Business Analysis: P&O axes 1,200 jobs and one-third of fleet to salvage ferries business

City sees overhaul as precursor to sale, leaving group focused on ports and logistics

P&O staked its immediate future as a ferry operator on the burgeoning freight market yesterday as it blamed the death of the booze cruise for the need to axe one-fifth of its workforce.

P&O staked its immediate future as a ferry operator on the burgeoning freight market yesterday as it blamed the death of the booze cruise for the need to axe one-fifth of its workforce.

Yesterday's long-awaited shake-up will see 1,200 jobs go from the group's loss-making ferry business, with staff at Portsmouth tipped to bear the brunt of the losses given that P&O plans to retreat from all but one of its crossings from the sea-faring town. A further 350 jobs depend on P&O's ability to transfer three of its Portsmouth-based fleet to other operators.

P&O hopes to plug the hole its ferries arm has made in its bottom line by slashing its ferry routes from 13 to nine and getting rid of one-third of its ships, slimming its fleet down to just 23 vessels.

Unions denounced the job losses yesterday, threatening strike action if any of the redundancies are compulsory. Bob Crow, the RMT general secretary, said: "Our members will be devastated by the massive cuts. We urged the company to consult with us properly, but instead they kept us guessing for weeks and then dumped a massive pile of documents in front of our reps after they had made their announcement. That is not consultation, and loyal P&O employees deserve better than this knee-jerk reaction."

But the City hailed the overhaul, which was far more radical than any observers had predicted, prompting analysts to bet that the group would manage to rescue its embattled ferries operation. Shares in P&O rose 5 per cent to 258.5p as analysts interpreted yesterday's shake-up as a precursor to an eventual sale of the ferries unit, leaving it with just its thriving ports and logistics businesses.

John Lawson, at Investec Securities, said: "The key message is that the steady drain on group resources should be stemmed and in time we would expect the group to completely exit the business."

Ever since the opening of the Channel Tunnel sounded the death knell for ferry operators, it has been a question of when, not if, P&O would be forced to retrench. Its ferries business has been struggling to stay afloat in a sea of red for the past four years: losing £40m last year finally prompted the group into action, and the new chief executive, Robert Woods, launched a far-reaching review six months ago.

The group blamed a litany of culprits for the decline of its ferries business, from the abolition of duty-free sales in 1999 to the French government's decision to raise the tax on cigarettes by 50 per cent over the past 18 months - moves that have all but killed the appeal of on-board shopping. Meanwhile, the travel revolution engendered by the rise of low-cost airlines has opened up far more exotic destinations than Calais and Cherbourg to sun-starved Brits.

And that's without even getting the group started on the traumas of operating in a market where two of the major players - Sea France and Brittany Ferries - are basically owned by the French government, and consequently under little pressure to deliver any sort of meaningful profit. Not to mention the ill-fated Eurotunnel, which has spectacularly failed to provide any form of shareholder return since its inception, leaving P&O with little choice but to slash rates for its crossings to stand any chance of competing.

Mr Woods said: "Our operating profit has seen a continuous and marked decline. If we want to keep this business, and we do, we need to get it trading profitably. We do have a pretty uneven playing field, but we are not asking for Government subsidies. We are determined to fight this."

The group is pulling out of all of its services to Normandy - leaving Britons who are keen to visit second homes near Cherbourg, Le Havre and Caen, or simply to go shopping, with no option but to switch to Brittany Ferries, which has agreed to take on two of P&O's ships. The only route from Portsmouth that P&O intends to keep is the crossing to Bilbao, in northern Spain. Just one ship will ply that route, compared with the six that used to operate out of Portsmouth. The service from Ireland's Rosslare to Cherbourg will also go, although the other Irish Sea crossings - from Liverpool to Dublin, and Larne to Cairnryan and Troon - will stay.

Where the competition is most intense - from Calais to Dover - P&O will retain most of the crossings, cutting services to six sailings per day instead of seven. Two ships will go, however, leaving six to ply the classic Channel route. Losing any more would be "uneconomic", Mr Woods said. Plus it would leave the lorry driving fraternity that supplies most of the route's custom with little option but to switch to the more regular Eurotunnel services. The group is banking on the continued growth of the freight market, which it estimates will supply 51 per cent of the ferries division's net revenue this year. It expects the market to continue to expand at an annual rate of some 6 per cent, boosted by demand from the new arrivals to the European Union. To stimulate demand for its crossings from truck drivers across Latvia, Hungary and the Czech Republic, P&O plans to overhaul its freight services, sharpening up its pricing and shortening drivers' loading times.

Despite the myriad ways of crossing the Channel - be it via the Chunnel, the new low-cost catamaran operated by SpeedFerries, or on a hovercraft - Mr Woods is adamant that ferries "undoubtedly" have a future. But rather than focus on the declining numbers of booze cruisers, who long since switched their allegiance to the likes of Tesco, which regularly offer a crate of lagers for under a tenner, he plans to chase those families that still prefer to take their own car to France. "Long-stay passengers and weekend-break passenger numbers haven't declined at all," Mr Woods said. He knows that the key to luring them is to transform Channel crossings into mini-cruises, with better food and shops on offer.

The group was unable to say when its Portsmouth-Normandy routes would close or when they would stop taking bookings for the services, promising only to embark immediately on consulting those employees likely to be affected.

The shake-up is expected to cost £60m to implement but P&O hopes the moves will boost the bottom line by an estimated £55m a year, with all the savings achieved by early 2006. Total exceptional charges from the review, including writing off £108m pounds in goodwill, would be about £240m this year, it added.

If the group manages to push through yesterday's plans, returning the ferries division to profitability at the end of next year, it will have successfully removed the last obstacle to shedding its conglomerate past for good. P&O has been slimming down for more than a decade, demerging its cruise arm three years ago and selling off its vast property estate to focus on its new love: its ports and logistics business. Even Mr Woods could not rule out an eventual sale of the ferries arm, admitting: "Over the medium and long term every company reviews what businesses it is in."