Scottish Government

4. Economic Structure and Performance

A diverse fleet

4.1 Scotland's fishing fleet of c. 1800 vessels is widely dispersed, and diversity - evident in the design of the vessels, species pursued and catching methods - is at the core of the industry's economic structure. Fluctuating opportunities in terms of the availability of species and access to overseas markets have encouraged diversification, investment and technological improvements within the development of the fleet as determined by the strategic choices of individual vessel owners and managed in very distinctive ways. As a result, the structure of the fleet is complex and often appears fragmented.

4.2 The benefits of a diverse fleet are more easily demonstrated in areas where there are greater concentrations of activity. Ports such as Fraserburgh and Peterhead in northeast Scotland and Lerwick in the Shetland Islands have served their local communities well through a mix of mainly small businesses operating inshore, shellfish, demersal or pelagic vessels. Such clusters of fishing activity have encouraged investment in port infrastructure and shore based businesses that make up the supply chain associated with fishing activity. Diversity has benefited these communities in the past where a decline in one area of the industry - as most recently experienced in the demersal sector - may be compensated by growth in fishing opportunities in other sectors such as pelagic and/or shellfish. Vulnerability, however, still exists in the high economic, social and cultural dependence on fishing. Other areas of Scotland lack this degree of internal diversity. Vessels based in west coast ports like Campbeltown and Oban may vary in size, design and catching method but, through the combination of natural circumstances and individual investment decisions, their activity is focused on shellfish. As a result the local fishing industry will be less resilient to downturns in fishing or market opportunities.

4.3 Although diversity within Scotland's fishing fleet is a recognised strength, it also presents clear challenges. It increases the risk of unintended consequences resulting from centralised policy decisions taken in Brussels (or Edinburgh) and it can make control and enforcement issues challenging. Nowhere is the diversity of the Scottish industry more vividly demonstrated than in the financial performance of the different sectors and individual enterprises that make up the fleet. Overall, however, diversity is seen as a core strength supporting the long term sustainability of the industry. In particular it enables the reproduction of small businesses, tailored to local conditions, in remote communities where opportunities for economic diversification are limited.

Fleet activity

4.4 There were 1784 vessels registered in Scotland in 2008, landing 365,000t of finfish and shellfish at a value of almost £390m (Scottish Government, 2009). To this may be added landings by foreign vessels contributing £61m (51% pelagic, 47% demersal and 2% shellfish). Further value is added (and additional employment created) through onshore activities, including primary and secondary processing, transport and a range of supply side activities such as engineering, gear manufacture, fuel supply.

Fleet size

4.5 Between 1998 and 2008 there has been an overall 16% decline in the number of vessels in the Scottish fleet (Scottish Government, 2009). The decline is most pronounced in the pelagic (-43%) and demersal (-41%) sectors. The over 10m shellfish vessels have fallen by 19% and the under 10m. vessels by 7% over the same period. Although many factors have contributed to the reduction of the over 10m vessels across the Scottish fleet by one third over the last 10 years, two decommissioning schemes (2001/2; 2003/4) made a significant contribution in removing 165 vessels from the register.

Landings

4.6 As Fig. 4.1 below indicates almost half the £390m catch by Scottish vessels in 2008 was made up of two species: Nephrops (25%) and mackerel (22%), with haddock the leading demersal species a poor third at only 9%. Overall the shellfish sector now dominates the pattern of landings by value (45%) followed by demersal landings (34%) and pelagic (21%).

Figure 4.1: All landings by Scottish vessels, top 10 species by value (£), 2008

Source: SFIA 2009

4.7 The relationship between volume and value of landings varies from species to species. Nephrops is an example of a high value product (average price, 2008: £2903/t) but the actual price paid varies according to quality and this reflects the method of catching. Average prices for Nephrops landed by trawlers (£2622/t) compares with an average of £7925/t for landings from the static gear fleet mainly as whole live animals. Mackerel, by contrast, is a comparatively low value species with high volumes of landings (86,619t) earning much lower average prices (£746/t).

Fishing as a business

4.8 There is a wide range of factors influencing the financial performance of individual businesses: some are internal to the business while others are external, reflecting wider sectoral or global conditions. Internal factors including strategic decision making, assets, product and promotion, and skills, combine to form the identity of the individual business. They interact with external factors, including sectoral competitiveness, the management framework, market conditions and fuel prices to determine the actual business performance.

Internal factors

4.9 Strategic decision making , which for many family enterprises may have been initiated a generation or more previously, is likely to influence all other internal factors and affect the degree to which the business is vulnerable to external factors. Such decisions include the choice of fishery, i.e. species targeted, type of vessel and method of catching. For some businesses, especially in the static gear sector, this has led to the pursuit of small but profitable niche markets. By contrast strategic decision making in the pelagic sector has resulted in high levels of investment in efficient, technologically advanced vessels which, though representing only 1% of the fleet, land 22% of the volume of Scottish fisheries.

4.10 Strategic decision making determines the nature and level of investment in business assets , including the vessel, gears and a licence to catch and land certain species of fish. Where quota restrictions are in place, the business will also hold fishing entitlements in the form of fixed quota allocations ( FQA s) together with any purchased or leased quota. The estimated market value of these quota entitlements will often be included in the vessel's balance sheet. Involvement in quota trading varies. Quota values are subject to several largely unpredictable external factors mainly associated with the regulatory framework such that many risk averse business owners have resisted becoming involved in quota trading; other owners have used the quota market to extend their asset holdings quite substantially.

4.11 The form and quality of a product presented to the market can usually be expected to exert a strong influence on its sales value. In fishing, however, where the catching sector is fragmented into a large number of comparatively small producers, the vessel owners are typically price takers. Concern is often expressed that the quayside market - the first point of sale for much of the catch - does not necessarily differentiate in terms of the quality of the product and reward vessel owners with better prices for good quality fish. As individuals, their ability to influence the sales price for their product is limited. Earning a reputation among local buyers for reliability of onboard handling, formal accreditation of the fishery and, less commonly, dealing directly with processors and retailers through contract selling are among the few opportunities for individual owners to enhance the market value for their products.

4.12 The skill portfolio of a fishing enterprise normally combines the skills of the owners, crew and onshore support staff. Traditionally a successful skipper was one skilled in the locating and catching of fish but in an unpredictable competitive environment he must also have access to a range of management skills if opportunities are to be exploited and threats avoided. Today fishing businesses often outsource key management functions to agents who will manage financial information and routes to the market. Where a skipper owner lacks direct access to key management and market information, he may find himself less able to make informed decisions and that may inhibit business performance. A stable and highly skilled crew can make a significant positive impact on business performance. By contrast poorly performing businesses, unable to guarantee high levels of renumeration to the crew, will find it difficult to retain experienced crew members and the high turnover and instability of crew membership is likely to have an adverse impact on financial performance.

External factors

4.13 Two issues are critical to maintaining a competitive environment for Scotland's fishing enterprises. The first is excess capacity created either by management intervention to reduce fishing opportunities for fishing vessels (see below) or by a lack of regulation to control entry into a particular fishery. An example of the latter occurs with the static gear fisheries for prime shellfish species, where rapid growth in capacity combined with a period of market decline has led to oversupply, depressed prices and reduced levels of profitability for virtually all businesses within the sector. The second issue concerns the availability of substitute products which may reduce demand for traditional products and so impose a new price ceiling. 'Substitute products' may take the form of imported supplies of the traditional product or the marketing of alternative species. Both are a particular problem for the demersal sector.

4.14 The key area of fisheries management which impacts most severely on fishing businesses in Scotland is the annual adjustments to TAC s and the tendency in recent years for quite marked downward adjustments to quota allocations. In the demersal sector particularly the resulting complexity surrounding quota and effort restrictions create serious problems both for short term planning and longer term strategic involvement. Thus far, long term management plans (e.g. cod) have failed to create the anticipated levels of certainty on which to base forward planning.

4.15 The seafood supply chain is long and complex, restricting the flows of market information to the vessel owner and creating uncertain market conditions in which to operate. A vessel owner's ability to exploit new market opportunities or adjust to changing market conditions is thus limited. Moreover, the number of intermediate steps in the seafood supply chain leaves vessel owners with a limited share of the value of the end product, regardless of the final market.

4.16 Fuel supply is a key component of the overall costs of fishing especially in the offshore sector towing heavy gears. Prior to the global financial crisis, the steeply rising cost of fuel was proving critical, but with the onset of the recession, demand for petroleum products fell and fuel price rises receded. However as the global economy recovers, the price of fuel is expected to resume a long term upward trend and become an endemic problem for the industry.

Financial performance

4.17 The financial performance of different sectors and individual vessels within the fleet varies dramatically and there are currently real concerns about future financial viability in some sectors. The table which follows presents an overview of the scale, activity and financial performance of the seven sectors of the fleet - pelagic trawlers; demersal trawlers; Nephrops trawlers; scallopers; pots and traps; low activity under 10m; and other. The boxes which follow that table set out the salient features and principal statistics relating to each of these seven categories. (The data are derived from SFIA 2009.)

Table 4.1: Scotland's Fishing Fleet 2008

Source: SFIA 2009

Sectors of the fleet

Pelagic trawlers

There are 23 pelagic vessels registered in Scotland and the sector exclusively targets pelagic species. The volume landed is controlled by TAC s set through negotiations between the EU and other north east Atlantic states. Investment in the sector has been significant and the current fleet is modern and efficient. Although the total number of vessels is small individual vessels can land up to 1,000 tonnes of fish in a single landing. Mackerel and herring are the most important stocks as they represent the majority of the quota available to the fleet and they also achieve the highest price as the quality is sufficient for human consumption. Over the last decade mackerel has increasingly become the most important species, largely through substantial price improvements and a relatively high TAC .

In 2008 Scottish pelagic vessels landed 211,000 tonnes of fish valued at almost £100 million. Of these landings, mackerel represented 83% of the total value and 49% of the volume. In contrast, herring represented 26% of the volume of landings but only 13% of the value.

The stocks targeted by the pelagic fleet are migratory and this leads to a highly seasonal and mobile fishery (see Figure 4.2). In a calendar year the mackerel fishery begins in January and is fishing from the South West of Ireland to the West of Shetland. The mackerel fishery begins to decline in late February before resuming in October when the majority of catch is taken to the North and East of Shetland. North Sea herring is targeted in the summer months and the fishery is largely in the sea off the North and North East of Scotland. The other main stock targeted by the pelagic fleet is blue whiting.

The average pelagic vessel spent 54 days at sea in 2008. The period when the fleet is inactive extends into many months during the year and although the physical and operational capacity is not being fully utilised the economic needs of the vessels are in general being met. Up to date financial performance data is not published for the pelagic fleet but in 2006 it was estimated that average turnover was in the region of £4 million per vessel and profitability was very strong.

Box 4.1 Pelagic trawlers strengths and challenges

Source: SFIA (2009)

Figure 4.2 Scottish pelagic landings by live weight(t) (2008)

Demersal trawlers

In 2008 there were 144 demersal trawlers registered in Scotland. The Scottish registered fleet is active all around the UK , including Rockall, and activity extends to the French, Norwegian and Faroese coasts. The most intensive fishing activity currently occurs in a wide area around the Shetland Islands.

The demersal sector of the Scottish fleet targets a mixed fishery and as a result landings consist of a high number of species. This is unlike the majority of other fleet sectors where a single or limited number of species dominate landings. Figure 4.3 below demonstrates the top 10 species landed by the fleet in 2008 and is shown in terms of the value of landings. Demersal vessels landed almost £120 million of fish in 2008. Over half of the value of all landings is made up of three species: monkfish, cod and haddock. The most significant species for demersal trawlers are all controlled by TAC s set through the CFP management process.

The demersal sector includes vessels of widely varying design, length and engine power and depending on the main stocks being targeted by an individual vessel, the type of fishing gear used also varies. The sector can be segmented into single rig trawlers, pair trawlers, seine netters, beam trawlers and twin rig trawlers.

The average turnover across the whole demersal sector was estimated to be £879,000 in 2008. Average operating profit was estimated to be £88,000 and average net profit was £8,400. If the whole demersal sector is divided, based on performance, into quarters the average performance of the top quartile in 2008 was a turnover of
£1.4 million, an average operating profit of £239,000 and a net profit of £108,000. The bottom quartile demonstrates an average turnover of £470,000, an operating loss of £24,000 and a net average loss per vessel of £66,000.

Some of the difference can be explained by the different strategic choices of individual vessels, many of which may be historic and difficult to adjust. However, there is also substantial variation in performance between different fleet segments within the sector. Analysis of performance by Sea Fish Industry Authority in 2008 suggests that average turnover can vary by up to £1.3 million between different segments and out of eight identified segments within the Scottish demersal fleet, seven are making an operating profit and only four segments are on average making a net profit.

Figure 4.3: Top 10 most valuable species landed by value, Scotland's demersal trawlers, 2008

Source: Scottish Government (2009)

Compared to other sectors within the Scottish fleet a larger proportion of the catch of the demersal sector is likely to be consumed within the UK . In addition to landings by the Scottish fleet, the UK also imports substantial volumes of both cod and haddock. In 2007 it was estimated that 32,000 tonnes of haddock were landed in the UK and 69,000 tonnes were imported. For cod the gap between total landings and imports is more substantial as 13,000 tonnes were landed but 115,000 tonnes were imported to the UK .

Box 4.2 Demersal trawlers strengths and weaknesses

Source: SFIA (2009)

Nephrops trawlers

There were 332 Nephrops trawlers registered in Scotland in 2008. Nephrops fishing activity is concentrated in two main areas: The Minches off the west coast of Scotland and the Fladen Grounds off the north east coast of Scotland. The fleet is divided between North Sea and west of Scotland trawlers, with the North Sea fleet being on average larger vessels. The sector can be divided into four segments: North Sea single rig trawlers, North Sea twin rig trawlers, west of Scotland single rig trawlers and west of Scotland twin rig trawlers.

Similar to the scallop fleet, Nephrops trawlers largely target a single species. Nephrops represented 83% of the value and 70% of the volume of all landings by Nephrops trawlers in 2008. The next most significant species in terms of volume for the fleet are haddock (8%), whiting (6%) and monkfish (5%). The most significant of these in terms of value is monkfish which earned the fleet over £5.5 million from landings. In total Scottish Nephrops trawlers earned £91 million from landings in 2008.

The average net profit for the fleet was estimated at £16,800 for 2008. Similar to other sectors, performance varies significantly. If the sector is divided, based on performance, into quarters, the average turnover of the top quartile is £560,000 with an operating profit of £101,000 and a net profit of £44,000. In the bottom quartile average turnover is £141,000 and on average these vessels just make an operating profit of £760 but a net loss of £9,301.

Nephrops are primarily sold as three different products: tails, whole fresh and frozen or live. Tails are the predominant product of the trawlers and are sold within the UK .

Box 4.3 Nephropstrawlers strengths and weaknesses

Source: SFIA (2009)

Scallopers

There are 56 scallop vessels registered in Scotland and the fleet almost exclusively targets scallops. There is no real effort restriction within the sector as the level of activity is only affected by licensing restrictions. The Scottish scallop fleet catches scallops all around the coast of Scotland, the Irish Sea and the English Channel and because of the scope of its operational area the fleet is often referred to as nomadic.

In 2008 scallops accounted for 85% of the volume (over 8,000 tonnes) and 93% of the value (£15.8 million) of landings made by scallop vessels. The next most significant species landed by the fleet is mussels, which in 2008 represented 10% of the volume of landings. The fleet also lands a small proportion of Nephrops .

In total, Scottish scallop vessels earned almost £17 million from landings in 2008. The average net profit reported by scallopers in 2008 is the highest of all sectors, excluding pelagic, in Scotland (£35,000). However, as with all fleet sectors, performance varies considerably within the sector. In 2008 the most profitable quarter of the fleet was estimated to have an average turnover of £640,000, an operating profit of £156,000 and a net profit of £102,000. The least profitable quarter was estimated to be generating an average turnover of £112,000, an operating profit of £2,500 and a net loss of £6,900.

France is the largest EU market for scallops and in 2007 imported over 130,000 tonnes of scallops, the vast majority of which were frozen. Spain and Italy are the next most important European markets.

Box 4.4 Scallopers strengths and weaknesses

Source: SFIA (2009)

Pots and traps

The pot and trap sector targets shellfish including crabs, lobsters and Nephrops . The average length of a vessel in this sector is 8.5m which is significantly smaller than the sectors described above. However there are vessels over 12m in length operating in this sector and these larger vessels tend to target brown crab. Within the pot and trap sector the largest volume of landings made by those vessels that are between 10m and 12m in length.

Vessels operating pots and traps landed over 14,000 tonnes in 2008 and the value of landings was over £37 million. The majority of the value landed by these vessels is achieved from crab and lobster (62%), whilst Nephrops represents 30%. Other species landed includes a proportion of mussels and a bycatch of finfish.

The Scottish fleet is active all around Scotland and the north west of England and there is also activity to the west of Ireland and Denmark. The most intensive activity is in the inshore area around Scotland.

On average a vessel categorised as within the pot and trap sector is estimated to have achieved an average turnover of £68,000, an average operating profit of £24,000 and an average net profit of £14,200. However, performance within the sector does vary. If the sector is divided into quarters, based on performance in 2008, the top quartile achieved an average turnover of £155,000, an operating profit of £59,100 and an average net profit of £37,700. In contrast the bottom quartile achieved an average profit of £27,000, an operating profit of £2,700 and a net loss of £800.

France and Spain are the main markets for the catch of the pot and trap sector. Other markets include Italy and Portugal. A large proportion of the product is shipped overseas straight from the vessels via Vivier lorries and as a result there is limited onshore processing activity within Scotland.

Box 4.5 Pot and trap fisheries strengths and weaknesses

Source: SFIA (2009)

Low activity under 10m

This category of low activity under 10m vessels exists to separate out small inshore vessels which demonstrate limited and often very part time fishing activity. Although low activity, these vessels are likely to be providing an important secondary source of income in many of the remoter communities in Scotland. There are 485 vessels categorised within this sector and the average number of days at sea per annum was 37 in 2008. The value of landings was less than £2 million in 2008 representing 846 tonnes. The main species landed by these vessels were crab, lobsters, Nephrops and mackerel.

Other

The sector of the Scottish fleet identified as 'other' includes gill netters, longliners, under 10m demersal, under 10m mobile gear and under 10m passive other. There were 146 vessels registered in Scotland that have been categorised as 'other'. The total value of landings made by this sector was over £21 million in 2008 representing almost 1,000 tonnes. As might be expected in an 'everything else' category the composition of the catch made by this sector is varied and consists of finfish and shellfish. Different vessels within the sector are likely to target different species. Monkfish, hake, Nephrops and scallops represent 72% of the total value of landings (Figure 4.4).

Figure 4.4: Species landed by value, Scotland's 'other' vessels, 2008

Source: SFIA (2009)

Summary

4.18 The data available show wide variations in performance between the different sectors of the fleet and also between different vessel businesses within sectors. There is also evidence that many fishing vessels across the sectors are sustaining losses. In at least four sectors: demersal, Nephrops trawlers, pot and trap and scallopers, the vessels in the bottom quartile of each sector, based on performance, are on average making a net loss, though some will be recording a small profit.

4.19 It is common for the debate on challenges to businesses in the fishing fleet to focus on external factors such as fisheries management decisions and fuel price. Whilst these factors are extremely influential, these issues tend to affect sectors of the fleet or the fleet as a whole. The extent of variation evident in the performance of individual businesses within sectors also indicates internal factors, such as skills, investment and efficiency, must also have influence. The ability of each individual vessel business to respond to external challenges is also likely to reflect the opportunities available in particular locations and the strategic decisions that have been made by individual vessel owners.

4.20 Diversity in the industry is a strength as it can protect local communities against the inevitable cycle of peaks and troughs and fluctuating fortunes in individual sectors. This element of instability is a factor in many industries and it is unrealistic to consider it can ever be eliminated. It is, however, essential and important that management and policy making affecting the fishing industry is well informed, sensitive and robust and the next chapter examines the structure within which decisions affecting fisheries management are currently made.