P&O and Stena combine forces to take on the Tunnel

Lord Sterling, chairman of P&O, yesterday predicted big job cuts but no price rises on cross-Channel routes after agreeing a pounds 410m merger of its Dover-to-Calais ferry business with the rival operation run by Stena of Sweden.

The deal, which brings together the biggest and second-biggest ferry operators on the busiest part of the Channel, is the most dramatic move yet by ferry companies to combat the price war sparked off by the opening of the Channel Tunnel. Prices have fallen by up to half over the past three years.

P&O said yesterday it was in talks with Brittany Ferries, the French state-controlled group, about possible capacity cuts on western Channel operations.

The P&O/Stena deal was well received in the City and by rivals yesterday, with P&O's shares rising 20p to 645p. It is the latest in a string of deals by the shipping-to-construction group to revitalise its image among investors. Last month it announced a pounds 2.6bn merger of its container interests with Royal Nedlloyd of the Netherlands, followed by a pounds 25.3m deal to buy out Royal Nedlloyd's half share in the North Sea Ferries joint venture.

Lord Sterling described that acquisition as "the very first step" in the rationalisation of the cross-Channel ferry industry, triggered by the Government's decision in July to lift restrictions on mergers and collaboration.

Yesterday he said the new merged business, to be called P&O Stena Line, would aim to achieve cost savings of pounds 75m by the end of next year. A substantial part of that will come from withdrawing ships plying the so-called short sea routes, which include Dover to Zeebrugge and Dover to Calais, with Stena's Invicta and P&O's Pride of Bruges being taken out of service, leading to between 350 and 400 redundancies. Estimated cost savings are around pounds 15m per ship.

Further withdrawals will be made next year. Although neither side would be drawn onnumbers, Lord Sterling said the combined fleet would not be cut "drastically" and one estimate suggested another one or two ships were earmarked to go. Before the reductions, P&O will contribute its eight ships on the route to the new venture and Stena the five it operates. P&O will own 60 per cent of the shares in the venture.

Job cuts from the combined workforce of 5,500 on the short sea routes could exceed 1,000. Lord Sterling said he would be "surprised" to see fewer than that number of redundancies, following cost savings in marketing, port operations and administration. Stena said its headquarters in Ashford, Kent, which employs 450 people, would have to be reduced in size, although some staff would move to Dover, where the new line's head office would be based.

Lord Sterling had some comfort too for ferry travellers, suggesting there would be "no change in prices" as a result of the deal and promising that P&O would remain a low-price operator. It would be "quite ridiculous to assume that there would be any increases at all," he claimed.

The merger must be cleared by the Office of Fair Trading, which could trigger a monopolies investigation, but cross-Channel rivals welcomed news of the link-up yesterday. Eurotunnel, the Channel Tunnel operator, said the rationalisation of capacity was "a logical step which should have been done earlier". Graham Ede, managing director of Hoverspeed, said: "It might get some commonsense back into the industry."

The merger is expected to boost the profitability of P&O's ferry operations, which saw profits crash from pounds 24.8m to just pounds 500,000 in the first half of this year. David Elsmore of Kleinwort Benson Securities expected losses at P&O European Ferries to deepen to nearly pounds 10m in the second half, but could see profits of pounds 30m next year.

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