Report recommends improvements for ferry system

  • The M/V Fairweather, one of the ferries within Alaska’s Marine Highway System, leaves from Auke Bay in this file photo. A new report aimed at improving the system’s finances recommends converting it to a state-owned corporation and forward-funding its budget to build passenger revenue. (Photo/Becky Bohrer/AP)

Insulating the state ferry system from annual political battles is one of the biggest things lawmakers can do to improve its operating efficiencies, according to a draft report released Sept. 13.

The Alaska Marine Highway System Reform Initiative draft report highlights the potential benefits the system could obtain from being converted into a public corporation as well as being forward funded by the state Legislature.

In May 2016, Gov. Bill Walker signed a memorandum of understanding with the Southeast Conference to have the Southeast Alaska nonprofit economic development group lead an examination of what reforms the state can take to improve the system’s operations over the long-term.

In recent years, as the State of Alaska has tried to reconcile annual and ongoing multibillion-dollar budget deficits, the AMHS has been caught in the middle of tense political battles.

Conservative legislators from Anchorage, Fairbanks and the Matanuska-Susitna region have often criticized the ferry system, which operates at a significant annual loss, as a bloated government agency that needs to be scaled back greatly.

Coastal legislators contend robust ferry service is vital for their communities and is often the only feasible way for residents in small communities to travel and ship vehicles, boats and all sorts of other goods.

The draft report compiled by the Alaska research firm McDowell Group in concert with marine engineering consultant Elliott Bay Design Group of Seattle acknowledges the AMHS will never be a money-making operation.

“Given the small markets served, long distances between ports, and often extreme weather operating environment, AMHS will always be dependent on public support to provide safe and reliable transportation,” the report concludes.

McDowell and Elliott Bay studied other ferry systems worldwide for their report.

The national firm KPFF Consulting Engineers was also contracted to draft a strategic business plan for the AMHS as part of the larger reform effort.

During the 2016 state fiscal year, the ferry system collected $47.2 million in operating revenues on $145.2 million in operating expenses. The revenue gap is filled mostly with state general funds.

Currently, the AMHS fleet consists of 11 ferries. State Transportation Department officials have been trying to sell the M/V Taku, one of the oldest mainliner ferries, and other vessels have been laid up due to budget cuts.

After the state dropped the minimum bid several times, a group of Portland investors secured the purchase at a sale price of $300,000 to turn the Taku into a floating hotel and restaurant on the Willamette River. Bids were unveiled Sept. 15, and the state Transportation Department announced Sept. 19 that it was accepting the bid.

Jonathan Cohen of Portland, Ore.,was the high bidder when the Alaska Department of Transportation opened three bidding envelopes for the 352-foot Taku.

Cohen, who represents a group of Portland investors, bid $300,000 — almost six times the amount of the No. 2 bid — and said by phone on Sept. 18 that he intends to transform the Taku into a waterfront hotel and restaurant that will occasionally sail into the Columbia and Willamette rivers.

“Our hope is to bring it to Portland, Oregon, where we’re based and to use it as a way to give this very historic vessel a second life,” he said.

At the same time, two new smaller “day boat” ferries destined for service on the popular Lynn Canal routes out of Juneau are under construction in Ketchikan. Construction of those vessels, built with about $110 million of state money, was approved shortly before the state’s budget fell apart when oil prices collapsed in late 2014.

The Department of Transportation is also working to replace the M/V Tustumena, which serves Homer, Kodiak and the Aleutian communities, but that replacement vessel will be paid for primarily with federal dollars.

While the AMHS will probably never be self-sufficient, the aforementioned recommendations could help it maximize its strengths, according to the report.

As it stands, the AMHS is a state agency managed as a public transportation service. Shifting it to a public corporation similar to the Alaska Railroad Corp. with its own board of directors would better allow for long-term operational and financial strategies to be implemented without the fear of them being changed or scrapped by political forces, according to the report.

A public state corporation would also still be able to receive federal highway funds, which the system relies on heavily for vessel maintenance and replacement.

As a public corporation the AMHS would be best suited to optimize operations if it were able to draw on the state AMHS Fund comprised of the revenue the system generates without approval from the Legislature, the report states. Allowing system leaders to manage the fund would provide a predictable revenue base.

Funding the system’s remaining needs ahead of the next year would also allow it to maximize efficiencies and “is essential for the system to take full advantage of its revenue opportunities.”

“Forward funding, which allows developing operating schedules up to 18 to 24 months in advance, would enhance revenue generation, especially in the nonresident tourism market where there is significant potential for growth,” the study authors wrote. “This growth would bring economic benefits to the many Alaskan communities that depend on the visitor industry.”

Roughly 40 percent of ferry riders are non-resident, according to the AMHS. The system is often marketed as an alternative to traditional cruise ships, particularly in Southeast Alaska. However, seasonal ferry schedules are finalized just a few months prior to implementation because the system budget is not known each year until the overall state budget is approved.

Cruise operators, on the other hand, set sailing schedules several years in advance to allow prospective customers ample time to plan vacations.

The report contends that increasing passenger fares significantly would impact ridership to a point that it would negate the sought revenue benefits. Conversely, lowering fares would not attract enough new riders to offset the lost per-passenger revenue.

It does suggest the AMHS employ demand management strategies as a way to grow freight revenue, which is currently about $2 million per year.

“AMHS should look for opportunities to partner with private freight carriers to maximize revenue and community service,” the report states.

Standardization of the ferry fleet to the extent possible and replacing the most expensive to operate ferries will in the long run significantly save money, according to the report; and utilizing modern automated ferries could reduce on-vessel labor by up to 10 percent.

The McDowell-Elliott Bay team also determined that continuing the system’s service to Bellingham, Wash., is critical because it accounts for 44 percent of total operating revenues.

The long-haul service through the Inside Passage is a popular way for people moving to and from Alaska, and to travel.

Taku sale

In July, Cohen outlined a plan to put a floating hotel at a pier in northwest Portland. According to the application, and as first reported by the Oregonian, the pier would be converted “into a terminal for river-related activities: floating hotel, watersports, seaplane terminal, spa, park, farmers’ market, and/or other amenities beneficial to adjacent condos and apartment buildings.”

Cohen said by phone that the result would be similar to the Queen Mary, an ocean liner converted into a hotel and destination in Long Beach, Calif.

“We’re not strangers to new and challenging projects. This is a different type of project, and it will come with its own challenges,” he said.

Cohen said the Taku wouldn’t be a high-end hotel; it’d be similar to the Society Hotel, which offers hostel-style accommodations as well as individual rooms.

“We’re not looking to offer high-end hotel rooms. We’re actually looking to make these the least-expensive hotel rooms in town,” he said.

The Taku’s open car deck might be converted into a space for a farmers’ market or small businesses, he said. The lounges could become spaces for “digital nomads” who need working room.

“Everyone has just been so positive about this boat, and I think it just has such a wonderful energy about it, and we want to keep that going,” he said.

Refitting the Taku is likely to be an expensive proposition, something that deterred other bidders. The state extended the bidding deadline four times, and that came after two other offerings received no takers.

According to information provided to bidders, the Taku needs several Coast Guard certifications and some significant maintenance work. Built in 1963, it is showing its age, and the cost of repairs was one of the reasons the ship was taken out of service in 2015.

All three bids for the Taku were below the state’s reserve price of $350,000.

Elwood Brehmer can be reached at [email protected]. James Brooks of the Juneau Empire contributed to this report.

09/28/2017 - 1:13pm