Stena Sealink versus Le Shuttle, Eurostar and the Rest

Stena Sealink versus Le Shuttle, Eurostar and the Rest

The Channel Tunnel: about as welcome to cross­channel ferry operators as Henry Ford was to carriage makers.

In July 1994 Stena Sealink, the Swedish ferry company, was waiting for the outcome of a battle caused by the opening of the Channel

Tunnel between Folkestone and Calais. Although the tunnel carried only four Eurostar trains a day in each direction between London and Paris, cross­channel ferry prices had already dropped to 20 per cent of 1993 levels. On some routes the

competition was particularly intensive and it had given rise to the court battle between France's Brittany Ferries and the United Kingdom's P & O. At the heart of

the case was P & O's Ffr49 three­day return fare for passengers originating in France on the 'long route' between Cherbourg and Le Havre in France and Portsmouth in England.

To qualify for the reduced fare, passengers had to collect three coupons from Ouesf­France, a regional newspaper covering the main catchment area for the Cherbourg­Portsmouth service. Brittany applied for an immediate injunction against P & O's 'loss­leading' prices at the Tribunal de Commerce in Rennes. Since Brittany Ferries' owners are 4,000 French farmers and regional councils, they have considerable influence in that part of France. Brittany Ferries' main accu­ sation was: 'predatory pricing, whieh we believe breaks French law if it is proved

to be intentionally aimed at eliminating rivals'. It complained that the massive price cut to 75 per cent of normal tariffs throughout the peak summer season made profits impossible. P & O asked the court to find itself unable to rule, since it was impossible to stipulate fares when some sailings carried ] ,600 passengers and others as few as 10. Industry experts say companies can gain by packing ferries with cheap­rate passengers, who swell profits by spending on food, drink and souvenirs during the voyage.

Stena Sealink entered the fray at the end of the summer season when pro­ motional fares in the United Kingdom dropped to Sl.The Central Committee of French Ship Owners (CCFSO) and their sailors' union demanded that the EU should impose minimum fares on cross­channel routes. They also wanted to bar all non­EU citizens from working on the ferries and claimed that, for safety reasons, all crew members must speak French. 'We believe it our duty to offer the keenest possible fare and that is what we do,' argued P & O in defence of its low

746 • OuerrictB Cast 3 Five: Stcna Scalink

fares. 'We thrive on competition which benefits the consumer and we would oppose any move to disrupt that.' Stena Sealink added: 'It would be ridiculous to increase prices in such a competitive industry.' The CCFSO responded to these comments: 'It is not our intention to be protectionist. Protection is where you

erect customs or other barriers to trade. It is not protectionist to seek to save the jobs of French seafarers.' Brittany Ferries had other problems, too. In 1993 it lost

Ffr90 million on a turnover of FfrSOO million, and had borrowings of Ffr 1,400 million.

Competition by Sea Stena Sealink has 30 per cent of the cross­channel market of 3D million annual passengers. P & O is market leader with a 42 per cent share, and Brittany Ferries is no. 3 with 9 per cent. Other contenders are Sally Line, owned by the Finnish Effjohn Oy group, and the United Kingdom's Hoverspeed, each with about 7 per cent of the market. Hoverspeed is unlike the other operators in that it uses fast ear­carrying hovercraft and Seacats rather than boats. A further 40 million passengers cross the channel by air each year.

Short routes dominate the cross­channel market. Ol the 24 million passen­ gers travelling between the United Kingdom and France, 16 million take the intensively competitive Dover­Calais route. Of these, 9 million go by P & (>, 6 million by Stena Sealink and 1 million by Hoverspeed. Although conspicuous for their consumer pricing and advertising, Sally Lines and Brittany Ferries arc minor contenders on the short routes most threatened by the Channel Tunnel. Not only are fares down by an average of 20 per cent, but the quality of the ships and the frequency of the service they offer is also up. Both P & O and Stena

Scalink have live vessels on the route. The short route is critical to both the big operators. In 1993 P & O made £77 million operating profits on sales of £615 million, while Stena Sealink made £24 million profits on £380 million sales. However, P & O depended upon duty and tax­free sales for one­third of its profits. The market will decline. Eurotunnel aimed for half of a 40 million sea­going cross­channel passenger market by 1996. In the opinion of London­based brokers, NatWest Markets: 'The route can work

with six vessels between them operating a service every 45 minutes. 1 The compe­ tition has already claimed one victim. Olau Lines, subsidiary of the German TT Line, stopped trading in May 1994. As the Channel Tunnel's threat increases and competition on the short routes intensifies, Stena Sealink and P & O are looking to the less competitive long routes. Hence P & O's quick purchase of Olati's luxury ferries to compete against Brittany Ferries between Portsmouth and Le Havre.

The Channel Tunnel will not affect all ferry traffic equally. Travellers between England and western France and Spain can avoid London and the congested south­east of England by taking a ferry from the south coast to Brittany or Spain.

Similarly, travellers to or from the Midlands or north of England have a choice of ferries from the east coast to north European destinations. A problem with these

routes is time. Ferries are slow and the journeys take between several hours to over a day, depending on the route. That means less regular services, provisions of cabins, bigger ships and. of course, higher costs. Nevertheless, Le Havre has spent £27 million building a new terminal to cope with increased demand and Dieppe has been given £6 million of regional funds to help pay for a new ferry terminal.

Ferry operators also hope to keep a high share of the eoinmereial trade on the short routes. Along with the 4 million cars that cross the channel each year are 170,000 coaches and 1.3 million commercial vehicles. A survey among ] 02 senior

transport executives found 62 per cent of transport companies believed that their drivers would prefer to stick with the ferries, while 84 per cent thought that the ferries would offer better facilities than the tunnel. 'We've managed perfectly well

Overview Case Five­ titcna Sealink • 747

without a tunnel; I don't see it making a big difference except for the novelty value,' said one transport executive. Seania, the heavy­truck company which commissioned the survey, commented: 'Eurotunnel has predicted it will carry more than 8 million tonnes of freight in its first full year of operation and it aims to take a significant share of the ferries' freight business. Our survey shows they may be in for a big surprise.'

The removal of customs between European countries has created a new busi­ ness for the ferry companies. The British are pouring across the channel to buy alcoholic drinks in France, where excise duties are much lower than in the United Kingdom. France levies SI.57 less than the United Kingdom on a bottle of cham­ pagne; 99p less on a bottle of still wine; and 25p less on a pint of beer. Since pretax prices are also low in France, total savings can be up to £60 on a case of cham­ pagne or £10 on six litres of some beers. The Wine and Spirits Federation reckons that 9 per cent ot' domestic sales of wine and 15 per cent of beer drunk in British homes arc personal imports that avoid UK taxes. Some of the imports are from holiday­makers 'stoeking­up' on their way through France or from legitimate day­ trippers whose main aim is to get the tax­free booze. They can import up to a year's supply of alcohol for personal consumption. The ferry companies benefited from the doubling of the day­tripper market in 1994. However, Whitbrcad, the

brewers, estimates that 30 per cent of the cross­channel booze trade, and the fastest growing part, was by organized bootleggers. They can make a profit of £324

per journey and can make up to four trips a day. After each trip they unload their vans on to trucks at Dover for distribution in the north of England. The British government and the Brewers and Licensed Retailers Association are unhappy about this trade, but not the ferry companies.

Competition Under and Over the Sea The Channel Tunnel poses two commercial challenges to Steiia Sealink: Eurostar and Le Shuttle. Eurostar is a passenger rail service, initially operating on the main London—Brussels and London­Paris routes, and Le Shuttle transports cars, commercial vehicles, their drivers and passengers between Folkestone and Calais. Eurostar's pricing is targeting the business passenger between the European capitals, which are on Europe's busiest air routes. Eurostar's £195 first­ class fare between London and Paris savagely undercuts British Airways' and Air France's £318 business class fare. However, both prices are well above the £79

first­class passenger rail fare for using British Rail, Stena Sealink and SNCF to get between the centres of London and Paris. In contrast, the cheapest Eurostar fare

(£95) is more expensive than both the cheapest air fares (£85) and the lowest priee for rail­sea­rail (£62).

Eurostar aims to capture 60 per cent of the London­Paris and London­ Brussels traffic, but British Airways see Eurostar as just another player in an already competitive market. The airline expects a dent in its business, but only in

the London area. Many of its daily flights to Paris depart from elsewhere in the United Kingdom. Similarly, British Midland, a regional airline, is confident. It concedes that Eurostar will have the benefit of novelty, but does not think it will halt the airline's progress ­ it achieved a 27 per cent increase in year­on­year demand for its European services in the last quarter of 1994. British Midland believes that the inner­city location of the train terminals will count against Eurostar. Sabina, Belgium's national airline, is similarly dismissive: 'The tunnel is

not a major worry. Parking facilities are poor at both Waterloo and Gare du Midi in Brussels, which will be an off­putting factor for businesspeople using the train.

We're confident we can stay on top.' Nevertheless, Sabina has entered the fray by joining with Avis to give businesspeople flying to Brussels from Gatwick or Manchester a free day's car hire. British Airways also admits that its £75 million We're confident we can stay on top.' Nevertheless, Sabina has entered the fray by joining with Avis to give businesspeople flying to Brussels from Gatwick or Manchester a free day's car hire. British Airways also admits that its £75 million

Stena Sealink's initial skirmish with Le Shuttle has given Stena confidence. The cross­channel freight and passenger businesses are very price sensitive. When Le Shuttle first started carrying trucks it did well, but then lost much of the business once initial priee offers had finished. Le Shuttle's prices for the launch of its full service in June 1995 were also thought too high compared with those of ferries. Many in the industry believe that an attractive price would boost customers. Christopher Garnett, commercial director of Eurotunnel, disagrees: "Our research shows that there is no requirement to undercut the ferries. People

get worried when you talk about premium pricing, but we have scope to add value and we will still be competitive.' Wendy Wong, Smith New Court analyst, explains the conflict: 'Eurotunnel has to be careful with any price­cutting ­ it has some anxious [and very long suffering] shareholders to consider.'

Fast. Luxurious or Inexpensive Consultants Healey & Baker think the days of ferries and short­hop air travel are

numbered. They report that: 'it is now generally accepted that for distances over 300 km, rail is more economical than road'. Rail will compete with air for passen­ gers' journeys within Europe and with road for freight. The importance of higher­ speed travel having been realized, there has been wide­scale development of high­speed networks and rail terminals throughout Europe. Brave new ventures with high­speed trains have confounded critics. Spain's high­speed train, the .'WE, almost broke even on its first full year of service. The train runs 471 km between Madrid and Seville using trains similar to France's Train a Grande Vitesse (TGV) and built by the same Anglo­French engineering group, GEG­Alsthorn. The AVE slashed the rail time for the journey from 5 hours 55 minutes to 2 hours 40 and mirrors the TGV's results:

• The high­speed train captures most of the market. Before the AVE 51 per cent of travellers on the route went by car and only 20 per cent by rail. The figures arc now 39 per cent by car and 44 per cent by AVE.

• Air travel is hard hit by high­speed trains. Iberia's share of the traffic on the route dropped from 18 to 7 per cent because of AVE.

• High­speed trains generate new customers. Twenty­four per cent of AVE users had never before travelled between Madrid and Seville. Originally the TGV between Paris and Lyon was projected to carry 6 million passengers a year; in 1993 21 million people travelled the route.

Eurostar achieves similar drastic cuts in travel time. Eurostar'.s journey time between London and Paris is 3 hours and between London and Brussels 3 hours and 15 minutes ­ times that will fall even further with the completion of Belgian and British high­speed links. Le Shuttle will take only 35 minutes and at peak times there will be four trains an hour. It will also be unaffected by weather and high seas. In competition P & O operates 25 sailings a day between Dover and Calais and a 'proven motorway­to­motorway time of 105 minutes'. It intends to speed up too, and has ordered a new high­speed Seacat for its Folkestone­ Boulogne route.

The threat of the Channel Tunnel has stimulated other forms of competition besides price cutting and speed. Targeting the frequent traveller, Sally Line has

Overview Case Five: Scena Senlink • 749

extended its nautical miles, frequent traveller programme. P & O's advertising promotes the pleasure of the sea crossing: 'Why sail across the channel when you can cruise across?' A substantial investment programme aims to give P & O 'the best appointed ships on the channel'. Borrowing a lesson from the airlines, sail­ ings have a new Club Class. This provides comfortable lounges, guaranteed seating and free coffee and newspapers. Perhaps the ultimate attraction is peace

and freedom from Euro­schoolchildren. The company aiso intends to give its passengers a lot more reason to spend money on board. P & O claims that revenue

from duty­free shops and other retail services already keeps fares down by an average of 25 per cent. Shipboard shoppers are a captive market with time on their hands. The whole 'cruise' experience contrasts with the service that Le Shuttle offers. 'People want style and comfort, not the commodity­like impersonal service of Le Shuttle,' says P ik O's passenger marketing and sales director, Brian Langford. Le Shuttle's advantage is speed, but 'the time advantage will be wiped out', says Langford, 'when people need to take a break after enduring the

"spartan" 30­minute tunnel journey'. Also, 'Le Shuttle will be charging a premium for speed', claims another P & O spokesman, 'so it's unlikely they can match our fares.' P & O's five­day return rates for a car and driver start at £57.

In many ways Eurotunnei's views concur with P & O's: 'You must remember,' says Christopher (iarnett, 'we're in the business of transport, not leisure.' Unlike truck drivers, who may leave their cabs for a quick meal in a separate carriage, car passengers must remain with their vehicles. There is nothing; to see while in the tunnel and little for the passengers to do. 'Le Shuttle is a means to an end for most users and we will market it to those consumers simply as a way of reaching their chosen destination,' says Garnett. 'But we ean build our business by giving customers reasons to travel. We could, for example, use direct marketing" to communicate with people we know enjoy practising sports in the north of France and persuade them to visit the area because of the ease of using the tunnel.' Wunderman Cato Johnson is handling the direct marketing" and David Butter, its executive vice­president (Europe), predicts that Eurostar will be 'the leading

brand in European travel'. lie says Le Shuttle will 'change the way people relate to the Channel and remove it as an obstacle to travel'.

Breaking All the Rules

A year after the full operation of the Channel Tunnel began, it was hard to square the competition with financial reality. With 35 per cent market share of the short route, the tunnel was still not attracting enough traffic to staunch its over­

whelming losses. In an attempt to compete with one over expensive venture, the ferry operators were competing to spend even greater amounts themselves by operating bigger, faster ferries and planning to bring in even bigger and more luxu­ rious boats. The competition has stimulated more passengers with 35 million crossings in 1997 compared with 22 million a decade earlier. The biggest increase is in French and other mainland European visitors crossing la manchv, who now make up 30 per cent of the traffic. For many travellers the duty­free shopping is a great incentive for the journey. Fares are so low that they can often be saved in

the duty­free shop. Lewis Carroll, author of Alice's Adventures in Wonderland, could not have invented a market more bizarre ­ ferry companies spending fortunes to compete with a huge loss­making competitor which will never go away, all supported by allowing people tobuy health­damaging drugs duty free!

Stena's Dilemma Stena Sealink had faced many sea squalls in the channel, but nothing like the competitive squall it was facing now. Was the cross­channel ferry market going to collapse? If so, how could Stena justify the investment that was necessary for it to

Overview Case Five: fjtena Secdink

compete effectively? Should it cut prices to match P & O's bargain basement prices or invest in refurbishing ships to provide ;i luxury service? Could it cross­ subsidize its price by getting passengers to spend more while on board, or .should it concentrate on running a basic efficient service like Le Shuttle? Should it invest

in new terminals to help it serve the long channel crossings? One option was to invest in radically new ships. There was a chance to leapfrog the competition by buying huge high­speed, high­tech catamarans costing £130 million each. Being the size of a football stadium, the vessels would be the biggest ferries in the world

and cruise at 40 knots. They could carry commercial vehicles, trailers, coaches and ears plus 1,500 passengers each. They would have considerable room for seating, bars, restaurants, cafeterias and duty­free shops, and, because of the unique hull construction, be stable in all weathers. Should Stena, like P & 0,

invest in new terminals with even larger duty­free areas? And what will happen when duty­free ends on 30 June 1999?

Maybe the competition from the Channel Tunnel would reduce. After saying it bad got its forecasts wrong, London & Continental Railway, the people who run the rail link between London and the tunnel asked for an extra £1.2 billion subsidy over the next ten years on top of the £1.8 billion already agreed. At 5

million passengers a year, their request was for £100 per passenger over the period. The government refused and threatened to nationalize the rail link, including Eurostar, within 30 days.