THAT SINKING FEELING

Richard Branson says he has “radical plans” for the fare structure across the Channel now that he’s got Eurostar to play with; which can only make the cross-Channel ferry operators wince.

In an above-the-waves market where prices are pared to the bone, the news at the end of last week that London & Continental Railways, of which Virgin is a part, has won the bid for the 2.7bn Channel tunnel rail link below the waves is ominous.

The deal comes with the Eurostar passenger service from London to Paris thrown in – as well as Waterloo International and St Pancras station. And such are the narrow, sometimes negative margins, which prevail in the market that it could lead to at least one ferry operator ending up dead in the water by the end of the year.

L&CR brings with it the marketing expertise of Virgin as well as the National Express transport company which are each part of the consortium. Both Virgin and National Express know a thing or two about taking on established rivals in a market, and National Express in particular is well versed in mass-market, budget-priced travel.

Branson says that L&CR and Eurostar should be competing “head to head” with the ferries and coaches. L&CR takes over Eurostar immediately – Branson is already talking about putting TVs in the back of seats on the trains just as he does in his airline.

What happens this summer is vital: it’s now cheaper for five people with a car to cross to France by boat than it is for them to travel from Piccadilly Circus to Heathrow on the Tube; if a market’s driving force is drastic price promotion then casualties become inevitable.

None of which augurs well for P&O, Stena, the Sally Line or Hoverspeed, which ply their trade across the Channel for an astonishing 84 crossings a day to France from the ports of East Sussex and Kent. And that doesn’t factor in Brittany Ferries, which operates further down the coast.

The ferry operators themselves seem convinced the only way out of this impasse is full steam ahead with what got them into it in the first place. Their tactics led to the price of a Channel crossing falling by 15-20 per cent last year, according to industry estimates. Things look even grimmer this year – except for the customer.

The biggest Channel ferry operator is P&O European Ferries, which has spent 600m investing in new tonnage over the past seven years or so and claims to be at the pinnacle of a ten-year rebranding strategy built, with the help of its campaign through Bates Dorland, around its sea-faring heritage. Splendid stuff; except that it sees a battle on price as inevitable this summer.

“Last year we found that the market was very late in getting started and we continued with the price promotional offers that we had intended to finish by Easter,” says P&O’s passenger marketing and sales director Peter Stratton.

“The indications are that nothing will change this year, much of the market seems to be showing late booking activity again.”

So P&O’s price promotions through Associated Newspapers like the Daily Mail and the Evening Standard are likely to continue over the peak-time Easter break just as they did last year, though like Stena it stopped discounting proper in January.

Le Shuttle, the tunnel car-carrying service, did not. It has just announced that it will for the first time extend its Apex fares through the spring break to the end of April, having previously decided to extend it through March.

P&O, says Stratton, has a considerable war chest it can draw on; but he also claims it was one of only two ferry companies to show a profit last year.

Just days ago the chief executive of P&O’s main rival Stena, Bo Lerenius, blamed fierce price competition, mainly from Eurotunnel rather than rival ferry companies, for the substantial drop in his company’s profits. For 1995 they were less than half those of a year earlier at SKr 201m (20m) compared with SKr 502m (50m).

Lerenius openly admits Eurotunnel will be the biggest player in the market this year. Le Shuttle is likely to take about five out of ten cars across the Channel compared with three out of ten last year.

Lerenius also claims there will only be space enough for two ferry operators. At the moment four groups compete with the tunnel directly.

Stena says it is less dependent on the Dover Calais short sea crossing than P&O – it claims 13 per cent of its profits come out of Dover compared with 80 per cent for P&O – and says its strength on other routes makes it less exposed than its rivals. It also says its fast catamarans will compete with the tunnel for speed, while its extra large ferries will cater for passengers who enjoy a sea-crossing.

Nonetheless, Stena sales and marketing director John Govett, calls the price cutting “absolute lunacy” and says he’s had enough.

Stena’s profit fall came in a market which is actually expanding at such a rate that ferry companies want to increase capacity rather than cut it – a ploy described as “insane” by one analyst.

All this, while the French franc has remained at such a high rate against the pound that the French Tourist Board felt compelled to invest in an advertising campaign for the first time in nearly a decade.

By the end of the summer the tunnel will be operating at virtually full capacity at peak times, say analysts, and we will see which operator did indeed have the deepest pockets. Govett’s initiative last weekend in introducing core rates of fare is the latest move designed to transcend the continuous move towards percentage discounts on fares.

If there is sufficient shake-out of the market to ensure that only the best-resourced survive, then the brand building which P&O has invested in for years, and which Stena is now developing, will become paramount. This will be end-game for the ferry operators.

Once the tunnel is fully operational there will no longer be any reasonable impediment to P&O and Stena merging their operations across the Dover Straits, as the companies tried unsuccessfully to do a couple of years ago. They could then carve up the other routes between themselves. We may well see some routes shut down altogether – Ramsgate-Dunkirk is a likely candidate, according to some observers.

In this scenario, maximum conquest of market share before negotiation would be vital.

“The market should stabilise by the end of 1996. The tunnel trains will have filled up at sensible times of the day – they have to run the trains at least three minutes apart which limits their capacity – and I think you’ll see some very stiff price increases from the ferries. The winner of the battle raging now could be in a very strong position indeed,” says one analyst.

Rapid rationalisation will be imperative for another reason. The European Commission has promised to abolish duty-free trade by 2000. Some analysts suggest a remarkably large proportion of passengers are crossing the Channel to bulk-buy duty-free booze. Presumably, that won’t last.

“The battle has to be fought and won between now and then. You can only offer tickets for a 1 if you’re getting your revenue from duty-free sales; once that dries up, if the situation continues as it is now, there will be trouble,” says an industry insider.

By the end of the summer, after the peak period results, it will be clear which ferry operators are still in the fight: “Everything is about June to September,” says Govett. The survivors can expect a period of calm as they consolidate their colossal investment and contemplate how to raise prices without alienating customers disgruntled by the demise of duty-free.

It is likely to be the last time a trip on the Piccadilly line seems dear in comparison to a sea cruise. Which is a shame, if for no one other than the customer.