Boarding the Eurotunnel rollercoaster: Michael Harrison predicts a queasy passage for the cross-Channel contenders as they wait for the passengers' verdict

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MOTORISTS heading west out of London on the A4 in the weeks before Christmas cannot fail to have noticed a giant billboard at the side of the road pitching violently from side to side in a manner designed to produce that queasy feeling. It was an advertisement for Eurotunnel's Le Shuttle service promising a smoother crossing of the Channel this summer.

Inevitably, that means a rougher ride for the ferry companies. If Eurotunnel's projections come true, by 1996 Le Shuttle will have captured half a cross-Channel market forecast to reach 25 million people from its current 18 million.

The resulting shakeout would mean capacity cuts by the two big ferry operators, P&O European Ferries and Stena Sealink, and the hovercraft operator Hoverspeed, and possibly the disappearance of some smaller players on thinner routes.

If, on the other hand, the ferry operators are correct, then the tunnel will not achieve a market share anywhere near that figure, even with its boast of a 35-minute crossing regardless of the weather.

In that case, it is Eurotunnel's 650,000 shareholders who are in for a stormy passage since the tunnel, built at a cost of pounds 10bn, will almost certainly have to seek refinancing. It may even end up in receivership.

The short-sea cross-Channel market is worth pounds 600m- pounds 650m a year and is a handsome earner for the two big players. P&O European Ferries increased passenger numbers on the Dover-Calais route by 20 per cent last year to 8.9 million and is reckoned to have made operating profits of about pounds 75m from its ferry business in 1992.

Stena Sealink increased passengers on the Dover-Calais route by 11 per cent last year to 6 million making pre-tax profits of about pounds 26m for Stena, its Swedish parent.

The two companies have spent pounds 500m- pounds 600m re-equipping their fleets in readiness for the tunnel. This summer each will be operating five super-ferries and offering a total of 50 sailings a day. Hoverspeed is gearing up to provide 26 return sailings daily.

When Eurotunnel enters the market it will very nearly double capacity. Even if the demand continues to grow at its current double- digit rate something has to give. By 1996 Eurotunnel expects to be taking pounds 400m worth of passenger and freight business away from existing cross-Channel operators.

Christopher Garnett, Eurotunnel's commercial director, says: 'There will have to be a reduction in ferry capacity. They cannot go on running 10 ferries and expect to make money. We also expect to see some reduction in capacity on other routes close to Dover.'

Mr Garnett also says the sheer fact of the tunnel's existence will expand the market. Of the 8 million car passengers Eurotunnel expects to handle in 1996, at least 1 million will travel simply because Le Shuttle is there.

Not surprisingly the ferry operators see things differently. They are sceptical of Eurotunnel's traffic forecasts because they doubt the ability of Le Shuttle to draw customers away from the westerly cross-Channel routes, such as Cornwall-Britanny and Southampton- Cherbourg.

As a Sealink spokesman says: 'Why take a 500-mile round trip to Dover if you live in the west of England and want to travel to the west of France?'

Thus far, however, it is a phoney war, not least where fares are concerned. The three big operators have published broadly similar tariffs, although Sealink argues that the pounds 60 difference between its standard off-peak summer fare and Eurotunnel's is enough to pay for a night in a good French hotel.

Until the tunnel opens this summer nobody knows what will happen to fares. Both the ferry operators and Eurotunnel insist that they have no interest in a price war. The widespread belief is that P&O and Sealink will, at the fourth time of asking, be allowed by the Department of Trade and Industry to merge their services.

Richard Jagger, of the analysts Greig Middleton, suspects an unholy alliance may develop to the disadvantage of passengers, keeping prices high and allowing the ferry companies to take out capacity and Eurotunnel to pay off its horrendous debt burden.

In the early years of operation Eurotunnel's interest payments alone will be pounds 600m a year - about the same as total current revenues from short-sea Channel crossings.

Richard Hannah, of UBS Phillips & Drew, a long-standing sceptic on Eurotunnel, is less sanguine about its ability to stay out of a price war or meet its debt payments.

'Eurotunnel has got to get a very sizeable share of the market to make it financially viable. I don't think the prices it has announced are sufficient, nor is the service innovative enough,' he says.

'Although neither the ferries nor Eurotunnel has an incentive to cut prices, both have a big incentive to grab marginal market share because that is profitable business.' In those circumstances he cannot see any way for Le Shuttle to avoid price- cutting.

Mr Hannah's greatest reservation concerns the ability of a market worth pounds 600m to finance the mountain of capital that will have been sunk into it.

The ferry operators, he says, are making a good return on capital investment of perhaps pounds 800m- pounds 1bn. Eurotunnel has to finance another pounds 10bn of capital from the same revenue stream.

Eurotunnel and its traffic consultants dispute this analysis, pointing out that the cross-Channel passenger market increased by 80 per cent between 1983 and 1993 and should grow a further 45 per cent by 2003.

It ignores, they say, the revenues Eurotunnel will earn from through- rail services competing against the airlines.

Eurotunnel forecasts that Eurostar rail services between London, Paris and Brussels, to be launched by British Rail, SNCF and SNCB in July, will bring in pounds 240m by 1996 and pounds 340m by 2003.

Most estimates suggest the tunnel will divert 4-6 per cent of European air travellers to rail by 2005 - equal to about a year's growth.

The effect, however, will be felt disproportionately by airlines operating between London, Paris and Brussels - principally British Midland, British Airways, Air France and Sabena. Nearly 3.5 million people fly between London and Paris each year and a further 1.1 million between London and Brussels.

Sir Michael Bishop, chairman of British Midland, says: 'By the time the tunnel is able to mount a real competitive threat to those routes, the airlines will be well-placed to market themselves in response. Second, airlines have more freedom with their product. If we lose customers on our Heathrow-Paris route, it is relatively simple for us to move resources to, say, a Heathrow- Zurich route, against which the tunnel is not competitive.'

Much will depend on the first few critical months. Fires, terrorist threats, signalling failures - many things could conspire to undermine the tunnel. Alternatively, choppy seas and militant French air traffic controllers could help turn Le Shuttle into a runaway success.

It is not just Eurotunnel that is fastening its seat belt for a rollercoaster ride.

(Photographs omitted)