TRAIN DRAIN

Rocked by a spate of top-level marketing departures and bad press, Eurotunnel has struggled in its first year. But the underlying problem is the massive debt from construction. Is there any light at the end of the tunnel, or is the only answe

Crossing the channel will be hassle free.” For the channel tunnel customer, that promise – made back in 1993 – is gradually becoming a reality. But the impact of the message has been obscured by bad publicity, brand confusion and billions of pounds worth of debt.

This week, Eurotunnel an-nounces its interim results. There are unlikely to be any surprises: revenue for the first half of the year is known to be about 104m; forecasts for total volume in the first year of operation will be announced, but figures since February show that by the end of August 715,400 coaches and cars had used the Le Shuttle vehicle service.

Meanwhile, interest repayments for the same period are 350m, with operating costs estimated at 150m. The total loss is likely to be well in excess of 300m.

At the company’s results announcement in April, chairman Sir Alastair Morton said: “In 1995 we may succeed or we may fail. Our debt service may overwhelm us.” But changing a nation’s ferry and airline habit does not happen overnight and an unspectacular performance during the summer has hastened a crisis.

There are, however, too many interested parties rooting to keep Eurotunnel on the life-support system for it to breathe its last just yet. The 225 lending banks would not want to face the prospect of so much bad debt; the shareholders who have seen their shares fall from a high of 11.72 to 1.19 don’t want to see their last hope slip away; and the politicians on both sides of the channel could do without the embarrassment.

“It’s common-sense to write it off, rebuild and restructure it,” suggests one analyst, “but in reality it could stagger on for many years.”

So, having suspended its debt repayments while its crippling finances are restructured, Morton is getting on with fighting legal battles with national railways and the ferries. And his marketing department is getting on with the fight to recruit customers.

But it has been a slower process than envisaged, with the marketing department being forced to start with its own recruitment. Earlier this year, commercial director Christopher Garnett left, along with UK sales and marketing director Neil Cooper and marketing manager Amanda Hill (MW April 7).

Recent speculation in the national press that the lending banks are putting pressure on Eurotunnel to restructure its marketing management is refuted by the chief lending banks. But another sustained criticism has been that the management is still dominated by those who saw the tunnel through its construction phase – it still needs more strength on the commercial front.

Despite these criticisms, the marketing department has hardly moved on since March. Six months have elapsed and still Garnett’s replacement hasn’t been found. The job is variously described by industry observers as “challenging”, “difficult” or “impossible”. Not filling it for six months is noted by one senior source within the lending banks as “a little careless,” even though Eurotunnel’s respected financial director Bill MacKenzie is covering.

Added to which the management is split across the channel. “The majority shareholding is French, the market is largely British and the management is half British, half French,” Garnett explains.

Garnett, whose own departure was accelerated due to ill health, is now heading Sea Container’s bid for the Great Western Service and South West Trains railway franchise.

He believes that added to the problem of persuading someone to take the commercial director job is the difficulty of finding an incentive, especially since “you can’t really offer share options”. He also suggests that “at the moment they may not need someone… in the short term it’s all about bums on seats”.

One of the problems with Eurotunnel’s marketing is defining which bums on which seats. Ambitious market definitions for the whole operation include destinations across Europe. Eurostar, the passenger operation, is looking at markets in competition with the airlines, but the only direct control exercised by Eurotunnel is on its Le Shuttle services which share the short sea market.

Both Eurostar and Le Shuttle have been building separate brands. Although MacKenzie says that they have been exploring joint marketing campaigns, the current financial arbitration doesn’t bode well, short term. Certainly, neither wants to be associated with Eurotunnel; as Garnett says: “Euro is naf, tunnel is negative.” But Eurotunnel itself has arguably become a brand in the consciousness of the nation – regardless.

At Le Shuttle Philippa Harris has run marketing since March and has spent the past four months building a team. Deborah Merrens joined a month ago from Merrydown cider as marketing manager for full fare and brand building; Halco Van der Steen is marketing manager for traffic generation; and Ruth Dawson is marketing manager with responsibility for the travel trade.

The 25m pan-European marketing budget is divided between the HQ in Calais and Folkestone. On the continent the job is different; according to Harris, “foreign travellers might be into hi-tech transport systems, but they’re not so in- terested in coming to England”.

Travellers from the UK represent 75 per cent of the short sea market, but the UK marketing task could not have been made more difficult; it’s a long-term task squeezed by short-term pressures.

So far this year the company has spent 10m on advertising, through agency BMP DDB Needham. According to account planner Anneke Elwes: “We’re talking about changing people’s long-term attitudes… it’s a long-term change and will take more than six months.”

In the first year the advertising has been primarily information based. But it switched from the original image-led “Fantastic Journey” campaign half-way through the year to the personal recommendation “vox pops” to build consumer confidence in the operation. “When you’ve got a new service it’s quite a big risk for people, so it’s a priority to make them feel confident in the system,” adds Elwes.

Reassurance has, of course, came harder after several mishaps. Operations are not yet up to capacity, nor 100 per cent smooth, but Le Shuttle is now running up to four trains an hour.

Volume is less of a problem; revenue is more so. Le Shuttle has moved its strategy away from an original premium-priced positioning to join this year’s free-for-all cross-channel price war. “There’s a much more aggressive price-cutting strategy than anything ever envisaged,” observes Garnett.

Harris prefers to see promotions, which include targeting beyond the core ABC1 market in the South-east, as “added value”. The company has not followed Stena Sealink’s 25 per cent price cut earlier this year, and a low-season Le Shuttle return costs 75. This doesn’t come close to the ferries’ 15 promotion. But various offers, most recently last week’s 33 per cent discount on duty free goods, are targeted directly at beating the ferries at their own game.

The ferry companies certainly show no signs of giving up the battle. Eurotunnel, for its part, is attempting through the courts to change government rules which allow sales of duty free on the boats but not on board the trains.

P&O has openly challenged Le Shuttle’s claim to have 39 per cent market share, added to which there’s another simmering dispute with the ferry companies.

Stena sales manager David Burdon believes that having recognised the need for more turn-up-and-go sales, Eurotunnel is overclaiming the amount of trade it gets through travel agents. This is despite the fact that Eurotunnel has “gone out of its way to exclude them during the past two years”.

Harris refuses to get involved in statistical mud-slinging and says that any accusation that she hasn’t paid attention to the travel agents is “grossly unfair”. But she concedes that “maybe we didn’t spend enough time explaining our service to them”.

Travel trade marketing manager Dawson is in the process of sending out updated literature to travel agencies, though the company is still at odds with the biggest chain Lunn Poly, which hasn’t carried Eurotunnel brochures. And a question mark now hangs over its Le Shuttle Holidays tour operation (MW September 23).

Despite the problems, the company still has a target of Le Shuttle capturing a 50 per cent share of the short sea vehicle market by next year. But that’s only half the story. While Le Shuttle is building its own awareness, 50 per cent of the tunnel capacity is taken by Eurostar.

Eurostar is performing well. It has succeeded in knocking the airlines on the London-Paris route and, having captured a large slice of the business market, it is cutting some prices to increase volume in the tourist market.

It recently unveiled a 76 return fare to Paris and plans to increase departures to 12 a day by the end of the year. It is claiming 40 per cent of the market with 2 million passengers to date.

But when Eurotunnel originally estimated the market, it was looking at 70 million or so passengers to destinations across Europe. Making money out of destinations beyond Paris is not on the near-horizon.

Eurostar’s contract was originally negotiated so that it pays 14.5m per month minimum usage charge. Eurotunnel is keen to renegotiate that contract.

There is one school of thought that Eurotunnel, even if it did harness that larger market, would never realise a profit given the gigantic debt that it has to service, however reconstructed, unless a large amount of that debt is written off.

Whatever the efforts of its own Le Shuttle marketing department, realising the full potential of the market as predicted and promised to so many, could take as long as it takes for shareholders to get their first dividend payment.

Key Dates on tunnel route

1986, March: British and French governments sign concession with the Channel Tunnel Group and France-Manche to last 55 years from completion of legislation.

1987, July: British channel tunnel legislation receives assent. The Railways Usage Agreement means that BR and SNCF will be entitled to 50 per cent of tunnel capacity.

1987, November: Bank credit agreement signed for a loan and letter of credit facility of 5bn.

1990, October: First contact made between English and French sides of the tunnel.

1994, October: 400 journalists delayed for an hour on media trip to Paris.

1994, November: Tunnel open for business – 17 months behind schedule.

1995, March: Temporary halt to Le Shuttle turn-up-and-go service after long delays.

1995, July: Le Shuttle now regularly running three trains an hour.

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