June 1996 € Volume 23 € Number 3
Changing Tides
Countdown to 2004: Greek coastal shipping prepares for deregulation
and colossal changes
By Harilaos N. Psaraftis
Shipping within the Greek coastal system has been an important activity
throughout the course of history. Evidence exists that boats sailed the
Aegean as early as the Stone Ages (about 13,000 BC). The Minoan civilization
of Crete (1,600 BC) was the first European civilization that seriously practiced
trade with the islands and the mainland. Ships were crucial in the Athenians'
defeat of the Persian Empire (480 BC) and in the establishment of their
own empire. Coastal shipping also played important roles in the Macedonian,
Roman and Byzantine civilizations.
In more recent times, the Greek commercial fleet has established itself
as a world leader, being involved in "deep sea" cargo trades all
over the world. Even though based on completely different principles, coastal
domestic shipping has developed along a parallel track. It has been critical
in promoting the development of the Greek islands and in sustaining the
economic and social cohesion of modern Greece as a whole.
Yet, for all its long history and steady evolution across the centuries,
Greek coastal shipping is about to experience unprecedented changes within
the next decade or so. This article spotlights these changes and gives a
sample of the pertinent analysis that can be made to investigate their impact.
The analysis itself has been carried out by the author and his colleagues
in 1993 in the context of a project sponsored by the Hellenic Industrial
Development Bank.
Busy Ports
Greek coastal shipping ranks among the largest such operations in Europe.
It involves the movement of passengers and cargo within a system of mainland-to-island,
island-to-island, and mainland-to-mainland connections. The actual number
of islands is close to 10,000, but only about 115 are inhabited. Of these,
69 are considered important from an economic perspective. The ports that
are considered important number 138, of which 42 are on the mainland and
the rest (96) are located on the islands. Crete is Greece's largest island,
with eight ports.
With few exceptions (short periods of temporary decline), coastal passenger
traffic has steadily grown every year over the last 30 years, from approximately
three million passenger movements in 1964, to about five million in 1970,
eight million in 1980 and 12 million in 1990. The heaviest traffic is generated
within the short-distance routes of the Argosaronikos Bay near Piraeus,
where passenger movements are more than double that of the long-haul Piraeus-Crete
lines. Vehicle traffic has also grown, often more steeply than passenger
traffic. The Piraeus-Crete line is the leader for both cars and trucks,
with car movements experiencing a 48 percent growth between 1981 and 1990
(more than double the equivalent passenger growth rate).
The introduction of large passenger/car ferries, which managed to displace
the traditional passenger-only steamers of the post World War II era, has
been the main reason for the generation of such a demand. Indeed, the evolution
from traditional passenger-only ships to passenger/car ferries is an important
change of the nature of coastal shipping in Greece in recent years. This
change has gradually developed over the course of the last 30 years and
has been spurred to a significant extent by rapid island economic growth
and by significant infrastructure improvements in island ports in the late
1960s and early '70s. This permitted, for the first time, ferry service
to these islands. In 1993 the fleet consisted of 104 large ferries (above
1,000 gross registered tons), 149 small and medium ferries (up to 1,000
grt), 69 conventional passenger ships, 52 hydrofoils and three catamarans.
An alternative to passengers who travel without a vehicle (car, bus or motorcycle)
is air transport, provided by Olympic Airways, and by its commuter subsidiary,
Olympic Aviation. Some private airlines have also recently entered the market
(this is a direct result of European air transport deregulation). Olympic's
domestic network consists of 34 airports, of which nine are on the mainland
and 25 are located on 23 islands (Crete has three airports). A few of these
destinations are also served directly by foreign airlines (charter or regular
flights).
Real Revolution
If the transformation of the system thus far has been a natural evolution,
a real revolution is about to happen within the next decade. One of the
main reasons is Regulation No. 3577/92 (referred to from now on as "the
Regulation") passed on Dec. 7, 1992, by the Council of Ministers of
the European Union (EU). The Regulation is concerned with the freedom of
service in maritime cabotage trades. So far under Greek law, only ships
flying the Greek flag have "cabotage privileges" in Greece, that
is, are allowed to carry passengers and freight between Greek ports. Several
other EU countries also have similar cabotage laws, which are very similar
to, but perhaps not as restrictive as, the "Jones Act" in the
United States.
All such national cabotage legislation is incompatible with the Regulation
and therefore has to be changed. Indeed, Article 1 of the Regulation gives
freedom to provide maritime transportation services within the entire EU
to all ships flying the flag of any EU member state, effective Jan. 1, 1993
(the official starting date of implementation of a borderless European market).
However, Article 6 grants exemptions (or, as they are officially called,
"derogations") from an immediate implementation of the provisions
of the Regulation for certain EU countries, Greece included. For Greece,
such derogations stipulate, among other things, that its coastal shipping
market will be deregulated in a phased period, so that it becomes fully
open to all EU shipping no later than Jan. 1, 2004. The 11-year waiting
period (already reduced to less than eight years) was intended to provide
Greece with the necessary time to prepare for the opening of the market
to competition.
How big a change will this be? "Quite monumental" might be an
understatement. For starters, the current system is completely regulated
by the Greek Ministry of Merchant Marine (MMM), which controls practically
all aspects of the operation, from network design to fare pricing, from
granting of route licenses to crew composition, and from development of
timetables to support of thin (low traffic) lines. Some of the existing
legislation dates back as far as 1926 and goes into such details as how
many cooks and stewards should be employed on a ship as a function of ship
size, what the prices of meals should be, and what fare discounts can be
granted to a heterogeneous array of special interest groups (including,
among others, members of the parliament, journalists, students, actors,
members of the military, boy scouts, members of large families, and even
prison security personnel).
Although it is recognized that thus far the system has worked reasonably
well, it is fair to say that in many respects the institutional framework
is complex, rigid, outdated and cumbersome. No rational criteria exist for
fare estimation and route licensing, and the discretionary power granted
to the Minister of Merchant Marine on many important matters is immense.
What is worse, some central components of the law are directly incompatible
with the Regulation.
Some other developments are also expected to lead to sweeping overhaul of
the system. For instance, Greek law mandates a withdrawal age of 35 years
for ferries. As the average age of the fleet is close to 25, more than half
of the existing ships in the fleet will have to be replaced by 2004. Perhaps
more important, as a result of the sinking of the ESTONIA ferry in the Baltic
in 1994 (900 lives lost), the International Maritime Organization (IMO)
has mandated new rules for the internal subdivision of ferries, both new
and existing. For a variety of reasons, these rules will be more stringent
for ferries operating in the Baltic and in the North Sea than for ferries
in the Mediterranean. Their effect will be twofold: (a) they will force
many of the existing Greek ferries out of commission, as a retrofit to make
them compatible with the new rules would be too costly, and (b) they will
induce many northern European ferry operators to move to the Mediterranean
sun, as it would be cheaper to convert their ferries to the looser "southern"
specifications (actually, some of these ships are already compatible to
them).
Last but not least, there is the expected impact of High Speed Craft (HSC)
on the system. In the summer of 1993, the Italian company Tirrenia (which
is state-owned) introduced a fast monohull on the line between Civitavecchia
(mainland Italy) and Olbia (island of Sardinia). This is a state-of-the-art
fast ship, capable of carrying 450 passengers and 126 cars at speeds up
to 43 knots. The trip (124 nautical miles) is traveled in 3.5 hours, of
which 3 hours are at the maximum speed. Two daily trips were planned for
the summer high season, dropping to one at lower traffic seasons. This HSC
is scheduled to operate only 11 weeks per year (July-October), and charges
for cars a fare only 15 percent over the equivalent conventional fare. In
view of the Regulation and the other developments that are expected to occur
soon, the appearance of such HSCs in Greece is considered only a matter
of time.
Note that today in Greece there are no HSCs that can also carry vehicles,
and conventional passenger-car ferries have a real monopoly on those passengers
who travel with their cars (captive demand). The rest of the HSCs operating
today in Greece are hydrofoils and catamarans, neither of which can carry
cars. And although hydrofoils have carved their own special niche in the
Greek market, catamarans have been less successful. Their meager presence
is mostly attributed to the existing system of route licensing by the MMM,
which, in one case, granted a license to a catamaran on the condition that
it serve a 10-port route. However, after 2004 such MMM policies would be
illegal, and HSCs that can also carry cars are expected to be active players
within the system.
OR/MS Viewpoint
Given all these developments, a simple question to ask is, What does the
future hold for the Greek coastal shipping system? From an OR/MS analyst's
point of view, this question can be both a dream and a nightmare.
It can be a dream because the range of problems that can be addressed in
the context of the monumental changes that are about to occur is extremely
rich in OR/MS content, and very challenging at the same time. Furthermore,
one would think that the magnitude of the change that is bound to occur
is likely to maximize the chances of implementation of a "clean slate"
solution in many areas, with maximum benefits to the players involved. Here
is just a sample of problems with a significant OR/MS content:
- In the light of deregulation, how should an individual shipping company
design its network of operations?
- How should the MMM design the process of licensing routes to carriers,
especially for thin lines to underdeveloped regions?
- What will be the modal split among the various modes competing for passengers
and vehicles (including air transport)?
However, there are also valid reasons the OR/MS analyst's job may run into
some obstacles. For instance:
- Greek shipping companies typically operate in an ad hoc fashion, with
the need for sophisticated OR/MS analysis usually not transparent.
- 004 may still seem far away to governmental agencies and politicians,
particularly since at least two general elections will take place between
now and then.
- Collecting reliable data for the analysis may be a formidable task.
In particular, it is the difficulty of data collection that can turn the
analyst's job into a nightmare. Such difficulty can be fully understood
only when one sets out to do the analysis. It is easy for an OR/MS analyst
accustomed to developing algorithms and working on abstract problems to
assume that the right data would be readily available to be plugged into
the models he or she has developed. Nothing of the sort is the case for
Greek coastal shipping.
Indeed, there are a variety of sources for coastal shipping data. But some
collect data of interest only to them, while others collect the same or
other data, with frequent inconsistencies and gaps in the data. For example,
the ship database of the Directorate of Maritime Transport (the MMM agency
overseeing routes and schedules) is not exactly the same as the ship database
of the Directorate of Merchant Ship Survey (another MMM agency overseeing
ship inspection and safety). Origin-destination traffic matrices are not
collected, and recent data is frequently missing. The most vivid example
in this author's experience was that in 1993 (the year of the study) the
most recent published coastal traffic data of the Greek National Statistical
Service was dated 1987.
Contrary to our initial expectations, a disproportionate amount of effort
was spent (by the 10 people on the research team, by MMM personnel and by
others) to collect, cross-reference, update and correct the data. In addition,
scores of volumes of relevant legislation were consolidated in about 30
pages. That effort, in and of itself, was perhaps tedious and mundane, but
it produced something of value, providing for the first time a broad and
concise representation of the status of the system. No analysis of future
scenarios and policies could be made without this initial "baseline"
knowledge.
One of the "hot topics" in view of 2004 is what portion of demand
(passengers and vehicles) will shift to HSCs (including fast ferries) after
2004, when these ships will be free to operate within the system. Given
that the passengers will be able to choose among several competing modes
(including air), what will be the modal split?
Performing the modal split analysis was by no means an easy task, for a
number of reasons. First, the relevant network in Greece is huge (at least
138 ports, 34 airports and thousands of inter-node links). Second, one could
only speculate what would actually happen during the few remaining years
to 2004 in terms of the fleet, introduction of new technologies, port expansion
and development of legislation, to mention just a few of the crucial factors.
Third, it was not immediately clear how the Greek traveler values his or
her time, which is perhaps the most critical parameter that one needs to
know in order to assess how much more the traveler is willing to pay in
order to travel faster.
In the face of this complex situation, the approach that was adopted consisted
of the following steps:
Details of the overall approach (which is rather involved) are outside the
scope of this article. Here we only highlight some important points and
results.
1) In Step 1, we decided to examine a nine-port, six-airport
network, distributed in the following six geographical "zones":
Athens/Piraeus area (two ports), Mykonos island, Santorini island, Western
Crete, Central Crete (two ports) and Eastern Crete (two ports). In terms
of size, and even though nine ports are only a small fraction of the 138
ports in the system, in 1990 total passenger traffic among the nine selected
ports was 19.2 percent of total Greek coastal traffic. Also in 1990, total
traffic among the six selected airports was 27.3 percent of total Greek
domestic air traffic. So from this perspective the selected sub-network
was certainly non-trivial.
2) In Step 2, and after several regression analyses, it was
determined that the best fit to historical data (1964-1989) for the entire
system is the one described by the following equation: TOTAL_PAX = exp (1.271
+ 0.0414*(Y-1963)), where TOTAL_PAX is the total passenger trips by sea
in year Y. The R**2 of this equation is 0.95, and the t-statistic on the
coefficient of 0.0414 is 21.06, both acceptable. The above equation projects
about 16.5 million trips in year 2000, about 19.5 million trips in 2004,
and about 25.5 million trips in 2010.
Creating the O-D tables for the sub-network was a rather tricky task. To
circumvent this problem, the direct assistance of the MMM was requested,
and after a series of estimates on how flows at each port split among different
routes, an "expert estimate" of the O-D table of passenger trips
by sea in the sub-network for 1990 was finally made. Then O-D tables were
created for passengers traveling with their cars and for those traveling
by air. Individual regression analyses for each link of the sub-network
then projected these flows to 2004.
3) In Step 3, we assumed that a total of five modes of transport
would operate in this network in 2004: air transport, conventional ferries,
hydrofoils, surface effect ships (passenger only) and HSC ferries. Note
that only two of these modes (air transport and conventional ferries) existed
on this network in 1990.
4) In Step 4, we assumed a "default" fast fare surcharge
of 15 percent vis-à-vis conventional fares; 30 percent and 50 percent
surcharges were also examined in the sensitivity analysis.
5) In Step 5, to calculate the passengers' value of time,
we used the "revealed preference" method and a logit model. From
the 1990 flows on the sub-network there is clearly revealed preference,
that of passengers traveling without a vehicle, split between air transport
and conventional ferry.
Performing a regression analysis, an "average" value of time equal
to about $2 per hour was extracted (1990 values). However, the R**2 for
this analysis was not that spectacular (0.54), implying that there were
probably more factors affecting traveler preference and behavior than those
examined by this model (fare and trip time).
6) In Step 6, the value of time was assumed to grow to 2004
as the projected rate of growth of Greek GNP. Then the logit model was run
and produced the O-D tables for 2004, per mode, and separately for passengers
traveling with a vehicle and for passengers traveling without a vehicle.
7) The results of Step 7 were as follows. In 2004, for those
who will travel without a vehicle, 32 percent will take the plane, 40 percent
will go by conventional ferry, 3.3 percent will take the hydrofoil, 3.7
percent will use a surface effect ship, and 21 percent will go by HSC ferry.
For those who will travel with a vehicle, 60 percent will go by conventional
ferry, while 40 percent will go by HSC ferry.
An economic feasibility analysis of HSC ferries was also performed. Interestingly
enough, it neutralized, to a significant extent, the promising results of
the modal split analysis. It boiled down to the realization that although
fast ships can attract a significant share of passenger traffic if the fares
they charge are modest (15 to 50 percent over the conventional fares), the
economic viability of such vessels is likely to be problematic because they
need much higher fares to break even. As the break-even fares are often
close to the level of air transport fares, very few people would accept
them, rendering the overall operation problematic. Several factors contribute
to this outlook, and to the extent that some or all of these factors change,
the outlook itself can change for the better. These are the following: (a)
low level of conventional fares, (b) high relative cost of HSCs, (c) low
value of time in Greece, and (d) year-round service imposed by the MMM.
Effects of Change
As interesting as these results might be, the pertinent question is whether
there has been any real change in the system in preparation for 2004.
Three and a half years after the Regulation was issued, a first-glance assessment
of the situation may very well lead to the observation that "little
or nothing is moving yet." However, there is more than meets the eye.
There have been two main developments in that regard. First, a few Greek
ferry operators have become members of the Athens Stock Exchange. Others
are planning to do so in the near future. This is a significant departure
from past practices, as most of the shipping companies in Greece are family
owned. Apparently, the Stock Exchange is, for the first time ever, seriously
viewed as a vehicle to raise capital for fleet modernization.
The second significant development has been a related one. Several Greek
ship owners have purchased or ordered brand new ferries. This is an important
change from the traditional policy of buying cheap secondhand ships (not
necessarily passenger ferries) and then making extensive conversions in
Greek yards. Trendsetters in that regard have been the twin ferries SUPERFAST
I and II, with a service speed of 26 knots. Interestingly enough, all of
these new ships have been allocated to the Adriatic corridor, linking Greek
ports such as Patras, Igoumenitsa and Corfu to Italian ports such as Brindisi,
Bari, Ancona, Venice and Trieste. So far no HSC ferry (monohull or catamaran)
operates between Greece and Italy, but there is speculation that this will
happen soon.
The Adriatic corridor is very important for the connection of Greece to
the rest of the EU, particularly since war broke out in the former Yugoslavia.
However, Adriatic services are different from internal Greek cabotage services
in many respects. For instance, no Greek flag requirement exists, and in
fact many of the Greek-owned ferries in that corridor are foreign-flagged
(mostly the Cypriot flag). As such, they are prohibited to carry passengers
from one Greek port to another Greek port on the Greece-Italy route (such
as from Patras to Corfu). However, by contrast to Greek-flagged ships, these
ships are not required to maintain year-round service. Another significant
difference regards the fares across the Adriatic, which, in contrast to
domestic fares, are not controlled by the MMM.
So one might argue that in many respects the picture that exists in the
Adriatic today (which is a much less regulated environment) may be a preamble
of what might happen in domestic services after 2004 (or at least in parts
of the system). But if this is indeed the case, one set of statistics is
revealing: Whereas the total fleets of large ferries of Greece and Italy
are comparable in terms of population, out of the 49 large ferries operating
in the Adriatic last summer, 48 were Greek-owned and only one was Italian.
Whether or not this is a sign that the much feared "foreign invasion"
into Greek waters is grossly exaggerated is only subject to speculation.
Whatever happens, one thing is certain. As things will never be the same
again after 2004, whoever travels in this part of the world in the next
few years will be uniquely privileged to experience first hand the full-scale
transformation of Greece's coastal shipping chrysalis.
Harilaos N. Psaraftis is a professor at the National Technical University
of Athens. He has two Master's of Science degrees (1977) and a Ph.D. (1979)
from MIT. He was a faculty member at MIT from 1979 to 1989 when he returned
to Greece. His research interests include transportation logistics, vehicle
routing and scheduling, maritime transportation economics and management,
intermodal transportation, and marine environmental protection. He represents
Greece on various research committees of the European Commission and is
active in several EU projects. He has been an associate editor of Transportation
Science since 1987.
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