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A previously confidential Dunedin City Council report shows the company was due for closure, before councillors voted to cover the cost of putting it into hibernation instead.
The company had taken a huge hit from the loss of international tourism caused by Covid-19, and had already been grappling with existing high operating costs and a $10million deferred maintenance bill.
Main shareholder Dunedin City Holdings Ltd recommended councillors vote to close it.
That carried a cost of $3.91million — $2.28million to clear debt and $1.63million in redundancy costs, holiday pay, and booking refunds.
DCHL said it was the best option given the company’s poor outlook in the medium to long term.
In a public-excluded extraordinary council meeting on April 6, councillors instead voted to mothball the company and, where possible, redeploy employees made redundant.
They also agreed to meet the ongoing costs of the mothballing, up to $1.05million from June 30.
Dunedin Railways chairman Kevin Winders said Dunedin Railways regretted the impact on staff.
"This is a very difficult time for them and we will work hard to do everything we can to look after them."
It would retain a skeleton staff of four people.
"We are unlikely to see international visitors return in the 2020-21 summer and the outlook beyond that is uncertain at this time.
"With this outlook, it is simply not possible to keep the business operating as normal."
DCHL chairman Keith Cooper said options would be put to DCHL and the council later this year.
It was too early to say what options might emerge, but the business and its products could look "quite different" in the future, he said.
The Otago Excursion Train Trust had decided to sell its 28% shareholding to DCHL, making it the sole shareholder.
Rail and Maritime Transport Union South Island organiser John Kerr urged "innovative thinking" from the council, including taking a serious look at passenger rail options that could utilise affected staff and assets.
There was some anger from employees who found about the proposal through media, he said.
But the decision did not come totally out of the blue.
"We were aware of some of the underlying pressures."
Dunedin Mayor Aaron Hawkins said mothballing the company was the only realistic alternative to full closure, but it was still a "heartbreaking outcome" for staff.
DCHL had advised the council that continuing to run Dunedin Railways would cost about $750,000 per quarter and there was little hope of any significant revenue for at least another 18 months.
Mr Hawkins supported investigating passenger rail options, and options to redeploy affected staff.
He said the investment in Hillside workshops showed the Government was keen on investing in rail and rail infrastructure.