P&O acts to beat off Eurotunnel

Ferry firm begins talks with rivals on a joint strategy in Channel war

P&O, the transport and construction giant, has started negotiations with its arch-rival, Stena Line, over collaboration on cross-Channel ferry routes. It has also begun talks with Brittany Ferries and SeaFrance with the aim of creating a wide-ranging response to the threat from Eurotunnel.

A P&O spokesman confirmed that talks were under way but doubted that an early deal could be struck. "We are dealing with some extremely detailed and complex issues, and the talks are at a preliminary stage."

The Government gave P&O permission in July to enter talks with Stena when it lifted a 17-year ban on commercial negotiations between the companies, following intensive lobbying led by P&O chairman Lord Sterling.

The City had been expecting talks to begin later this month, once the peak summer season ends. It will be pleased that negotiations have already started and that P&O is prepared to adopt horizons broader than collaboration with just Stena.

Discussion has been expected to focus initially on the Dover- Calais route, but P&O is keen to extend co-operation right along the Western Channel.

The negotiations with Stena are expected to be highly sensitive, given the long history of competition between the two businesses. There are also fundamental differences in their preferred responses to the Eurotunnel threat.

P&O believes the best approach would be a joint-venture company that would allow significant cost savings. Fewer ships, a single marketing and sales operations, and centralised administration would improve competitiveness.

Stena prefers a pooling approach. That would bring co-operation on sailings and pricing but little scope for cost reduction.

Both sides are prepared, however, to keep an open mind, given the urgency in dealing with Eurotunnel. Both have suffered at the hands of Eurotunnel, which has taken more than 40 per cent of traffic on the Dover-Calais route. In May, it slashed its prices, forcing the ferry operators to make cuts in their peak season.

P&O announced a 34 per cent fall in Channel ferry profits last year. Interim results later this month will show that competition is not easing. Last week Stena announced that a rise in first-half losses were attributable in part to the price war on Channel routes. It said conditions on the routes were expected to remain tough throughout the year.

Although it was this financial and competitive pressure that persuaded Ian Lang, President of the Board of Trade, to lift the ban on negotiations between the two companies, they will be mindful of continuing regulatory concerns about closer links.

In making his decision Mr Lang overruled John Bridgeman, Director-General of Fair Trading, who had argued that, while the ban on talks about fares and fleet pooling should be lifted, a restriction preventing merger negotiations should remain.

The progress of collaboration between the ferry companies will also be closely monitored by Eurotunnel. Eurotunnel had its best month yet in July and claimed its market share rose to 44 per cent. It said the land route to the Continent was now firmly established in both the leisure and freight markets.

However, the company is still locked in delicate negotiations with its banks over the rescheduling of its pounds 8.4bn debt burden. Those negotiations could be hampered by any moves by the ferry companies to help them recapture market share.

Eurotunel is therefore expected to lobby fiercely against any co-operation it regarded as being anti-competitive.