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Eurotunnel Taps Top Clients, M&A to Lift Cargo: Freight Markets

The Channel Tunnel rail link between Britain and France was built on the promise that it would render sea trade on the route redundant. Fifteen years on and operator Groupe Eurotunnel SA is revising its cargo strategy for a second time as volumes languish two-thirds below their 1998 peak.

Chief Executive Officer Jacques Gounon has dropped Paris- based Eurotunnel’s short-term growth targets and put Briton John Smith in charge of building traffic more gradually by seeking contracts from a smaller number of premium customers.

Gounon needs to revive freight flows to wring value from an asset that, while voted the top construction achievement of the 20th century in a poll of 400 engineers, is virtually train-free at night. Since joining from GB Railfreight, the company acquired last year to win clients directly instead of relying on operators, Smith has been analyzing the tunnel’s failure even to approach its original traffic forecasts.

“It has got to be down to price and quality,” Smith said in an interview in London. “Those are the only two things that will drive people away. We have some fantastic facilities but they’re underused. We need to understand what the market can sustain.”

Freight traffic through the 30 mile (48 kilometer) tunnel fell 4 percent to 1.13 million metric tons in 2010, prompting Gounon to scrap a pledge to match a high of 3 million metric tons by 2012, setting a new target of 2016. At the project’s 1987 inception volumes were forecast to reach 10 million tons.

Shuttle Boom

The slump means cargo contributes just 13 percent of total revenue and contrasts with growth in Eurotunnel’s other businesses that has helped lift the stock 13 percent this year, taking the company’s value to 4 billion euros ($5.4 billion).

The shares slipped 2.1 cents, or 0.3 percent, to 7.40 euros at 10:10 a.m. in Paris. They jumped 5 percent on Jan. 19 after Eurotunnel posted record annual access fees from Eurostar Group Ltd. expresses and the best-ever car and truck numbers on its own short-distance drive-on shuttles. Gains have been encouraged by plans at Eurostar and Deutsche Bahn AG to offer passenger services from the U.K. to Amsterdam, Cologne and Frankfurt.

Gounon’s new freight strategy centers on attracting clients who need to move entire trainloads of cargo at least five times a week, making more effective use of Eurotunnel’s fixed cost base.

Adding GB Railfreight for 31 million pounds ($50 million) and the cargo unit of Veolia Environnement SA bought in 2009 for 103 million euros means the company can run trains for thousands of miles anywhere from southern Europe to Scotland, rather than merely through the tunnel.

Partnerships

The move has also ended Eurotunnel’s reliance on business from French state operator SNCF and the U.K. freight unit of Germany’s Deutsche Bahn, which it now regards as competitors as well as customers, according to Smith, who says volumes can best be grown by establishing ventures with logistics companies that would take on responsibility for filling trains.

The focus on premium clients and regular trainloads mirrors Gounon’s approach to lifting truck traffic on becoming chief in 2005, said Pierre Flabbee, an analyst at Kepler Equities in Paris with a “buy” rating on the stock.

“Originally they were going after all kinds of customers in direct competition with cross-Channel ferries, but after Gounon took over they decided they were a premium service,” Flabbee said. “When you have clients with regular volumes you can manage your operating costs with far greater visibility.”

Europorte, as the cargo unit is known, announced its first major contract since the GB Railfreight takeover on Jan. 11, when Danish container shipper DFDS A/S signed up for a mixed- goods service between Daventry in central England and Novara, northern Italy.

Cost Overrun

Gounon has already rebooted Eurotunnel’s freight strategy once, having slashed cargo prices by almost 50 percent in 2007 in a bid to wrest business from shipping lines.

For more than a decade after the tunnel opened the company was held back by higher-than-estimated construction costs. Its management was ousted by a shareholder rebellion in 2004 before three years of negotiations with creditors resulted in a debt reorganization that signaled a change in financial fortunes.

Even then, a fire on a truck shuttle, French industrial action and the credit crunch and recession all stymied growth, with limits on the common use of rolling stock and SNCF’s decisions to scrap productivity improvement plans amid union hostility and terminate a single-wagon business that accounted for 40 percent of tunnel freight also acting as a brake.

Keep on Trucking

Eurotunnel will benefit from government efforts to cut carbon emissions by promoting “intermodal” networks, where containers are transferred seamlessly to trucks only for the final leg of a journey, according to Gounon.

Still, the company will find it tough to displace road haulage on the 80 percent of journeys in which goods travel less than 200 kilometers, Francois Bertreau, CEO of French logistics specialist Norbert Dentressangle SA, said in an interview.

Dentressangle moves the equivalent of 250 trucks a day by rail but sends about 700 vehicles across the Channel, mostly by ferry, and has no plans to charter freight trains, Bertreau said in a Jan. 26 telephone interview, adding that “supermarkets aren’t very often in railway stations.”

Ur-Cheng Leong, an analyst at Credit Suisse in London, estimates annual freight growth through the tunnel at 2 percent to 5 percent over the next few years.

Eurotunnel’s Smith says he’s certain an infrastructure link rated more impressive that the Golden Gate Bridge, Empire State Building and Hoover Dam in a survey by CONEXPO-CON/AGG, North America’s biggest construction fair, can win a greater share of the lucrative market for next-day goods if service improves.

“Sometimes a degree of naivety helps,” he said. “When we started GB Railfreight I’m not sure we understood the challenge, but I think we have risen to it. The same probably applies now.”

To contact the reporters on this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Chris Jasper in London at cjasper@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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