Eurostar is losing 180m a year on its London to Paris, and Brussels, services. Passenger numbers are 40 per cent (about 3.5 million people) short on targets set by parent London & Continental Railways (LCR). And even the most optimistic assessment says it will not break even until 2001 – two years after it was scheduled.
These are the bald statistics that have brought LCR to the brink of collapse and left the future of Eurostar, which was supposed to fund construction of the Channel Tunnel Rail Link (CTRL), open to question. It now faces a change of ownership which will affect long-term marketing and advertising.
When LCR, whose shareholders include the Virgin Group, National Express and London Electricity, took over Eurostar in 1996 from Government-owned company European Passenger Services, the rail link project was included in the deal.
But in January, LCR had to ask the Government for an additional 1.2bn to complete the rail link. Deputy prime minister John Prescott refused and gave LCR 30 days to come up with a solution to the financial shortfall. Last week he extended the deadline for a further 30 days, until March 31, and added a new dimension. “I have held discussions with London & Continental Railways and Railtrack for whom the shareholders envisage a future role.”
But Railtrack is not allowed to operate Eurostar – a clause in its vesting documents forbids it. Prescott’s statement seems to suggest it could go into partnership with LCR to get round this problem and leave Eurostar in LCR’s hands. Alternatively, Eurostar could be franchised out to a private operator. Most analysts tip Virgin, but other names mentioned as possibles include National Express and two non-LRC shareholders, Stagecoach and Connex.
The competing interests of LCR’s eight shareholders has been criticised as contributing both to the over-inflated targets it used to secure the Eurostar contract, and to the inconsistency in its advertising and business strategies.
Virgin is understood to have been working on proposals to run the Eurostar franchise for the past three months. One source says it has distanced itself from LCR on the grounds of conflicting agendas.
“There was a bit of a personality clash,” says the source. “Virgin was bringing loads of ideas to the table but, as Sir Derek Hornby (LCR chairman) would say, we’re not running Virgin Eurostar, this is Eurostar. However, I envisage that LCR will remain as it is running the service but with Virgin having a bigger role. Also, it could be a great combination if you combine the power and capacity of Railtrack with the aggression and marketing nous of Virgin.”
But questions will be asked about the wisdom of Virgin running Eurostar.
It could also be politically difficult to give Virgin the franchise in the light of criticism of its existing train operations. Last month an Office of Passenger Rail Franchising survey showed that punctuality on the West Coast route had dropped since Virgin took over. But Prescott and LCR may have no alternative.
“Despite the fact the Virgin people have been moved off the LCR venture, it is possible it will end up being called Virgin Eurostar,” says another source. As the future of Eurostar comes under scrutiny, so will previous business and marketing strategies.
A fast link from central Paris to central London, without air travel delays, should surely be a winner. How could a company involved in this project so signally fail to meet its targets? City sources, as well as people in the ad industry, have singled out a misguided marketing strategy as the crux of its woes.
“It gave away too many discounts,” said one analyst. “Once it had done that it found it increasingly difficult to raise the price.”
A senior ad agency source says that the price discounting worked against the message it was putting across in its advertising. “It was made into an aspirational brand through its advertising and marketing. But because it was most relevant to business class travellers it has forfeited everything that made it sexy and exciting in pursuit of passengers.
“There has never been any accountability. Eurostar has made a huge impact on BA’s London to Paris route but has had to reduce its price to meet its (LCR’s) targets.”
Another problem has been the image projected in advertising. “The advertising has not been consistent,” one agency source says.
The launch campaign in 1994 was handled by Young & Rubicam but it lost the bulk of the account to St Luke’s in 1996. Its first work was the Eric Cantona campaign which raised the service’s profile but brand advertising was subordinated to the need to sell tickets and meet what sources say were “impossible” targets. According to ACNielsen-MEAL, Eurostar spent just under 13m in the 12 months to the end of 1997.
Personnel changes have also affected Eurostar’s consistency. Mark Furlong was seconded from Virgin to be marketing director but moved back to Virgin last November. Commercial director Ian Brookes left to rejoin Virgin in October last year. The arrival of Hamish Taylor as managing director from British Airways 12 months ago was designed to bring more consistency to the marketing effort.
LCR and Eurostar defend their positions, citing the problems associated with the November 1996 freight train fire that severely affected passenger confidence. The company also admits original forecasts were wildly optimistic and based on passengers who were simply not there. One source says LCR expected Eurostar to triple the air-rail cross-channel market.
“The question you have to ask is whether the original forecasts were correct or whether Eurostar is a successful business in its own right,” says Taylor, who succeeded Richard Edgely as managing director in March last year. “We have to drive the business forward with a smaller volume. But passenger numbers were up in 1997 to 6 million compared with 4.86 million in 1996.”
Taylor says the company will develop the leisure market, which makes up about 80 per cent of its business, through product enhancements such as special ski trains, and targeting new customers outside the South-east where most of the advertising has run in the past. He is also looking to create a consistency over the business and leisure markets.
In marketing and advertising terms, Eurostar needs to be more consistent. The Ashford terminal could be better exploited. But it has structural problems which mean it cannot be as flexible as its airline rivals. One source suggests it needs to develop further links to Europe. Plans for overnight services to 13 European cities were scrapped last year.
“It should have been more confident in marketing the success of Eurostar,” says a source close to the company. “The whole Channel Tunnel rail link has been dominated by engineers and finance departments and nobody has ever worked out the potential and what was needed to meet targets. It sacrificed the brand advertising for the short-term need to fill trains cheaply,” says the source.
Eurostar now has to wait until March 31 to discover who will take control of its future. It has to reverse its massive losses and build traffic. Its new owner will have to market its way out of the situation.