How cross-Channel routes became a huge challenge for P&O

P&O Ferries offered a simple defence when it ordered its ships back to port to fire their entire crews: the company would go bust without a new business model.

The decision provoked one of the highest-profile confrontations between British politicians and the corporate world in years — but it also highlighted the challenging economics of operating ferries across the English Channel.

After resuming a limited service without fanfare in the middle of the night on Tuesday following a six-week halt as the company’s ships were given thorough safety inspections, the group faces a daunting task to turn losses into profits.

The Channel is an important artery for trade and passenger travel between the UK and continental Europe but sea links with France have suffered since the heydays of the 1980s and 1990s.

Competition from low-cost airlines, the Channel Tunnel and the emergence of cheaper ferry rivals has hit the business hard.

Casualties of the so-called “short straits” that cover the 20 miles between the Kent coast and northern France include the old hovercrafts, which made their last trips in 2000, SeaCat catamarans and several ferry companies such as SeaFrance and SpeedFerries.

As holidaymakers were lured into the skies by the convenience and affordability of flying, the Eurotunnel also began to take a considerable chunk out of the market for carrying lorries: in 2019 it accounted for just over 40 per cent, according to its owner Getlink.

Brexit added additional uncertainty as it diverted some freight bound for Ireland on to ferries sailing directly to the EU, allowing companies to bypass additional paperwork in Britain.

The pandemic then took its toll. P&O Ferries lost a combined £200mn in 2020 and 2021, which included restructuring costs after 1,100 workers were fired, as Covid-19 ripped through the transport industry.

By March this year, the group’s difficulties had built up to such an extent that chief executive Peter Hebblethwaite insisted the decision to sack 800 crew and replace them with a cheaper workforce was ultimately straightforward. “This is about giving P&O a long-term future or closing it,” he said.

P&O’s accounts show the company struggled in the two years before the pandemic because of rising fuel prices, the weaker pound and Brexit uncertainty.

Before then, the company, which also sails between Scotland and Northern Ireland, Liverpool and Dublin and Hull and Holland, had weathered the challenges on the cross-Channel routes and been profitable.

In 2019, DP World paid £322mn to buy P&O from its parent company, Dubai World. Then, Sultan Ahmed bin Sulayem, DP World’s chief executive, welcomed P&O’s “robust performance” and said the company would “drive shareholder value” in the following years.

But this was before the emergence of new cut-price competition following Irish Ferries’ introduction of a Dover to Calais route in 2021, which industry executives say is the biggest threat to the company.

The Irish group operates a similar low-cost crew structure to the model controversially brought in by P&O.

Unions had long warned that Irish Ferries posed a threat to pay and conditions at the two established cross-Channel operators P&O and DFDS — warnings that came true in March with the sackings.

Irish Ferries’ Dublin-listed parent Irish Continental Group also has a “very conservative balance sheet and a very strong business model and cost structure”, said Stephen Furlong, a transport analyst at stockbroker Davy.

“It has a very strong record in terms of capital allocation and operating efficiency,” he added.

Most worryingly for P&O, the arrival of Irish Ferries has led to overcapacity across the Channel, a problem that sent several companies under in the early 2000s.

Danny Southby, an executive at freight forwarding company Davies Turner, said he had noticed ferries “often” sailing 50 per cent full.

He added it was telling that there was almost no disruption from the unexpected loss of P&O services until the Easter school holidays in the middle of April, with the pick-up of leisure trips.

DFDS warned of “considerable” overcapacity in the market in its most recent annual report, while UK transport secretary Grant Shapps was told by DP World in November that the new competition “poses challenges” to P&O, according to official minutes of a meeting between the minister and the multinational logistics group.

Of the three cross-Channel groups, P&O could be hit hardest by the capacity threat.

“DFDS and Irish Ferries are two well-funded, pretty strong shipping groups who have a long history of persevering in any market,” Furlong said.

Significantly, DFDS, P&O’s main rival on the Channel, has not suffered the same existential issues over the past two years, and reported positive earnings on its cross-Channel routes in both 2020 and 2021.

For some industry figures, P&O has been its own worst enemy with poor management decisions, even before the sackings. It has gone through three chief executives in two years, and recently announced the departure of its chief financial officer.

It also decided to outsource its duty free on board in 2018, just before rivals went on to report bumper sales in the following years.

But it is the sackings, which P&O claimed were the only way to save the business, that have piled the most pressure on the group.

That has led to a criminal probe in the UK, while the transport secretary has suggested a boycott and begun a push to force ferry operators to pay the minimum wage, which would undermine P&O’s new efficiency savings.

P&O boss Hebblethwaite — dubbed “the most hated man in Britain” at one parliamentary hearing — may find restarting services is the easy part as the company now faces its toughest battle to survive.