Faced with the increasing threat of the Channel Tunnel, ferry companies P&O and Stena were hoping to protect their interests through a merger. But any decision is on hold for the near future, and both companies have been left treading water, u

The P&O European Ferries and Stena Line ferries crossing the Dover-Calais route this week are owned by two rudderless companies.

Neither has a marketing director and each has put four top directors on “gardening leave” while they wait to hear whether competition authorities will allow a merger of their Dover-Calais routes.

The new company, to be called P&O Stena Line, if it gets the approval of the Department of Trade & Industry, would take a 40 per cent share of the lucrative routes between Dover and Calais. But it would leave the companies free to compete in other areas.

Since it was announced in October last year, the plan to merge the routes has wound its way through competition authorities on both sides of the Channel. It was expected last week that the UK’s President of the Board of Trade Margaret Beckett was about to give the go-ahead.

Now sources at the European Commission say it could be Christmas before it gives its decision on the planned merger of their short-sea crossing operations. Until a decision is given, the two companies’ future plans are in dry dock.

The new concern’s Dover-Calais routes will compete with its two parent companies’ other routes across the Channel. So, none of the eight directors on leave have taken part in any day-to-day decisions at Stena or P&O on the basis that this could put them in a compromising position if and when the new company finally begins to operate.

But the directors will also have to be ready to begin operating the new company as soon as the go-ahead is given.

Stena has effectively lost its sales and marketing director John Govett to the new company. Meanwhile, P&O European Ferries marketing director Peter Stratton left in May to become commercial director of train operator Connex South East, so each company has been without a marketing supremo during the crucial peak-season period.

The companies cannot recruit to replace the eight directors until they know the fate of the deal. If Stena takes on a new marketing director, and the deal is kicked out by the competition authorities, Govett will probably be wanting his job back.

Stena and P&O want to merge on these routes for one reason alone: the Channel Tunnel – because it has become fully operational over the past two years, and taken around half of the market on the short-sea route. It now presents a real alternative to the ferries, an unfairly supported one, claim the ferry owners. They describe the Tunnel’s operator Eurotunnel as a bankrupt company kept afloat, as it were, through pressure from two governments determined, for political reasons, not to see it sink without trace.

The merged company wants to axe three ferries from the Dover-Calais route, cutting total sailings by 45 return trips a day. P&O Stena Line will run the passenger service across Dover-Calais and the freight services running between Newhaven and Dieppe, and Dover and Zeebrugge. Stena will have a 40 per cent stake, P&O 60 per cent.

The proposed merger, announced over a year ago, was expected at the time to reduce yearly costs of 280m on the routes by more than 75m. When the proposals were announ-ced, the two companies were also expected to reduce the number of people they employ from 5,500 to 4,500. The deal allows for either side to buy the other out by 2002.

The aim was to have the merger completed in time for this year’s peak season, which is now drawing to a close, and the French government has already approved the decision. However, both Stena and P&O are still awaiting approval from the British and European Union competition authorities. The EC is poised to write to them before the end of the month, detailing its objections to the deal. The companies then have six weeks to apply for a two-week hearing before the competition commissioner Karel Van Miert if they do not agree with its findings.

The Monopolies & Mergers Commission reported to the British Government in April but Beckett has been waiting for Brussels’ decision. Before these latest reports, she was thought to be preparing to give the proposals the go-ahead by the end of this month.

There have already been suggestions from within the industry about the concessions the two companies will have to agree. For instance, there will probably be some kind of inflation-linked system of pricing for ferry crossings,while P&O and Stena are also likely to have to provide more boarding space and ticket booths for rival operators SeaFrance, Hoverspeed and Holyman Sally ferries.

Such is the enthusiasm of the ferry operators for the merger, they would welcome any such proposals – Stena executives warned they might walk away from the merger if clearance was delayed long after the summer.

During the long wait for clearance, the commercially insane price war across the Channel has continued – with P&O, for instance, reducing its peak-time return to match Eurotunnel’s Le Shuttle price of 165 – a 58 per cent cut on last year.

Stena president Bo Lerenius says he has an alternative plan if the merger is blocked, though of course he won’t say what it is. But in practical terms both companies’ choices are limited: they can continue competing with each other on the cross-Channel routes under discussion; or one of them could merge with the state-owned ferry company SeaFrance.

SeaFrance is in a strong position since it is the only French flag carrier across the Channel, it is state-sponsored and likely to remain so given the recently-elected French government’s socialist credentials and its attitude towards plans to privatise another state travel group, Air France (it’s against it). Also no government would wish to add to the already high rate of unemployment in the Pas de Calais region by withdrawing funds.

Stena, however, came out of a joint operation with SNAT in 1995 and is unlikely to want to go back into it. P&O is also unlikely to pursue this route, partly because it is more able use its muscle as the strongest player in the market.

Lerenius has already described the detrimental effects the delay has had on his company: “In the end it gets pretty difficult to motivate an organisation to go out and fight the competition when they know that as soon as it gets the go-ahead many will leave,” he says.

Results for the whole of the Stena group saw the company move into the red at the end of last year with losses of Kr448m (41m), compared with profits of Kr201m (18.5m) in the previous period.

For its part, P&O European Ferries is in bullish mood: last week it announced strong results with operating profits of 11.3m for the six months to the end of June, compared with 500,000 in the same period the previous year.

“Obviously we’ve been helped enormously by the Tunnel fire but we’ve helped ourselves too,” says acting sales and marketing director Alan Hopley. “Our pricing strategy has improved this year. Previously no one knew the price of a ferry crossing because there was so much discounting. We’ve countered that, kept our nerve when others cut prices and the clearer message has worked with our consumers. If the merger is rejected then there will be blood in the water: we have to be strong to survive and we will be.”

Hopley points out that duty-free provisions are being abolished in 1999, when all ferry services from British ports are likely to be rendered uneconomic (it costs 14m to 17m a year to operate one ferry), increasing the pressure still further.

The Tunnel has, to some extent, actually helped the ferries – the Dover-Calais crossing saw total volume growth of 23 per cent in the year to August, compared with the same period the previous year, says P&O. This was partly due to the strong pound, and was also because of the competition-fostered marketing activity and increased publicity brought by the opening of the Tunnel.

The Tunnel provided a genuine alternative to the ships and a way out of the stranglehold which the ferries previously held on the market. But it has also ex panded the market for everybody.

This was a view apparently shared by Ian Lang when he was Secretary of State at Trade & Industry last year. In July last year, he overruled the then director general of fair trading, John Bridgeman, and agreed to scrap a 17-year ban preventing the two ferry companies merging. They, not surprisingly, took this as a signal for a merger to go ahead and proceeded to outline plans to do just that.

Then came Lang’s apparent U-turn in November last year following the Tunnel fire when traffic was transferred to the ferries. This was a fortunate act for the ferry companies at least, given the foot-dragging of the regulatory authorities. It provided P&O and Stena with extra income this year when they were still in unexpected competition with each other.

The ferry companies believe the Tunnel fire and the fact that they were once again so obviously in a dominant position impressed upon the various regulatory authorities the potential that existed for them to exploit that position.

Lang decided to refer the plan to the MMC – he expressed particular concern about the Dover-Calais route – though the Government maintained that it had made it clear to the ferry companies that any proposals would still be subject to competition law. For his part, P&O boss Lord Sterling, himself a Government advisor, said the regulatory authorities must have contemplated the emergence of a single major ferry operator when the undertakings were lifted.

Now, a year later, the ferry operators are faced with yet another delay. Eight of their directors are at home on full pay – nice work if you can get it, but maybe a little dull and certainly costly in management time. More importantly, the companies cannot plot their future directions until a decision is taken, one way or the other.

Whatever the EC’s decision, one thing is certain: this summer’s situation on the Channel will not be repeated next year.


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