, Britain
In May 1994 the traffic office of a cross-Channel ferry operator was doing what it did every May. Checking the summer bookings, working out when the older ship could be spared for her survey, arguing with a forwarder about next year's rate.
The difference that May was the tunnel. Not a proposal, not a shaft in a field near Folkestone, but an operating railway under the water. The vehicle shuttles that would carry the cars and the lorries were not running yet, and were due before the end of the year.
A ship has one permanent weakness that everybody in the trade knew about and nobody could fix. It is at the mercy of the weather and the tide, and it has to come out of service periodically whether the market wants it to or not.
The tunnel sold the one thing a ship cannot promise
The Channel Tunnel opened in May 1994 and its shuttle services built up through 1995, which matters more than the opening date. The competitive effect arrived as capacity was commissioned, across about eighteen months, which is slow enough to argue about and fast enough to be fatal.
What it offered was not principally speed, although it was quicker. It was certainty: a fixed crossing time, a frequency, and no cancellations for weather. For a haulier running a schedule, variance is the expensive part, not duration. A crossing that takes ninety minutes reliably beats one that takes seventy-five minutes most of the time and six hours in a gale.
Ferry operators could not answer that with a better ship, so they answered with what they could change. Fares on the short crossings were cut, and cut again. Larger vessels were brought in, which lowers cost per unit provided you fill them. And for another five years, there was the shop.
A sailing costs the same whether the ship is full or empty
The economics of a ferry route are almost entirely fixed, and that is the beginning of every problem this industry has.
Once the sailing is in the timetable the crew are aboard and on articles, the bunkers are burned, the port dues are payable, the berth is booked, and the finance or charter hire runs on regardless. Whether she crosses with four hundred cars or forty barely changes the cost, so the marginal cost of one more car on a sailing that is going anyway is close to nothing.
That single fact explains the behaviour of the whole sector in the middle 1990s. When the marginal cost is near zero, any fare above zero improves the day, so two operators reasoning that way on the same route will take the price down to something neither can live on while their fixed costs sit exactly where they were. Everybody can see it happening. Nobody can stop first, because stopping first means sailing with empty space and the same bill.
The related trap is slower and worse. A low fare offered to fill a ship this summer becomes the fare the customer expects next summer. Yield falls faster than volume, and a route can be busier than it has ever been while the operator loses money on it. The honest question is not whether the ships are full. It is what a lane metre sold for.
Then there is the dry dock. A vessel has to come out of service for survey and docking and it is not optional. While she is out, the operator either charters in a replacement, which is expensive and rarely a like for like ship, or takes sailings out of the timetable, which is worse, because frequency is much of what is being sold. Choosing the month is one of the few free decisions in the year, and it is taken against a competitor who has no dry dock at all.
Freight is sold by the lane metre to a very short list of buyers
A ro-ro ferry's freight capacity is quoted in lane metres: metres of deck lane, one vehicle wide. An articulated lorry takes something over sixteen metres of it. That is the unit the deck is planned in and the rate is quoted in, and it is a better measure of a route than passengers carried, because it is the part that pays in the winter.
Freight, cars and foot passengers are three different businesses sharing a hull.
- Freight is contracted, negotiated annually and concentrated. A small number of hauliers and forwarders can account for a very large share of the deck, so a very large share of the revenue sits in a handful of conversations. Those customers know your load factors, and what the tunnel quoted them.
- Accompanied cars are seasonal, price sensitive and booked late. They fill July and vanish in February.
- Foot passengers bring the least revenue per head in fares and the most per head at the counter.
The tunnel took freight first, which was the worst possible order for the ferries. Freight is the year round business that pays for the ship between September and May. Losing summer cars damages the best months. Losing freight damages the months that were already thin, and those decide whether a route stays in the timetable.
The shop was the profit and it had a closing date
Duty and tax free sales to travellers within the European Union ended on 30 June 1999, and the date had been settled years in advance.
On a short crossing that shop was not a sideline. Retail and catering spend per passenger, set against a fare cut to compete, could be a substantial part of what the crossing earned, and on some traffic the fare existed mainly to get the passenger in front of the counter. Day trips were sold on that basis quite openly.
So an operator in 1994 faced two things at once. A new competitor whose share would grow month by month, and a known date on which a large part of the contribution stops. The second is the more instructive, because it is the rarer situation in business: you are told, years ahead, exactly when a profitable line of income ends. The operators who spent that notice rebuilding the cost base and fighting for freight were in a very different position in 2000 from the ones who spent it enjoying the last of the duty free.
Where this shows up in the game
The Tunnel Opens starts on the south coast at Southampton in May 1994 with a cross-Channel operator, Solent Line Ferries, and runs for three years at hard difficulty. The objective is survival: still sailing after thirty-six months. That is deliberately not a number, because this is not a scenario you win on one. The epilogue reports lane metres sold in the final year, which tells you whether the route survived or merely the company did.
You do not start clean. One customer is two fifths of the revenue, which is realistic for freight and uncomfortable in precisely the way it was. A new competitor takes a growing share of the freight from the second month and of the cars from the eighth. Duty free income runs for the whole scenario, and in month one you are told it ends on 30 June 1999. One vessel has to go to dry dock during the run and the month is yours to pick. Port dues are payable on sailings booked rather than sailings run, which is a detail that only matters on the day you cancel.
The seed is fixed at 600009, so every attempt meets the same competitor, the same weather and the same Britain, and the scores can be set beside each other. It runs under ironman rules: one save, and what happens happens.