No-frills airlines deal blow to Eurotunnel

Revenues continue to shrink as traffic falls ? Talks with banks under way ? Debt-for-equity swap expected
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Eurotunnel's troubles mounted yesterday as figures from the operator of the rail link between Britain and France showed that the numbers of cars and coaches carried last year continued to plummet.

Eurotunnel's troubles mounted yesterday as figures from the operator of the rail link between Britain and France showed that the numbers of cars and coaches carried last year continued to plummet.

A trading update released yesterday showed revenues are still shrinking and the group admitted it has yet to stabilise its business. Eurotunnel again blamed budget airlines for taking more of the market, as ever-greater numbers of consumers are tempted by the low fares available to continental Europe.

Analysts said yesterday's trading news was not a helpful backdrop to negotiations under way between Eurotunnel and banks over its crippling £6.2bn debt. The worsening trading position further weakens the interests of shareholders in the talks, which are expected to result in a debt-for-equity swap.

Eurotunnel's revenues depend on the number of trucks, cars and coaches crossing the Channel, from Folkestone to Calais. It also receives fixed revenues from other users of the tunnel - Eurostar trains and freight operators.

Jean-Louis Raymond, Eurotunnel's chief executive, said: "The cross-Channel market has remained difficult for all operators, as it has for Eurotunnel."

Total 2004 revenues were down 4 per cent to £538m, with sales from transport activities falling 3 per cent to £519m, while non-transport services - such as the retail revenues from shops at its terminals - plunged 23 per cent to £19m.

M. Raymond said: "The improvement in Eurostar traffic over the last year has certainly been encouraging, but competitive pressure remains strong and the impact on the market of the development of 'no-frills' airlines is being felt ever more strongly.

"Making sure that Eurotunnel remains competitive in the future has required a radical change in commercial policy."

The company carried 2.10 million cars under the Channel last year, down by 8 per cent on 2003. It pointed out that the whole cross-Channel car market shrank by 6 per cent last year.

"The car market continued to contract throughout 2004, whilst traditional ferry operators, new entrants, and the 'no-frills' airlines maintained strong competitive pressure," Eurotunnel said.

The number of coaches taken across the Channel in 2004 was 63,467, a 12 per cent decline. The company said: "Cross-Channel coach services continued to contract. Eurotunnel's greater dependence on the scheduled coach market together with continued expansion from 'no-frills' airlines resulted in a 12 per cent fall in volume."

The news on truck traffic was better. The company carried 1.28 million trucks last year, unchanged from 2003 levels. This sector should improve this year, the company said, after it put in place a new booking policy from 1 January. It means that truck companies have to commit to a set level of tunnel use, rather than simply use it when the cheaper ferry route is not available.

Eurotunnel said it had not benefited from the enlargement of the European Union, which has led to increased trade between Eastern Europe and the UK. On a journey of that length, the time saved by using the tunnel, compared with the ferry option, did not justify the extra expense involved, it said.

The number of passengers using the Eurostar train service through the tunnel rose 15 per cent last year to 7.28 million. While this had no impact on Eurotunnel revenues, as Eurostar's fee is fixed, the company said that the figure was "encouraging". The minimum usage charge arrangement finishes in November 2006, when revenues from this source will depend on passenger numbers.

Freight traffic, governed by the same arrangement, increased 8 per cent to 1.89 million tonnes. Eurotunnel announced a €40m (£28m) cost-saving initiative last year, called Project Dare. The company will unveil a strategy later this year to try to increase passenger numbers.

"By combining these initiatives, Eurotunnel has given itself the means to stabilise revenues and to restore margins," M. Raymond said.