Scientific Game

Exit the Dragon

Market consolidation as well as a company failure could spell bad news for Macau’s shuffling army of ferry passengers

Monday, 03 October 2011 16:33
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The failure last month of the ferry operator Macao Dragon was merely the outward manifestation of deeper structural problems in the Macau economy. Despite a decade of gaming market liberalisation, the concept of real competition in other areas of the local economy often tends to be honoured more in the breach than the observance.

Even before Macao Dragon breathed its last, there was a highly significant development in the market. On 11th August, an announcement that barely got a mention in the Macau media revealed that New World First Holdings Ltd—a Hong Kong-based operator of ferry services to Hong Kong’s outer islands and to Macau—had been sold to Shun Tak. Shun Tak is a shipping and property conglomerate founded by Dr Stanley Ho and run by his daughter Pansy. It also operates TurboJet—the dominant (and at one time monopoly) ferry service provider between Hong Kong and Macau. As part of the HK$350 million deal, Shun Tak got New World’s fleet of catamarans and the ferry concession agreement granted by the Macao SAR government.

On 1st September, less than two weeks after the Shun Tak takeover, New World First Ferry Services (Macau) announced it was reducing the price of a single trip between Macau and its operating base at Kowloon in Hong Kong, by HK$19 (US$2.4) or its equivalent in patacas. The company said this was to reflect a decision by the Macau government to drop a departure tax previously levied on tickets from Macau. TurboJet didn’t make an equivalent offer to reduce the price of its tickets from Macau to downtown Hong Kong. That led some to wonder whether New World First Ferry’s largesse was an astute move designed to deflect any suggestion that the Shun Tak takeover was against consumer interests.

Even when competition is introduced into the Hong Kong-Macau tourism market, it can be a relative concept compared to some other parts of the globe, given the spider’s web of family and business ties that bind Macau’s and Hong Kong’s ruling elite. Macao Dragon wasn’t entirely the people’s champion of choice it has been presented as in some quarters. Its major shareholder is local businessman Ng Fok, who also has business ties with Stanley Ho. And New World First Holdings had been—up to the point of its sale to Shun Tak—50% owned by NWS Holdings. NWS Holdings in turn was founded by Cheng Yu, a shareholder in Sociedade de Turismo e Diversões de Macau—the tourism investment company started by Dr Ho that originally ran his former Macau casino monopoly.

On 14th September came market attrition, with news that Macao Dragon had ceased trading. The ferry operator—launched only 15 months earlier—had been offering cut-price services between TurboJet’s home base at Hong Kong-Macau Ferry Terminal at Sheung Wan and the Taipa Temporary Ferry Terminal in Taipa, Macau. The debts of Macao Dragon could reach over HK$10 million (US$1.28 million) and are expected to exceed the company’s total assets, according to the company’s provisional liquidators Deloitte Touche Tohmatsu. Macao Dragon did not own the four catamarans it operated, but leased them from sister companies, Deloitte stated.

No Contest

Why Macau needs more competition in its transport infrastructure

The increase in Shun Tak’s market dominance on ferry services from Hong Kong to Macau—brought about by its purchase of New World First Ferry and the failure of Macao Dragon—matters for a number of reasons. Over time, Shun Tak will be able to dictate pricing of services and create a more powerful marketing system that will make it even harder in the future for rivals to enter the sector.

This is taking the transport infrastructure in exactly the opposite direction from the Macau gaming market, which has seen unprecedented competition in the past five years. But in Hong Kong and Macau—unlike in the European Union or United States—there are currently no rules against cartels or price-fixing and therefore no way to institutionalise competition and make it the norm. Even in the Macau casino sector there have been occasions—such as during the global economic crisis of 2008-09—when several of the overseas casino operators seemed keen to cosy up to Stanley Ho when he suggested an industry strategy that in effect amounted to price fixing. Things are not much better in Hong Kong. In January this year, Hong Kong’s legislature published for consultation purposes a Competition Bill after a decade of debate. But there is some scepticism about whether key provisions will end up watered down in order to protect the interests of the small number of families who currently control much of the commerce there.

The New World First Ferry deal means Shun Tak now has a dominant position in the schedules of the two biggest ferry terminals out of Hong Kong— the Hong Kong-Macau Ferry Terminal at Sheung Wan on Hong Kong Island and the China Ferry Terminal at Tsim Sha Tsui in Kowloon. Nearly 30% of Macau’s 2.5 million visitor arrivals in July were Hong Kong residents—most of them travelling by sea. The total number of people travelling to Macau via Hong Kong by ferry is even higher because many tourists from the Chinese mainland combine a shopping and sightseeing trip to Hong Kong with a visit to Macau.

There has been some improvement in ferry services—both in terms of larger, higher capacity catamarans capable of moving more people in one trip, and in terms of berth space—though the latter improvement has mainly been at the Hong Kong end. According to Hong Kong’s Marine Department, in the first six months of 2011 there was an 8.5% increase year-on-year in  the number of inbound catamaran journeys from Macau to Hong Kong’s terminals (including the SkyPier at Hong Kong Airport and the Tuen Muen facility), and a 6.9% increase in outbound journeys. Wide- bodied, high capacity catamarans now outnumber by 4-1 the older, smaller jetfoil boats that are part of TurboJet’s legacy fleet.

There is, however, some evidence of strain on the system—possibly because of management practices by the ferry operators and the immigration services, rather than because of physical capacity at the ports. A year ago, the ferry  journey from Hong Kong to Macau used to take “about one hour” as the recorded announcement aboard Shun Tak’s TurboJet ferries puts it. Now it’s not unknown for that same journey to take an hour and a half. Ferries on both legs of the journey often have to sit idling on arrival waiting for docking space to become available. This may be due to the sort of ‘stacking effect’ seen at busy airports. A ferry that is late departing may miss its slot at the other end. Boats now typically leave five to ten minutes behind schedule at the Macau end, not only because of docking and turnaround issues (vessel cabins must be cleaned before they can put to sea again), but because of the often long lines of passengers—many of them from the Chinese mainland—waiting to clear immigration prior to departure and whom have already been sold a ticket for a specific departure time. Macau’s Statistics and Census Service, DSEC, says that in the first seven months of 2011, the number of visitors transiting the Outer Harbour increased by 9.2% to 4,032,759. That was 64.5% of the total visitors travelling by sea (some people arrive at the Inner Harbour from neighbouring Zhuhai). A further 1,954,215 (31.2% of the total) transited via Taipa. It’s unlikely that even a 50% increase in ferry journey time will put off avid Chinese gamblers from making the trip to Macau. But it may not do much to assist Macau in its much-vaunted aim of being a top quality international destination with conferences and exhibitions to rival Hong Kong. Those people travelling into Macau on a foreign passport can face an additional 45-minute wait at immigration at peak times. That could be something to do with why Macau’s performance in the MICE segment has been somewhat volatile.

In terms of the logistics of ferry travel to Hong Kong, Hong Kong’s Maritime Department allows half an hour’s docking time per ferry at Sheung Wan’s 12 berths. That means it can handle a maximum 24 sailings per hour—12 inbound and 12 outbound. This is ample capacity when TurboJet is running its normal service at 15-minute intervals between 7am and midnight. But when the firm ups its services to intervals of five minutes, as it does during some peak times, it pushes the harbour facilities to the edge of what they can manage.

Keeping It in the Family

Competition is a state of mind, not just a word

Aside from physical capacity of the ports, there are political considerations that come into play when it comes to competition on the Hong Kong-Macau route. The port infrastructure in downtown Hong Kong and in downtown Macau was originally designed to accommodate TurboJet, not developed as a municipal facility to be shared with multiple carriers—in the manner of an airport. That means if a new entrant comes to the ferry market, it is effectively stepping into Shun Tak/STDM ‘territory’. It has to accept the management practices and priorities of those companies—knowing that it will not be given priority over ‘family’.

That has some important implications when it comes to attempting to plan services on a strategic basis for the good of the whole tourism market. The story of Las Vegas Sands’ attempts to open the ferry market to more competition is a good example. At almost every step, Sheldon Adelson and his management team at LVS faced resistance from local interests. LVS understood from the beginning of its entry to the Macau gaming market that the ties between Shun Tak and the casino operator SJM meant Shun Tak had no commercial interest in delivering passengers to SJM’s rival, The Venetian on Cotai. So Mr Adelson had to do it himself. The first stage was to get a new ferry terminal opened at Taipa. To its credit, the Macau government did that, and said that—unlike with the downtown ferry harbour—no one operator would be allowed to dominate it.

This didn’t go down well with Shun Tak. Pansy Ho, in her role as managing director, publicly criticised the Macau government for allegedly not opening up the Taipa route to public tender (even though there was some prima facie evidence that for commercial reasons Shun Tak had actually opposed the Taipa terminal in the first place).

The Taipa terminal opened on 16th October 2007, but CotaiJet’s services weren’t able to launch until a month after that—because of apparent berthing issues at the Hong Kong end. In December 2007, CotaiJet briefly had to suspend its service by order of a Macau court. It followed moves by another ferry operator—Hong Kong North West Express—which complained the Macau government had not conducted an open tendering process before granting the concession. It created the impression that for some parties in the market, the competition issue was a ‘card’ to be played strategically rather than a general principal to be adhered to.

Without a change in mindset regarding the consumer benefits of competition for ferry services, it’s difficult to see how the quality of transport infrastructure to Macau can improve at the same pace as the service quality of the gaming industry that nurtures it. Macao Dragon offered cheap fares—in some cases half what the other operators were charging—and also innovations such as a wireless internet connection on board—a boon for those who like to work on the move. But it was handicapped from the beginning of its operations in July 2010 by a cap imposed by the Macau government on how many passengers it could carry per trip—750 on the outbound leg from Hong Kong and 600 on the return journey. That cap was reportedly because of the capacity limitations at the Taipa terminal served by Macao Dragon, though some wondered if there was an element of local politics involved. Given that the company’s four catamarans each had a capacity of 1,200 passengers, and the company’s low-fare business model was based on being able to operate each sailing at or near capacity, then the restrictions placed a serious burden on the viability of the venture from the start.

The proposed road bridge linking Hong Kong, Macau and Zhuhai might go some way to creating competition to the ferry trade. It was originally due to be completed in 2015 or 2016. But with Hong Kong’s Court of Appeal yet to decide on a lower court ruling that quashed the environmental permits for two elements of the bridge project, it’s anyone’s guess as to when the thing will actually be finished.

TurboJet rejects criticism that it is complacent toward the wellbeing of its customers or that it is anti-competitive. It has made much of the fact—in public statements to the media—that it froze its ferry ticket prices for around two years thanks to forward contracts on its marine fuel supplies. Since July, however, the price of an economy class weekday night sailing from Macau to Hong Kong has gone up from HK$155 to HK$175. That’s an increase of almost 13%—nearly double the 7.9% consumer price index inflation reported in the Hong Kong economy in July. And it comes in the context of the Macau government actually cancelling a departure tax previously imposed on outbound journeys. At the time IAG went to press, there was no sign that TurboJet planned to follow New World Ferry’s lead and pass on the saving to its customers.

Pansy Ho, the managing director of TurboJet’s owner, Shun Tak, suggested in comments to the local Macau media that Macao Dragon’s failure was evidence that tighter criteria were needed for the issuance of ferry concessions in Macau.

“Ultimately we notice that the administration’s wish to open up the market—something we support—has brought inconvenience to passengers,” Ms Ho was quoted as saying.

Shun Tak’s “support” for an opening up of the Macau ferry market isn’t immediately obvious. In 2007, her father Dr Stanley Ho actively opposed the granting of a licence to CotaiJet. Dr Ho’s fourth consort—the Macau lawmaker Angela Leong—even asked Macau’s Secretary for the Economy and Finance Francis Tam during a Legislative Assembly session in November 2007 why the government had granted a ferry licence to a company [CotaiJet] “which does not have experience in operating ferry services”. That hardly sounds like the voice of economic liberalism in full cry. Competition isn’t just a word. It’s a state of mind. Turkeys may not vote for Christmas, but Christmas still comes around anyway. For Macau to move backwards in competition terms on something as fundamental as the means of moving millions of people to its doorstep risks harming the efficient operation of the tourism market—and ultimately the profits that the casino operators have worked so hard to achieve.

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