Future Transport Sector Changes and their Impact 1 Technical and Operational Integration

We have already identified the problems of defining the logical boundaries of the Tunnel’s operations. Eurotunnel itself has also recognised that some of its traffic and financial difficulties stem from the dependence on decisions taken by others, particularly the national rail operators. This has driven the policy of seeking operating rights in France to be able to provide a more integrated service for freight through the Tunnel and on to key destinations in continental Europe. Secondly, Eurotunnel proposed a continental gauge railhead at Cheriton to enable traffic using larger size containers and piggy-back travel through the tunnel without interruption to access the UK road network and ultimately build traffic demand for future freight use of CTRL to possible transhipment locations closer to London (e.g. Stratford). Finance for this project has not yet been secured.

Clearly any development which leads to a shift in traffic from road to rail will have beneficial environmental effects on Kent. We recognise in this that this is unlikely to lead to an actual reduction in road traffic, simply that the future growth will be slightly less strong. In the short- term the creation of a freight facility at Cheriton would have a positive impact on employment but depending on whether it generates new traffic or diverts it from existing rail or road services it might increase flows of HGVs on the access routes.

Any move to integrate operational control of the tunnel with the linking high speed lines would also have the potential to increase operational efficiency, reduce conflicts leading to delay and thus enhance through rail services for both passenger and potentially in the future freight traffic.

There is also potential to enhance the level of service provided to road traffic using GPS systems to provide approaching traffic with information on services, likely departure times and confirm bookings. This would increase certainty for both customers and operations staff who would have greater knowledge of the likelihood of pre-booked vehicles arriving in time for the scheduled departure. This is a further example of integration of the tunnel with its associated infrastructure.

6.12 Implementation of the EU's 2nd and 3rd Railway Packages

The EU has taken a strong lead in trying to open up the rail sector for greater competition, regarding the closed nature of the rail industry in most EU member states as a barrier to greater competitiveness with other modes. These attempts date back to the landmark Directive 91/440 which paved the way for the separation of infrastructure and operations, at least in accounting terms, such that the charges for track access would be more transparent and hence provide the basis for open access. Consistent with the desires expressed in the 2001 White Paper on Transport 2010: A Time to Decide, the EU developed the first railway package of three directives which entered into force in 2001. The first package was designed to open the market for international rail services in two stages: by 2003 on the trans-European rail freight network and by 2008 on the entire network. It confirmed the need for clear

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identification and separation of roles of infrastructure operators, railway operators and regulatory bodies, and their respective finances.

The second package, on which agreement was reached in March 2004, contains four principal measures:

• A common approach to rail safety

• Amendment of current directives on interoperability

• Establishing a European Railway Agency as an effective steering body • Amending 91/440 to extend and speed up opening of the rail freight market

Whilst taken together all of these should work towards improving the competitive position of the rail sector, the last is the most significant since it provides for both international and national freight services. International markets are now to be fully opened by 2006 and complete opening (including cabotage) by 1 January 2007. This is of considerable significance to the international traffic through the Channel Tunnel and also provides for open access by any operator to build networks of domestic services which could complement international services.

Given this development in the freight sectors a Third Railway Package is proposed, principally to open up the market for international passenger services by 2010. This broadly provides the same rights in passenger as for international freight services and is timed to coincide with the completion of the high speed network in the EU. Whereas a principal threat to rail freight is seen to come from road, the principal threat to international rail passenger services is from low-cost airlines. However it also envisages that there should be competition for existing service operators, Thalys and Eurostar are specifically mentioned, where operators should have the right to pick up and set down at any station on an international route. This could mean competitive services provided within a single member state (although some safeguards are envisaged for existing public service obligations contracts (i.e. subsidised local services). There are also proposals for minimum rights to information for passengers and the certification of locomotive drivers.

Overall the implementation of these packages should have a positive impact on cross- Channel through rail services, although there remain many questions concerning the potential market size for effective competition. Positively, Eurotunnel could potentially become an operator of freight services to take advantage of the access the packages provide or it could use that access to attract more services offered by other operators (for passengers and freight). On the other hand the open access required by the packages will apply to the tunnel operation itself and therefore not only pose some technical problems but also weaken Eurotunnel’s quasi-monopoly of the facility.

6.13 A Shift in Transport Costs and Regulation against Road Transport

Despite its dual-mode status, tunnel traffic is dominated by road traffic for both passengers and freight. Any moves to increase the cost of road use in line with the policy statements of both the European Commission and the UK government will have significant impacts on both the growth of total traffic and the share of road. A number of possible scenarios could be considered here.

First, there could be a reduction in discretionary traffic; a large share of cross-Channel passenger traffic is discretionary for leisure, shopping etc. Customers would seek closer destinations or reduce total travel if costs were significantly increased. If the increase in costs were imposed mainly on motorway use this may have differential effects on different categories of traffic depending on origin and destination with regional traffic being less affected than traffic from further away from the tunnel.

For freight traffic there is likely to be less impact. Freight operators are more able to pass on higher costs to their customers, although this may have a longer term impact on the relative volumes of internationally traded and domestically produced and consumed goods. Perhaps of greater significance is the relative rate of adoption of new charging patterns in different EU

countries. Road haulage is an extremely competitive sector run on tight margins. Recent complaints by road haulage operators in the UK have centred on the relatively high tax and hence cost of fuel, and the cost of the annual vehicle licence which is more closely related to identifiable road track costs in the UK than in some other countries. These lead to UK based hauliers finding it difficult to compete on equal terms with continental competitors. This needs to be balanced against the higher wage and social costs faced by operators in most near Continent countries. A further source of complaint has been the increasing penetration of hauliers from Central and Eastern Europe, or those using labour from such countries. From 1 May 2004 on the accession of eight of these countries to the EU (along with Malta and Cyprus) it will become necessary for them to comply with the minimum standards provided in a wider range of EU social legislation.

6.14 Restructuring of Ferry Operators from Dover

Some studies in the 1980s raised the possibility that the opening of the Tunnel would result in fierce competition and the withdrawal of ferry services from Dover as well as other Ports. Although there has indeed been price competition which is likely to continue it seems unlikely that all ferry operations will cease: there may however be some substantial restructuring of the industry. From Eurotunnel’s perspective any instability in the ferry market poses problems of how to respond. P&O have already been involved in further rounds of job losses as they seek to contain costs. It is relatively easy for ferry operators to enter and leave specific markets and thus there is the possibility of one or more of the major operators pulling out and being replaced by an alternative operator. This could see for example the equivalent of the airline low-cost operator providing more limited services with minimal on-board facilities, an innovation already planned by P&O. The other possibility is that a major operator pulls out and is not replaced, leading to a reduction in the level of services.

If there were to be a significant reduction of the level of service through Dover, we would expect some reversal of the traffic trends of the past ten years with less emphasis on the short-crossing routes. This would depend to some extent on capacities at alternative ports and road access to those ports. We regard it as less likely that there would be a simple switch to the alternative near ports such as Folkestone or Ramsgate. Under the assumption that part of the Dover ferry traffic would move to other (longer sea) routes it is unlikely that Eurotunnel would need to absorb all of the current Dover ferry traffic, but even if this occurred it would only present significant capacity problems at major peaks.

From the wider economic perspective in Kent, the loss of services through Dover would be a major problem. The district has already suffered from substantial reductions in employment in the port and ferry industry over the past 15 years, added to the losses through the closure of the coalfield. Although the direct incidence of the loss of ferry jobs on the local community is reduced somewhat by the pattern of residence of such workers, further losses would of necessity have a significant negative impact on economic activity. These would be unlikely to be compensated by any employment increase occasioned by the transfer of traffic to Eurotunnel.

Reduction of ferry operations from Dover would provide additional capacity for the development of other port services including cruise liner and short-sea shipping services, but it is unlikely that these could replace lost ferry operations in terms of either employment or value added to the local economy.

6.15 Financial Restructuring of Eurotunnel

Under this we consider the inverse scenario of Eurotunnel’s creditors finally losing patience and forcing the company into insolvency. Again we consider this an extremely unlikely outcome. The difference with the loss of ferry services is that operations cannot simply be moved elsewhere or easily replaced by an alternative form of service. Much would depend on the nature of the restructuring. A simple bankruptcy of the existing company would in a sense write off the capital cost of the project and allow a new operator to concentrate on providing a low marginal cost operation. Our expectation is that Channel Tunnel services would not be

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allowed to cease, although the governments would face problems of how to organise this, not least in terms of maintaining a level playing field vis a vis ferry operations.

From the point of view of the local economy the repercussions may be less serious than the closure of the ferry services from Dover given the likelihood of continued operations, the numbers of people employed. Any disruption to services for a period would have negative consequences for traffic flows since a greater burden would be placed on the ports and the need to accommodate passengers and freight from the through rail services.

6.16 Restructuring of Eurostar

This leaves the concern about any of the core services provided by other operators through the tunnel being withdrawn. Given the possibility of alternative operators, including Eurotunnel itself, in the freight market, this section concentrates on Eurostar. Eurostar has itself had a difficult history. Conceived as a joint operation of three national (state-owned) rail operators on the basis of high traffic forecasts it had found it difficult to live up to expectations. Many of the originally planned services (regional Eurostar in the UK and overnight sleeper services) failed to materialise for a mixture of technical and economic reasons. More than the core inter-capitals service, these were the victim of low-cost airline operations. Overnight rail services throughout Europe have seen a substantial reduction in recent years. A service which has been becoming increasingly competitive in time terms with airlines for London- Paris/Brussels now frequently looks uncompetitive in basic fare terms (not least given the significant reduction in business class travel on airlines in Europe). The technical equipment for Eurostar, designed on the basis of ambitious traffic forecasts has proved to be too large and inflexible for the efficient matching of capacity to demand which the yield management techniques used by airlines is able to achieve.

Given the complexity of the ownership of Eurostar and its assets and the competing interests of some of these owners we do regard the future of Eurostar in its present form as giving rise to concern. The complete loss of through rail passenger services is unlikely, but a significant reduction in the scale or nature of operations has to be considered. Some of the possible changes would be a reduction in service frequency (particularly to Brussels) to increase load factors with the excess fleet being redeployed as has already been done in both France and the UK; the elimination of intermediate stops in the UK (possibly Ashford after the opening of Ebbsfleet, but also possibly the removal of any intermediate stop) which would reduce the costs of maintaining the terminal facilities and enhance the through service by eliminating the time penalties from stopping (which are now quite severe at Ashford following the opening of CTRL.

The consequences of this for Eurotunnel would be serious. It is unlikely that more than a small percentage of the more than 6 million passengers would switch to the shuttle services. Most would either switch to airlines or simply not travel as there is evidence of a significant new discretionary (largely shopping and leisure) market which has been created by Eurostar. The consequences for Kent and the wider UK are more worrying. The potential for absorbing up to 6 million extra passengers through the London airport system is limited; as has been seen in France the successful operation of high speed train services over distances of up to 600km has decimated parallel air services, thus freeing up scarce slots at airports for the growth in longer distance services. The failure of the UK to be plugged in to the European high speed network, which will shortly mean that high speed lines will connect London with such destinations as Bordeaux, Marseille, Frankfurt and Amsterdam, is difficult to evaluate. However, there is evidence that being on a critical network is perceived to have economic value and being on all the critical networks has significant added value. For Kent this latter point is of great significance. The loss of Eurostar services would deprive Kent of any direct high speed (air or rail) international connections (depending on the success of the start-up of scheduled air services through Manston). A critical point in the expansion of Ashford and the development of Ebbsfleet has been the international rail links provided and the absence of these would lead to a marked reduction in the attractiveness of these locations. Although we do not believe a significant proportion of this traffic would switch to road, except for that with a Kent origin or destination, there would be an increase in traffic flow and hence congestion etc on Kent roads.

6.17 The Impact of CTRL

To a large extent the completion of CTRL provides the inverse situation to that of motorway connections. The development of domestic services on CTRL not only provides a faster route to London, but more significantly provides vastly improved access to national rail services to the Midlands and North through St Pancras, Kings Cross and Euston, together with access to a wider South East market via Crossrail. This provides a real possibility that CTRL, which is only possible as a result of the existence of the Channel Tunnel, will provide a positive boost to Kent locations for business development and not just improve commuting access times to London. This is particularly significant for the balanced development of both the expansion at Ashford and the development of Ebbsfleet.

CTRL also provides scope for the development of additional cross-Channel services which could be significant in furthering the integration of the Transmanche region whilst allowing Eurostar in its existing form to concentrate on the inter-capitals business.

6.18 The Role of the Low-cost Airlines

In an earlier section it was argued that the low-cost airlines may have had a significant and unforeseen effect on the cross-Channel passenger market. Some commentators have argued that the low-cost airlines will prove to be a short term phenomenon and that the other cross- Channel operations will in the future face a very different competitive situation. So, for example, increasing concern in the European Commission about concealed subsidy to low- cost airlines is seen by some as signalling a reduction in low-cost airline activity. Similarly it may be that environmental concerns (with consequent fuel taxation) or security considerations make it more difficult to operate low-cost airlines.

This argument needs to be treated with caution for three reasons:

• The changes that the advent of low-cost airlines triggered in the operations of conventional airlines will probably remain even if the low-cost operators become less prominent.

• If the low-cost airlines have created new markets for short breaks and fly-and- drive which detracted from cross-Channel movements these new markets will remain and will not easily be served by surface modes.

• If low-cost airlines have created new bench mark expectations about a “good deal” for continental travel this will persist in the mind of consumers and cannot be ignored in cross-Channel pricing.

The most recent development in low-cost airlines affecting Kent is the proposal by a newly established Irish airline to use Manston as a base for hub operations from the British Isles into continental Europe. Published prospective timetables suggest that these operations will not compete directly with surface modes to near Continent destinations (in terms of destination and frequencies). They may however offer fly-drive alternatives to car crossings and Eurostar