Channel war sinks P&O profits

SHIPPING group P&O sank £210m into the red last year, as its UK ferries were ravaged by the bloodbath in the Channel. Massive write-downs in the value of its loss-making, cross-Channel routes saw the company plunge into the 2004 loss, taking the edge off the swansong for chairman Lord Sterling, who is retiring after more than 20 years at the helm.

The company, which has been on the brink of re-entry into the FTSE 100 on the back of strong business in its international ports business, reported a £15m trading loss on the ferries - down from around break-even in 2003 - and write-downs and reorganisation costs of £266m.

Things do not appear to be getting any better. In his trading outlook, Lord Sterling warned: 'The market for ferries remains challenging, particularly for the tourist business.'

Referring to dock closures on the French side of the Channel which hit P&O ferry users especially over the recent half-term break, Sterling added: 'Current operational difficulties at Calais will have a negative impact on results in the short term.'

This is just the latest in a litany of problems to hit the ferries, the last wholly owned shipping business in the P&O empire.

Cross-Channel ferries have been up against unprecedented competition. On the Dover crossing, P&O has been caught up in a vicious price war with its traditional rival Sea France, as well as fast ferry-operator SeaCat and a new catamaran entrant SpeedFerries.

On top of that, it has had to cope with custom being taken away by budget airlines like Ryanair, FlyBe and easyJet flying Brits to France, as well as Channel Tunnel operator Eurotunnel and even the Eurostar high-speed passenger train service out of Waterloo.

P&O says it is now more interested in chasing freight revenues after a massive shake-up announced last September, which saw the axing of a third of its UK ferries fleet and a quarter of the routes on which they operated, leading to the loss of 1,200 jobs - a fifth of its staff.

On the short Channel crossing between Dover and Calais, P&O cut back from seven to six vessels. And it has almost given up sailing out of Portsmouth, cutting routes from the South Coast port to the northern France destinations of Le Havre, Caen and Cherbourg, and leaving only its longer-haul service to Bilbao in northern Spain.

The results mask a strong underlying performance from its international ports, where business is up 34% on an underlying basis, and which saw P&O's pre-exceptional group profits before tax come in 65% better at £170m.

That strong growth has put P&O shares on the crest of a wave. Opening today at 319½p - valuing the company at £2.3bn - the stock is trading close to a four-year high, having doubled over the past two years. The final dividend has been cut by a third to 6p.