Ferry operators plan sea-change

The Government’s decision to allow P&O, Stena and Hoverspeed to co-operate on the cross Channel ferry market signals the beginning of the end of cheap deals for consumers travelling to France (MW July 19).

But that is about the only certainty. The full implications of the change are far harder to predict and will take at least two years to filter through.

The President of the Board of Trade, Ian Lang, acting against the advice of some travel operators and a senior civil servant, claims the move is “releasing P&O Ferries, Stena Line and Hoverspeed from all restrictions placed on them in 1979 and 1982”. Those restrictions prevented them from undertaking a range of co-operative activities, including sharing vessels and prices to foster competition and protect the fledgling Channel Tunnel.

The kind of “code-sharing” common to the airline industry could also now be exploited. This usually means passengers book tickets with one airline but fly another for part of their route; in the ferries’ case it could mean a kind of pooling of sales arrangements.

But most observers believe that advertising and marketing arrangements will remain separate as the companies continue to invest in their own brands.

The reason for the Government’s change of mind is the operating success of Channel Tunnel company Eurotunnel and in particular its Le Shuttle service, the vehicle-carrying train service. Eurostar, the passenger-only service, competes more with the airlines flying to Paris and Brussels than the car-carrying ferries plying the Channel waters.

Le Shuttle now claims about 40 per cent of the total cross-Channel passenger market (on the Dover-Calais route), while P&O holds nearly 30 per cent and Stena around 20 per cent. Stena and P&O have five ships each on the Dover-Calais route, while P&O also has three freight-only vessels going to Zeebrugge. The companies pretty much agree on these figures, but there is no independent source for such statistics.

Market share figures will take on overriding importance if and when the ferry companies sit down to negotiate. Hoverspeed, the smallest of the three ferry operators, with two hovercraft on the Dover-Calais route and one SeaCat high-speed catamaran on the Folkestone-Boulougne route, appears the most vulnerable.

The ferry companies, especially P&O, which led the campaign to have barriers to co-operation removed, argue that the success of Le Shuttle, which pays no share dividend and has taken a holiday from most of its debt repayment until March 1997, is no longer a fledgling operation and ought to take its chances in an open market.

Lang overruled advice from the Director General of Fair Trading that P&O should not be released from a 1982 undertaking preventing it from merging with Stena. Instead he has opened the door, should the companies want it, to a merger. But the consensus in the City is that a merger is extremely unlikely given the diversity of P&O, with its interests in cruises and construction, and Stena, which is strictly a ferry company.

At first glance the ferry operators in the Channel market seem to have behaved irrationally by both increasing the number of crossings from about 60 a day to over 80 since the opening of the Tunnel, and by refusing to be beaten on price. But the reality is not so clear. Stena, at least, is far from clear about what it is now allowed to do.

“We are not entirely sure what the decision will enable in practical terms,” admits Stena Line UK managing director Gareth Cooper. “It is wrong to assume it will automatically pave the way to rationalisation of Dover ferry services since, as the President of the Board of Trade points out, any common or joint activity will still require the consent of the UK or European Union competition authorities.”

P&O chairman Lord Sterling is more definite, believing over-capacity in the market will inevitably lead to rationalisation: “We can now get ahead with looking at how best to achieve this.”

It is worth noting that the move came at a good time for Sterling personally. A poll of 20 investment fund managers days before the announcement revealed that 15 wanted Sterling to go, so unhappy are they with P&O’s performance in the Stock Market.

“P&O and Stena have five ships each on that crossing [Dover-Calais] and they could reduce that to, say, three ships each of modern, larger and faster ferries aiming for departures every half hour,” says Matthew Marchant, transport analyst at NatWest Securities.

Publicly, at least, Stena sounds the more coy of the pair. It emphasises that its preferred strategy is to establish a “strong, standalone business on the Dover-Calais route”, noting though that it will listen to suggestions from its competitors.

Stena has always claimed to be less dependent than P&O on the Dover-Calais short-sea crossing which it says accounts for 13 per cent of its profits (for P&O it represents 80 per cent of profits). Stena also claims that its strength on other routes makes it less vulnerable than its rivals.

However, Stena’s profits for 1995 were less than half those of the previous year: 20m compared with 50m. Chairman Bo Lerenius blames fierce price competition, from Eurotunnel rather than other ferry companies, for the drop.

Lerenius believes there will only be space across the Channel for two ferry operators, at least competing with Eurotunnel on the Dover-Calais route, compared with the four groups there are now (Stena plus P&O, Hoverspeed and the Sally Line). Brittany Ferries and Sea France work the ports further west.

Despite apparent coyness, City analysts expect crossings to be reduced and prices to rise. One source says: “I do not expect prices to be raised or frequency of sailings to be reduced in the autumn brochures. The talks, if there are talks between the two companies, will be a slow process and are likely to begin at the end of the summer season, in September or October at the earliest.

“Stena has added more vessels to the Dover-Calais route and it would want any kind of pooling to be on an equal basis. I don’t expect there to be any real kind of impact until the second half of 1997, and the benefits will not be seen until 1998.”

He adds that both companies can expect to be hit hard in their results in the second half of the year, as a result of Le Shuttle’s decision to slash prices for the summer season, and both main ferry companies’ avowal not to be beaten on price.

It is inconceivable that the present situation across the Channel will continue into next year. Competition authorities in the UK and EU will still have the final say when it comes to “co-operation” deals, but travellers will have to set off even earlier if they want a good deal.