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Light at the end of the tunnel?

24th August 1995, Page 42
24th August 1995
Page 42
Page 43
Page 42, 24th August 1995 — Light at the end of the tunnel?
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Which of the following most accurately describes the problem?

Freight traffic through the Channel Tunnel is rising steadily but, with another funding crisis looming, can it continue to woo international hauliers with such competitive prices?

F,4 urotunnel is heading for another day of reckoning with its bankers as it

struggles to cope with interest payments of £2 million a day. The Channel Tunnel operator needs to give some clear indications about how and when it expects to become profitable before the 220-strong consortium of banks, to which it owes 1.8bn, agree to another cash lifeline.

One option will be to raise prices on the increasingly popular Le Shuttle service for commercial vehicles. Matthew O'Keefe, analyst with UBS Phillips & Drew, expects a refinancing package to be drawn up as early as September.

"The banks will review the traffic data and then decide how next to proceed," he says, blaming "wildly over optimistic" traffic fore

casts made at the time of the banks' last refinancing package in May 1994 for the problems now facing the company.

Eurotunnel predicted then that it would carry 7.78-million tonnes of freight on Le Shuttle this year. According to UBS this equates to 648,000 commercial vehicles, based on the average weight of trucks using crossChannel ferries.

Yet in the first six months of this year, only 146,480 CVs used Le Shuttle.

There are signs that commercial success may be on the horizon, however, despite Eurotunnel's net loss of £387m announced in April.

Le Shuttle is now carrying more than 30,000 trucks a month, which is 35% of all CVs crossing between Dover and Calais. Georges Christian Cazot, the company's chief executive officer, describes this as "establishing a leading market position" on the route.

By the end of next year the company expects to have cornered 40% of the total crossChannel market for CVs. The number of Railfreight trains travelling through the tunnel rose from 595 to 730 between May and June, making a total of 3,101 for the first six months of this year.

Railfreight Distribution says: "The encouraging thing is that growth is not only steady but consistent. If there had been serious problems with any part of the operation, we would not have seen that growth."

But to achieve its share of the market, Eurotunnel has been forced to to abandon its plans to charge premium rates for Le Shuttle freight services which were launched in May 1994.

Sea crossings

Prices are now very close to those charged by P&O European Ferries and Stena Sealink Line on short sea crossings.

P&O says its freight volumes have remained almost constant over the past year and Stena Sealink says its freight volumes have actually increased by 8% on the Dover-Calais route in the first six months of this year.

Brian Cork, P&O freight director, believes it is highly unlikely that Eurotunnel will attempt to charge a premium price again. "The freight industry is extremely price conscious and there is no way in the world that they can add £40 to £50 on top of what they charge now The market is going to find its level; Eurotunnel will have their limit and we will have ours."

Ray Terlman, freight sales manager for Stena Sealink, claims Eurotunnel has caused rates to tumble out of "near desperation" to fill its trains. He says: "There has hardly been a month gone by without Eurotunnel making some sort of special offer. There have been so many of them that it is difficult to know what its prices are for freight customers."

Tedman accepts that Eurotunnel has had to pursue customers aggressively because it is competing in a market which has been dominated by two ferry companies for many years. "But in doing so," he adds, "they have created a downward spiral of rates which is not good for the industry or for them."

Whatever the problems facing Eurotunnel, the banks are unlikely to allow it to go bankrupt because they have so much capital tied up in the venture.

"This is nothing like as straightforward as a normal company in difficulty which tends to be in a mature market where volumes are going down," says a spokesman for the four biggest bank lenders to Eurotunnel. "In this case the project is at the very beginning of its history and volumes are increasing."

He believes it is misleading to match current traffic levels with the forecast made by Eurotunnel last year because of the delays in getting the service fully operational due to technical reasons.

"Effectively," he adds, "the company is almost six months behind where it expected to be in the prospectus and it remains to be seen whether in six months' time it has actually caught tip." He argues that Eurotunnel has probably now achieved a premium level of service because initial technical difficulties have been overcome. And he insists that Le Shuttle's advantage over the ferries is likely to become more pronounced during the summer bemuse of the dedicated service it offers to hauliers.

TOTAL:

"Eurotunnel can advertise that they will provide the same degree of service to HGV drivers in August as they do in January," he explains. "There is no question of giving priority to coaches or tourists as on the ferries."

Both large and small operators seem satisfied with Le Shuttle's speed and reliability following initial qualms about its reliability Rod Carman, managing director of Brit European Transport in Stoke-on-Trent which makes about 32,000 Channel crossings a year, says: "It's faster than ferries and [see it continuing to gain some market share."

Nick Charlesworth, general manager of Laser Transport in Lympne, Kent, says his company did consider reducing its use of the tunnel in January because of poor service levels. "They have gone through an enormous learning curve and now we are finding that when it is operating properly, it is highly competitive." he says. "There are distinct operational advantages because we can reduce journey times by an hour and sometimes more when we use the tunnel instead of the ferries."

Trevor Paul, managing director of Lichfieldbased Twente Express, says he would probably be prepared to pay more for using Le Shuttle because of its speed: "We are able to offer our customers far quicker transit times to and from the Benelux countries. We're finding there is an advantage, particularly in winter months because that's when ferry companies tend to take off certain crossings."

Six months

Having spent six months splitting its traffic equally between the ferries and the tunnel, Twente Express has come down firmly in favour of the tunnel.

However, other companies are still wary of making such a commitment, partly because it is in their interest to ensure competition between ferries and tunnel remains strong.

Paul Blackburn, transport manager of Chambers 8.z. Cook Freight in Birmingham, says: "Our policy is not to go 100% with one company; we would never put all our eggs in one basket." He points out that the time saving on the tunnel does not always make a difference, particularly on longer trips, and ferries offer drivers the chance to walk around, eat a meal and buy duty free. Although Eurotunnel will be tempted to increase its prices as a way out of its financial predicament, its immediate priority must be to consolidate and build up its share of the freight market.

U by Guy Sheppard