The surprise decision by Margaret Beckett, President of the Board of Trade, follows a lobbying campaign by Lord Sterling, P&O chairman, to treat the ferry firms more leniently. Mrs Beckett said in November that a price cap would be triggered by the end of duty free sales in 1999. But yesterday these requirements were watered down.
The price cap, which does not apply to freight, will only commence in March 2001 and the European Commission can extend this date if it wishes.
The cap depends on duty free sales being abolished in 1999 and on P&O/Stena and Eurotunnel controlling between them 90 per cent of the market. Currently the three companies have an 82 per cent stake.
P&O and Stena will remove three of the 14 vessels they operate on three major routes including Dover-Calais. At least 500, mainly seafaring, jobs will be lost in the restructuring. P&O estimates the two ferry companies will save pounds 75m but will take a pounds 38m restructuring charge in 1998.
Russ Peters, head of P&O European Ferries (UK), will be managing director of the new entity owned, which is 60 per cent by P&O and 40 per cent by Stena of Sweden. Joint chairmen Lord Sterling and Dan Sten Olssen welcomed the go-ahead which they have fought for since 1993.
They said in a joint statement: "This is excellent news. Any remaining uncertainty has now been removed."
The City gave the go-ahead a warm welcome, pushing up P&O's share price 7p to 777p. Eurotunnel saw the development as a good opportunity to raise prices.
For P&O ,the joint venture is another step in a broader corporate restructuring that began in 1996. In a bid to bring return on capital up to 15 per cent, Lord Sterling has sold off property, floated off Bovis Homes, and established joint ventures for his bulk and container shipping arms.