Tunnel firms fear waters will close over them

A decade after the Channel Tunnel opened to passengers, the rail companies are struggling to stay afloat, reports Clayton Hirst

A Eurostar will arrive in the centre of London at 8.45am tomorrow. Nothing unusual in that, but the train won't be pulling into Waterloo station. Instead, it will be perched on the back of a giant barge floating along the Thames to London Bridge, where it will be moored for a couple of days.

A Eurostar will arrive in the centre of London at 8.45am tomorrow. Nothing unusual in that, but the train won't be pulling into Waterloo station. Instead, it will be perched on the back of a giant barge floating along the Thames to London Bridge, where it will be moored for a couple of days.

The stunt is to mark the 10th anniversary of passenger train services through the Channel Tunnel, supposedly demonstrating that Eurostar goes "to the heart of the city". But it will also act as a fitting metaphor for the fortunes of Eurostar and the other two companies involved in Channel Tunnel rail services, Eurotunnel and English Welsh & Scottish Railway (EWS). For they are struggling to keep their heads above water.

More on Eurostar and its unorthodox birthday celebrations later. First to Eurotunnel, the company at the centre of the cross-Channel rail industry, which is frighteningly close to sinking.

Under the new management of French chief Jean-Louis Raymond, Eurotunnel is involved in its third financial restructuring in a decade. The source of the trouble is its debts - £6.4bn owed to over 200 banks - a hangover from the overspend in building the £10bn, 50km tunnel. The company's banks will demand their first cash interest payments next year. But Eurotunnel is not generating anywhere near enough money to cover these payments and there is now a real possibility that it could go bust.

Project Dare is designed to slash costs and sort out some of the long-standing operational issues bedevilling the businesses. But the future of the company really hinges on a confidential plan that was presented two weeks ago to HSBC and French investment bank Calyon, which are representing the 200 lenders. The two banks will tell Eurotunnel's creditors next month whether they think the plan will work or not, but it is understood that they already have major concerns over the proposals.

To survive, Eurotunnel will have to convince its banks to write off billions of pounds of debts. What will the lenders want in return?

Jan Plantagie, an analyst at credit rating agency Standard & Poor's, says: "We believe the business can only carry £3.4bn to £3.7bn worth of debt. Therefore, much of Eurotunnel's debt will have to be converted into equity."

If Mr Plantagie is right, that's bad news for the shareholders. The value of their investments has already fallen 55 per cent this year. A multi-billion- pound debt-for-equity swap would render the shares almost worthless.

Eurotunnel's board will get a chance to test the waters next June when it asks shareholders to approve a smaller, £500m debt swap. This is to clear some short-term loans taken out during its last financial restructuring. A "no" vote would plunge Eurotunnel into an immediate crisis.

The interest payments on the loans are not the only headache for the company. At the end of 2006, a 10-year-old agreement between the British and French governments comes to an end. This set a minimum charge that train operators had to pay Eurotunnel to use the Channel Tunnel. The agreement was based on wildly unrealistic projections of passenger numbers and freight volumes. Therefore, when the agreement expires, Eurotunnel's annual revenue will fall by up to £60m.

This will benefit EWS and Eurostar, which will pay less. But a question mark remains over the future of EWS's freight operations through the tunnel. The company is just starting to recover from the 2002 asylum seeker crisis, when many of its customers turned their backs on rail as refugees smuggled themselves into Britain on freight trains. EWS is winning back the business and it is expected to carry more than two million tons of freight this year, compared to below a million in 2002.

The new trade will not, however, deliver enough revenue to cover a bill that will shortly land on its doormat. The Government currently pays EWS's tunnel tolls, totalling £26m a year. But the arrangement expires in April, and for the 19 months until Eurotunnel's minimum charge ends, EWS will be saddled with a bill that it can't afford to pay.

"This is a fragile business. We'd have to stop running through the Channel Tunnel," says Graham Smith, the planning director of EWS. "We don't want to frighten the horses, but this is the point we have made to the Department for Transport and the Strategic Rail Authority." The Government is due to decide on whether to bail EWS out by the end of the year.

The company believes that if it can survive this, then its future on the Continent is bright. The European Commission is pressing countries such as France and Germany to deregulate their rail freight markets, and this offers EWS a "huge opportunity", says Mr Smith. The company is looking to set up a continental European office and is in talks with General Motors over how to convert its locomotives to work on continental tracks.

With the new rail freight markets opening, EWS hopes it can repeat the upsurge in fortunes seen at Eurostar.

The unexpected rise of the low-cost airlines and years of mismanagement have meant that Eurostar has been loss- making all its life, relying on billions in public money to stay afloat. But the company is starting to turn the corner. While still making a loss, the manage- ment of the business has been simplified (see the box opposite), competition from the airlines has abated and Eurostar is benefiting from last September's launch of the high-speed line between north Kent and the tunnel.

As a result, Eurostar is expected to carry more than 7.1 million passengers this year - a record, though way off the 16 million projected when the tunnel opened. "The high-speed line was the turning point for us," says Richard Brown, the company's chief executive.

The next milestone will be the planned opening in 2007 of the £3.3bn high-speed extension to St Pancras station in north London. "By then, Eurostar will have come of age. We would expect it to be the natural choice for any journey between London and Paris and London and Brussels," says Mr Brown.

But as with almost anything to do with Channel Tunnel rail, there is a glitch. To run services from St Pancras, Eurostar needs a new £300m depot at Temple Mills in east London. This would be funded by the taxpayer, but the Transport Secretary, Alistair Darling, is dragging his heels over approval.

If the "go" signal isn't given soon, this could delay the opening of the line to St Pancras. "We do need a decision pretty quickly," says Mr Brown. "I suspect and hope that we will get one in a very small number of weeks."

In the meantime, he's got his floating train to keep his mind off the subject. And while Mr Brown hopes it will be plain sailing for Eurostar, Eurotunnel shareholders must be worrying that they are about to be sold down the river, and EWS will be praying for a Government bailout.

THE MAIN PLAYERS

Eurotunnel: operates the Channel Tunnel and runs the Shuttle service which carries cars and lorries. Eurotunnel makes money by levying an access charge on train operators using the tunnel, and through Shuttle fares. The company is a two-headed beast, with stock market listings in the UK and France.

Eurostar: operates passenger train services from London to Paris and Brussels. Eurostar is owned by three companies: French state railway SNCF is the largest shareholder with 62.5 per cent; a UK consortium headed by London & Continental Railways owns 32.5 per cent; and the Belgian national railway, SNCB, has 5 per cent.

English Welsh & Scottish Railway: Britain's largest rail freight operator runs services through the Channel Tunnel. The private company is owned by Canadian National Railway; the Boston-based investment company Berkshire Partners; the Auckland-based merchant bank Fay Richwhite; and US investment bank Goldman Sachs.

THE RESCUE PLANS

Project Dare: Eurotunnel's latest recovery plan is aimed at boosting revenues and cutting costs. The company is in a deep hole: it must start paying interest on its £6.4bn debt at the end of next year, but it doesn't generate enough cash to cover the payments. Project Dare will involve making people redundant and adopting the practices of the low-cost airlines, where cheaper tickets are offered to passengers who book early.

Project Galaxie: this plan was devised by ex-Eurotunnel chief Richard Shirrefs before he was ousted by rebel French shareholders. Galaxie involved cutting the access charges to the train operators in an attempt to increase volumes, but the plan was ditched.

Project Jupiter: a plan to streamline the complex structure of Eurostar, which involves 11 companies in three countries, into a single entity. It was abandoned earlier this year because of huge legal issues. Instead, Eurostar created a single management team to run operations in the UK, France and Belgium.