Eurotunnel digs for more revenues to avert meltdown

Click to follow
The Independent Online

Eurotunnel is set to unveil a major shake-up of its contract with the British and French railways which will allow the company itself to carry more passengers and freight through the Channel Tunnel.

The plan is designed to avert a financial meltdown in two years' time when the minimum usage charge paid by Eurostar and the freight operator EWS expires - which could cut Eurotunnel revenues by £80m a year or 15 per cent.

The new contract proposals, details of which will be unveiled alongside Eurotunnel's 2003 financial results next month, could see the railways' 50 per cent share of Channel Tunnel capacity fall to 40 per cent or less.

Eurotunnel, which already operates its own passenger and freight shuttles between Folkestone and Calais, would then use the increase in its capacity to start operating its own through-freight services or allow other operators to launch their own passenger services. One option is a "hopper" service which would enable passengers to commute from Lille to Ashford or direct to central London.

News of the planned changes in capacity sharing came as Eurotunnel reported a 5 per cent decline in revenues last year to £566m. Richard Shirrefs, the chief executive, blamed the fall on "intense price competition". Eurotunnel's own shuttle revenues fell 11 per cent to £309m. Car passenger numbers were down by 2 per cent to 2.28 million but the number of trucks handled was 4 per cent higher at 1.28 million. Eurotunnel expects growth in its freight and passenger markets of about 1 per cent this year.

The ending of the minimum usage charge will coincide with a new financial crunch for Eurotunnel, which is labouring under £6bn of debt. Under present arrangements, Eurotunnel is able to pay some of its interest charges in the form of "stabilisation notes" which convert into shares. Since 1998 this has saved the company nearly £500m in interest payments.

However, from the end of 2005, it has to start paying all of its interest in cash which would mean a big increase in its current £300m-a-year interest bill.

At that point, a refinancing of the company is likely, or alternatively some fresh debt restructuring which would enable the company to continue to afford its annual interest bill.

By converting the stabilisation notes into shares, Eurotunnel will save £25m a year in interest, but at the cost of diluting existing shareholdings by some 14 per cent.