over 15

years^


Inner Harbour, River and non-labour R&M**

Inner Harbour, River and other unallocated labour R&M**

Manly R&M**Cap Ex

For the Manly service: Given that the bulk of major maintenance for

Freshwater class vessels is outsourced already, Sydney

Ferries’ costs are broadly in line with benchmark costs (but marginally different due to

forecasting differences)


The gap between Sydney Ferries’ vessel labour R&M costs and efficient costs is mainly caused by the difference in labour productivity. Based on efficient cost analysis R&M costs could be reduced by at least $2m p.a. or 25%.

15-year* annualised labour R&M costs (excl. Manly) ($m)

Sydney Ferries 7.9**

Efficient Costs^ 5.9

Note: * FY12F–FY26F; ** Adjusted downwards from $9.1m for historic forecasting gaps; ^ Efficient BAU costs as estimated by Incat Crowther; ^^ In FY11, 1056 hours were worked per FTE, with EBA stipulating 1880 total hours (40 hours per week * 47 weeks p.a.); ^^^ Labour R&M costs incurred which cannot be attributed to vessel R&M, BSY or wharf maintenanceSource: Sydney Ferries detailed P&L and payroll data; Sydney Ferries maintenance and Total Asset Management Plan forecasts; Incat Crowther; L.E.K. analysis

15-year* annualised labour hours (excl. Manly)

Sydney Ferries 56,602

Efficient Costs^ 45,182

Effective hourly wage rate ($)

Sydney Ferries

139 (FY11)

Efficient Costs^ 130

Hourly wage rate ($)

Sydney Ferries 78 (FY11)

Efficient Costs^ 91

Labour utilisation

Sydney Ferries

56% ^^ (FY11)

Efficient Costs^ 70%

Equals $9.7m labour cost from previous slide when unallocated^^^ labour of

$1.8m is included


a

×

×


The capacity of the proposed vessels under partial and full fleet renewal scenarios has been chosen to accommodate maximum boardings on Sydney Ferries services

201203182

284292245

216

0

50

100

150

200

250

300

350

400

450 Proposed capacity for Inner Harbour and River vessel

Maximum passenger boardings of Sydney Ferries services, 23 – 29 May 2011 (Typical week)Number of passenger boardings

800 passengers was chosen as the capacity for the larger vessel proposed for the Manly service as it was the greatest capacity possible given the length of the vessel

Information regarding the maximum passenger boardings on the Manly services was unavailable

However, other Sydney Ferries vessels, with 400-600 pax capacity, are used to supplement the Freshwater class during periods of high demand on the Manly service

Previous fleet renewal studies have suggested a capacity of 800 passengers for vessels on the Manly service

Source: Sydney Ferries Passenger Load Survey 23-29 May 2011; L.E.K. analysis

Proposed 24m vessel – Inner Harbour and River Proposed 35m vessel - Manly

Passenger capacities for the proposed vessels are 400 pax (24m) and 800 pax (35m)

Dar

ling

Har

bour

Balm

ain

-W

oolw

ich

East

ern

Subu

rbs

Parra

mat

ta

Zoo

Neu

tral

Bay

Mos

man


c

d


Analysis* shows that partial fleet renewal offers the most significant savings

250

200

150

100

50

0

Crew costsVessel utilisation

Fuel costsCap ExVessel maintenance costs

Note: Costs exclude savings from other opportunities such as EBA renegotiation; * NPV analysis of fleet renewal options over a 15 year period; ** Calculated using a real WACC of 7%Source: Sydney Ferries detailed P&L and payroll data; Sydney Ferries maintenance and Total Asset Management Plan forecasts; Incat Crowther; L.E.K. analysis

NPV of Sydney Ferries vessel R&M costs (FY12F-26F)**$AUD Millions (Real, 2011 base)

Sydn

ey F

errie

sB

AU

Sydn

ey F

errie

sad

just

ed B

AU

Effic

ienc

ybe

nchm

ark

Effic

ient

Cos

ts

R&M

sav

ings

Fuel

sav

ings

Sele

ctiv

e re

-eng

inin

g

Part

ial f

leet

rene

wal

Full

fleet

re

new

al

R&M

sav

ings

Cap

Ex

Fuel

sav

ings

R&M

sav

ings

Cap

Ex

Fuel

sav

ings

Addi

tiona

l lab

our

Labo

ur g

ains

Vess

el u

tilis

atio

n ga

ins

a b c d

Adju

stm

ent f

orhi

stor

ic

fore

cast

ing

gap



Summary of efficiency improvement opportunities

Sydney Ferries could reduce its FY16F cash costs by $6m (from $141m to $135m in nominal 2011 dollars, or by $5m from $124m to $119m in real terms) without IR reform

- introduce part-time vessel crews on Inner Harbour and River service areas

- replace Inner Harbour Engineers with qualified “Mates”

- reduce ticketing officers as result of introduction of electronic ticketing

A further $13m in efficiency improvement could be achieved with a commitment to some service reductions on the River and CapEx for partial fleet renewal ($11.5m in real terms)

- reduce off-peak River service frequency on weekdays

- terminate off-peak River services at Cabarita on weekdays

- replace Lady and Freshwater class vessels

With EBA renegotiations aimed at improving labour productivity, an additional $15m improvement would be feasible ($13m in real terms)

- Balmain shipyard

- vessel crew

- wharf GPHs



Efficient costs for FY16F are estimated to be $107m p.a., relative to projected costs of $141m. Around half this saving could be achieved without IR reform

20

0Eff. Costs

with IR reformBusiness-as-usual costs

Vessel crew EBA

renegotiation

Eff. Vessel R&M costs with current

fleet

107

Off-peak River service

reduction

Wharf GPH replacement

Part-time vessel

crew on I/H and River services

Currently available eff. Costs

135

I/H Engineers replaced with

qualified "Mates"

Off-peak River service termination at Cabarita

Eff. Costs without IR

reform

123

Partial fleet renewal

(Freshwater and Lady

class)

141

160

60

140

120

100

80

40

Sydney Ferries efficient operating and asset costs adjusted for benchmark costs without and with IR reform (FY16F)$AUD Millions (Nominal)

Vessel operating

costs

Wharf operating

costs

Riverservice

Partial fleetrenewal

(R&M* andoperations)

Note: * Annualised over the 15-year period from FY12F-26F. Excludes Cap Ex of $37m in FY15F and redundancy costsSource: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; Incat Crowther; L.E.K. analysis

Vessel operating

costs

Wharf operating

costs

Vessel R&Mcosts

Currently available without IR reform

Requires service reduction

Requires Cap Ex of $37m in FY15F Requires EBA renegotiation

Reduction in ticketing

officers as a result of

electronic ticketing 21 3 4



Savings of over $30m in cash costs could be available to Sydney Ferries by FY16F if IR reform was achieved

100

80

0FY16FFY15FFY14FFY13FFY12FFY11

$AUD Millions (Nominal)

160

140

120

Sydney Ferries operational, R&M* and Cap Ex cash costs** (FY11–FY16F)

Note: * Vessel R&M costs have been annualised over the 15-year period from FY12F-26F; ** Excludes redundancy costsSource: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; Incat Crowther; L.E.K. analysis

1

2

3

4

Efficient costs with River service reduction and partial fleet renewal, but without IR reformEfficient costs with River service reduction, partial fleet renewal and IR reform

Business-as-usual (nominal)

Currently available efficient costs


Business-as-usual (real)


Savings of almost $20m in cash costs will be available to Sydney Ferries by FY16F without IR reformCash costs (Nominal $m) FY12F FY13F FY14F FY15F FY16F

BAU cash costs* excl. Cap Ex 120.8 125.7 130.9 124.6 135.8

BAU Cap Ex 4.6 4.7 4.9 5.0 5.1

Total BAU cash costs 125.5 130.4 135.7 129.6 140.9

Part-time vessel crew - (3.1) (3.2) (3.3) (3.4)

I/H Engineers replaced with Mates - (0.9) (0.9) (0.9) (1.0)

Reduction in ticketing officers - - (1.0) (1.0) (1.0)

Off-peak River service reduction - - (3.4) (3.4) (3.5)

Off-peak River service termination at Cabarita - - (2.6) (2.7) (2.7)

Partial fleet renewal – vessel R&M** - - - (5.2) (5.3)

Partial fleet renewal – labour mix - - - 1.0 1.0

Partial fleet renewal - fuel - - - (2.3) (2.3)

Partial fleet renewal – Cap Ex - - - 37.1 -

Total cash costs^ without IR reform 125.5 126.4 124.7 148.9 122.6

Note: * Op Ex and vessel, Balmain and wharf R&M; ** Annualised over the 15-year period from FY12F-26F; ^ Excludes redundancy costsSource: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; Incat Crowther; L.E.K. analysis



Sydney Ferries will be able to save a further $15m in cash costs in FY16F if IR reform is conductedCash costs* (Nominal $m) FY12F FY13F FY14F FY15F FY16F

Total cash costs without IR reform 125.5 126.4 124.7 148.9 122.6

Efficient vessel R&M with current fleet - - - (6.1) (6.3)

Vessel crew EBA renegotiation - - - - (7.5)

Wharf GPH replacement - - - - (1.8)

Total cash costs with IR reform 125.5 126.4 124.7 142.8 107.1

Note: * Excludes redundancy costsSource: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; Incat Crowther; L.E.K. analysis



Reducing costs will take significant commitment and time, especially for the larger efficiency improvement opportunities

Opportunities without IR reform Requirements

Increased use of part-time vessel crew

Current EBA already allows for part-time vessel crew

Reduction in ticketing officers

EBA agreement to reduce FTEs due to electronic ticketing

Replacement of Inner Harbour Engineers with Mates

EBA agreement to introduce new Mate role

Off-peak service frequency reduction for River services

Government agreement to reduced services

Off-peak service termination at Cabarita for River services

Partial fleet renewal Government commitment to c. $37m Cap Ex

Opportunities with IR reform Requirements

Replacement of wharf GPHs with CAOs*

Negotiation of wharf GPH redundancies (wharf GPH jobs guaranteed under current EBA)

Move to efficient vessel R&M costs with current fleet

EBA agreement to reduce headcount, improve job scheduling

Increase use of outsourcing and contract labour

Renegotiation of vessel crew EBAs

EBA agreement to bring vessel crew remuneration and productivity in line with market

Decreasing relative ease of im

plementation

Note: Costs exclude redundancy costs; * Customer Assistance OfficersSource: Sydney Ferries detailed P&L forecasts and payroll data, maintenance budgets and total asset management plan; Incat Crowther; L.E.K. analysis

Partial fleet renewal increases feasibility of Balmain Shipyard (BSY) reform


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