The Eurotunnel Back on Track

Eurotunnel, once a paragon of bad projects, sees light in Europe's deregulating railroad sector

  • Antoine Antoniol / Bloomberg / Getty Images

    Shuttle traffic is at a record high.

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    One consequence of the debt-reduction deal, however, was a shrinking of Eurotunnel's already withered share price. Gounon then laid off 900 employees — nearly a third of its staff — as he looked to cut costs. He also boosted shuttle prices by 10% to lift revenue — a move that risked sending customers to ferries and discount airlines. Eurotunnel had one big advantage, though, and Gounon began hammering away at it. "Time is money, and not only do customers save both thanks to our short, 35-minute travel time, but they also use a nonpolluting means of transport," he says.

    As part of his growth strategy, Gounon has taken Eurotunnel into a sector of rail travel that has burned other players: freight. SNCF continues piling up losses in the sector, while a relatively recent entrant, Veolia, reversed course, selling its freight business to Eurotunnel. In May, Eurotunnel reinforced its position by purchasing the third largest British operator, GB RailFreight.

    Unlike the go-anywhere, haul-anything approach of loss-making heavyweights like SNCF, Eurotunnel maintains profitability in freight by staying small and selective, Gounon says. The company targets specific clients and routes it has identified as viable — for instance, running small trains between silos for a grain producer in Burgundy and then hauling the collected load to a Marseilles-area processing center. Content with being profitable in such niches, Eurotunnel isn't looking to increase its market stake too far beyond its 2% in France and 8% in the U.K.

    Gounon is also planning to transform one of Eurotunnel's first failings — inflated traffic estimates — into an opportunity as train service across Europe becomes more deregulated. Despite breaking its own traffic record, Eurotunnel operates at only 50% of capacity. That may prove golden when the expected boom in high-speed rail materializes once giants like SNCF and Deutsche Bahn, and possibly new rivals such as Air France and Veolia, are free to crisscross Europe. It's expected to provoke a veritable scramble, which will significantly increase rail options (and lower prices) between the U.K. and continental Europe.

    Wider selection of operators and prices will be a boon to Channel-hopping travelers, and so too to Eurotunnel, especially in the run-up to the 2012 Summer Olympics, when all rails will lead to London. Deutsche Bahn will start testing its high-speed trains on Eurotunnel and U.K. rails in October. In anticipation of these changes, Eurotunnel has joined four partners — including infrastructure units of Goldman Sachs and Prudential — in bidding for the concession to operate the High Speed One rail line, which is 67 miles (108 km) long and links the tunnel's Folkestone mouth to St. Pancras station in London.

    The winning bidder will likely have to plunk down $2.3 billion or more for the 30-year concession. It would allow Eurotunnel to manage traffic on that link optimally for its own business. But whoever runs that section of track is going to be sending trains — and paying Eurotunnel for their passage — between London and the tunnel. Says Flabbée: "Everything that's happened since the debt deal was struck shows Eurotunnel is a very viable company with clear ideas about how to grow and diversify but without getting overextended." It's a win-win for Eurotunnel, a company that's finally on a very nice roll.

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