Is Eurotunnel in too deep?: The pounds 10bn venture needs half the Channel traffic by 1996. A price war is just one of the likely snags. Patrick Hosking reports

THE TUNNEL is dug, the track laid, the rolling stock ordered, the travel agents briefed, the tickets on sale. The Channel tunnel is no longer a dream. Only the most dogged pessimist doubts that passengers will start travelling through it on 8 May.

Eurotunnel, the Anglo-French group that has the concession to operate the tunnel for 65 years, last week unveiled its eagerly awaited fare structure for Le Shuttle, the last key piece in a jigsaw that has been more than a century in the shaping. (An aborted tunnel was begun in 1880.)

But for all the engineering pyrotechnics, all the disputes with the construction companies, all the brinkmanship with the banks, all the unmet deadlines and breached budgets, the biggest uncertainty remains - will the punters actually use the thing?

The question is more than academic for Eurotunnel's bankers and shareholders, who have injected a combined pounds 9bn into the cash-guzzling project, with the promise of another pounds 1bn this spring.

Eurotunnel has set itself ambitious targets. Not only does it plan to capture 50 per cent of the cross-Channel cake by 1996, it also expects the very fact of its opening to enlarge the cake substantially. Customers will have to flock to the tunnel in droves.

The fares for Le Shuttle, the train that will ferry motorists and their cars under the Channel, have been set higher than expected. They range from pounds 125 return for a carload in winter to a peak price of pounds 310. Most are a little higher than the equivalent ferry fare.

There was an almost audible sigh of relief from the Channel ports as Christopher Garnett, Eurotunnel's commercial director, outlined the structure; at least the tunnel was not trying to undercut the ferries.

Asked by the Independent on Sunday whether Eurotunnel would respond if the ferries cut their fares, Mr Garnett said: 'We would not be following. We're not going to get involved with price wars. We're not going to get involved in discounting.'

Nevertheless, outside observers believe the prospect of a price war is real, despite the absence of hostilities so far. Keith Betton, head of corporate affairs at the Association of British Travel Agents, said: 'In the seven years I've been here, I've seen so many companies say they won't get involved in a price war and then have to eat their words.'

Richard Hannah, an analyst with UBS and a close follower of Eurotunnel, is equally sceptical: 'I'm convinced there will have to be a price war because of the excess capacity created by the tunnel.'

He said fares would have to come down sharply to generate the extra volumes needed to meet Eurotunnel's ambitious revenue targets. 'Even if Eurotunnel captured the entire existing cross-Channel business from the ferry companies, it would still not generate enough revenues even to cover its costs.' He argued that Eurotunnel had to create a fresh wave of demand for cross-Channel travel, and it could only do that by cutting prices.

But for the moment it does not need to. There will be a shortage of rolling stock for the first few months of operation. Le Shuttle will not carry caravans or coaches until September. And it will only be in the summer of 1995 that Eurotunnel will seriously be looking to maximise demand.

Even the ferry companies acknowledge a feeling of phony war about the present situation. Graeme Dunlop, chairman of P & O European Ferries, said: 'There's a fancy gavotte taking place. We're not yet confronted by the real dance. That will begin when the tunnel is up to capacity.'

For the inescapable fact is that there will be massive overcapacity across the Channel almost as soon as the tunnel opens. The ferry companies, which have had years to ready themselves for the onslaught, are well-prepared and well-financed, and will not give up their customers - and pounds 600m-plus of annual revenues - without a fight.

Mr Garnett, in unveiling details of Le Shuttle, proudly concluded: 'The tunnel stands alongside the Suez and Panama canals as milestones in international transport.' Engineers marvelling at the tunnel's design would concur. But whereas Suez led to much human bloodshed, the Channel tunnel is only likely to precipitate corporate carnage.

Eurotunnel expects to earn its revenues from three main sources: Le Shuttle for car passengers; the Paris-London passenger service; and freight. Le Shuttle will be much the most important, accounting for well over half of all expected revenues.

Le Shuttle will run 24 hours a day, every day of the year. Motorists will drive down the M20, tune in to Cross-Channel Radio to learn details of the next departure, buy a ticket at the terminal near Folkestone, and drive on to the waiting train. They can buy tickets in advance but cannot make reservations for a particular train.

Once through customs and immigration and security checks, they drive on to the waiting Shuttle - a 24-carriage monster of single and double-decker carriages. Passengers spend the journey inside their cars, though they can get out to stretch their legs and use the toilets. The carriages are windowless but air-conditioned.

The journey from platform to platform takes 35 minutes. Just one hour after leaving the motorway, the holidaymaker is on the autoroute and heading south. That is the theory, at any rate. There are no shops or restaurants on the train, but these are available at the terminals at each end.

By 1996, Eurotunnel expects to carry 8 million car passengers and their vehicles across the Channel. That compares with the 18 million who made the trip by ferry last year from the Channel ports.

In addition to Le Shuttle, British Rail and its French equivalent SNCF will operate high-speed trains between Paris and London under the Eurostar name. These will carry passengers only, from Waterloo to Gare du Nord, in three hours, starting this June. There will also be a London-Brussels service taking three hours and 10 minutes. The railways hope to compete for business travellers, poaching passengers from the airlines.

The third income strand for the tunnel - freight - will come from dedicated Le Shuttle Freight trains, carrying lorries on flat cars from 7 March. and ordinary freight trains run by the national railways.

Last month, Eurotunnel signed up its first account-card customer, the haulier Sheddick of South Wales. There is no fare schedule. Deals with hauliers are individually negotiated. Eurotunnel expects to run two freight shuttles an hour from the start, rising to three an hour at peak times.

Freight and Eurostar will make a useful contribution to Eurotunnel's coffers, but Le Shuttle which will make or break the company. It is spending pounds 25m advertising the service across Europe and the television campaign will start shortly in Britain.

Mr Garnett sees Le Shuttle's advantages over ferries as speed, convenience and reliability. 'We are a unique service comparable with the impact of the opening of transatlantic airline routes on the ocean liners.'

The speed advantage will probably be unarguable. After adding in loading and unloading times, the Dover-Calais ferry takes almost twice as long, motorway to motorway. The hovercraft is about as quick as Le Shuttle.

Convenience and reliability have yet to be proved. Queues to use Le Shuttle seem as likely as queues for the ferries - possibly more so, because Eurotunnel will not take reservations for specific trains. But the tunnel will be unaffected by the winter storms that disrupt the ferries. That and the advantage of avoiding seasickness has led Eurotunnel to widen the price margin over ferries on its winter tariff.

Eurotunnel says the response of the public in the five days tickets have been on sale has been excellent, though it refuses to give any figures. And Abta's Mr Betton believes the novelty of the tunnel - the one-upmanship of being the first to use it - will produce a surge of bookings among the dinner-party classes.

But one independent survey suggests most people in Britain are lukewarm about the tunnel. Mintel found last year that 77 per cent of 932 randomly selected adults were not very likely or not at all likely to use it. Half of them felt it could be a target for terrorists. On perceived safety, the tunnel came out roughly as risky as the ferries.

Regionally, Londoners were the most favourably inclined, with 29 per cent saying they would be likely to use it. But worryingly for Eurotunnel, the rest of South-east England - a key catchment area to be won over for the tunnel to succeed - was mostly negative, with a favourable response of only 15 per cent.

The other unknown quantity in the calculation is the response of the ferry companies and the ports. They have had six years to prepare their defences to their new rival. The biggest is P&O European Ferries, which changed its name from Townsend Thoresen after the Zeebrugge disaster, when its Herald of Free Enterprise sank with the loss of 192 lives.

According to its chairman, Mr Dunlop, it has spent pounds 400m over the past five years modernising its fleet. 'We've revolutionised the ferry industry in the last five years, creating an attractive product.'

Certainly its newer vessels, such as the Pride of Dover and the Pride of Calais, are a far cry from the shabby, vomit-smelling, beer-soaked, cramped, crowded tubs that used to ply their trade across the Channel. 'The ferry crossing is now part of the holiday,' said Mr Dunlop. 'It's no longer the evil it used to be.' Customers welcome the opportunity to visit the restaurants and shops - options unavailable on Le Shuttle.

He is not too worried by Le Shuttle's speed advantage. Many motorists, especially those with long journeys ahead or behind them, will welcome the opportunity to rest for two hours and have a meal.

Mr Dunlop added: 'Le Shuttle will offer a basic spartan service. The only advantage they will have is novelty. And novelty soon wears off.' He would not be drawn on his response to any fare-cutting by Eurotunnel: 'We'll meet that when we come to it.'

The other big ferry operator is Stena Sealink, once a subsidiary of British Rail, now Swedish-owned. It says the tunnel's only threat is to the Dover- Calais services. The impact on services further west will be zero. A spokesman said: 'You're not going to drive hundreds of miles east to the tunnel entrance, and then hundreds of miles west again on the French side, just to use the tunnel.'

Stena also reckons its price differential will be enough to persuade travellers to stick with ferries. 'On most of the fares the difference is pounds 60, pounds 70, pounds 80 or even pounds 90 on equivalent services. The customer will see that as the price of a night or two in a hotel or a slap-up meal - and come our way.'

The only other big operator across the Straits of Dover is Hoverspeed, which offers a hovercraft service from Dover to Calais and Sea Cat service from Folkestone to Boulogne.

The conventional wisdom is that P&O and Stena will be permitted to combine their cross-Channel services once the tunnel is operating. In the past, the Office of Fair Trading has blocked such a merger on competition grounds.

Unlike the tunnel, the ferry operators have the option to take their capacity elsewhere. Ships could be transferred to other routes - further west from the Straits of Dover, or across the Irish Sea, or on longer-haul voyages to Spain. 'With 18 routes we've got tremendous flexibility,' Mr Dunlop said.

Another option would be to shrink the fleet size. Many P & O vessels are chartered, with an option to end the lease after a year or two. 'If we needed to slim down, we could sell some of our older ships. There's a ready market in the eastern Mediterranean,' Mr Dunlop said.

Shifting or shrinking capacity is not an option for the tunnel. Its only hope is to build volumes aggressively. According to Mr Hannah at UBS, Eurotunnel's annual costs once the tunnel is fully operational will be more than pounds 1bn, including interest payments of pounds 650m.

Its projected revenues, by contrast, will be pounds 550m next year, rising to pounds 1.1bn by 1999. That requires annual revenue growth of 19 per cent a year. 'I think it's going to be quite a struggle for them.' And, without fares that are much more competitive, quite impossible.

----------------------------------------------------------------- UNDER OR OVER THE CHANNEL ----------------------------------------------------------------- Le Shuttle Car ferry Return fare in winter pounds 220 pounds 126-pounds 139 Return fare in summer pounds 280 pounds 139-pounds 220 Return peak holiday season pounds 310 pounds 289-pounds 320 Time, motorway to autoroute One hour Two hours Comfort Own car seat Lounges Sea view None Yes Frequency Up to 4 per hr Every 1 1/2 hrs Reliability Weatherproof Weather worry Booked trips No Yes Restaurants No (in terminal) Yes Shopping No (in terminal) Yes Yob density Middling High Social cachet High in beginning Negative -----------------------------------------------------------------

(Photographs omitted)