Now Eurotunnel faces the acid test

It is nail-biting time at Eurotunnel - but commercial nail-biting for a change. For most of that corporation's life it has been worrying about technical, contractual and financial issues. But now these are (more or less) past and the tunnel faces a simple commercial question: how many people will want to use it?

As the services build up - Eurotunnel is just about to start the passenger trains for selected grandees, shareholders and the like - the tunnel will start to demonstrate how large a commercial base it can expect to generate in its early years. Of course there are its own projections of traffic, the projections upon which it raised the money to build the project, and there are independent estimates, too. But in business one only knows demand when the show is offered to the buying public, and one has only to look at that other 'Euro' venture, Euro Disney, to see how estimates of demand can fly out of the window.

In the case of heavily-geared, single-product, ventures like these two 'Euros', revenue in the early years is very important: every pound below projections is a pound not available to pay back debt on schedule, and in the early years of its operation Eurotunnel will have a net cash outoutflow.

The 'front-end loading' effect of any such underperformance is well analysed in the most recent piece of what will doubtless become a string of City estimates: a paper from the securities house Smith New Court, called Chunnel Implications. SNC did not produce traffic estimates of its own, but rather examined the financial estimates from Eurotunnel, which in turn were based on traffic estimates from independent traffic consultants.

SNC divided the tunnel's market into the four main segments: passenger shuttles, freight shuttles, passenger through-trains and freight through-trains. Passenger shuttles first.

Eurotunnel's assumption here is that by 1996 it will take half the car and coach traffic at present using the ferries, while the independent traffic consultants reckon that the share will be even higher: 63 per cent. In terms of theoretical capacity this is perfectly plausible, for it would result in only 72 per cent capacity utilisation. Plausible perhaps, but realistic? SNC does not dismiss these estimates, but it does wonder whether in practice the tunnel can achieve this share.

In any case this market share must be translated into revenues, and in the early years not only will Eurotunnel be discounting sharply from its brochure price, but many travellers (such as shareholders) will be doing so free, or at heavily discounted prices.

As for freight, SNC is also sceptical of the estimates of 50 per cent of market share next year and 63 per cent in 1996. As with passenger cars, there is enough theoretical capacity to achieve these levels, but whether half or more consumers will choose the tunnel is far from clear.

Estimates for passenger rail services are calculated by looking at the present air traffic between Britain and the various Continental destinations, and estimating what proportion might be diverted to rail. As far as the two nearest large centres, Paris and Brussels, are concerned, there is no doubt that a lot of traffic will shift: the Eurotunnel and the independent consultants' estimates for 1996 are 65 and 70 per cent respectively.

But BAA, on the other hand, points out that 25 per cent of its traffic is from interlining passengers, while people who live near airports may still find the airlines more convenient than the trains. True, there will be some diversion from services to other Continental cities, but the further one moves from the Channel, the greater the time advantage of air travel.

It is difficult to compare the BAA estimates with those of Eurotunnel because these are drawn up in different ways. But the overall message - aside from the fact that all estimates are most uncertain - seems to be that the risks for Eurotunnel are on the downside.

Finally rail freight, the part of the service that is fully operational: from Eurotunnel's point of view this is not an important sector, for it is expected to bring only 8 per cent of its revenues in 1996. Much here depends on the rail companies' ability to sell the service - in theory, freight trains should be very competitive on long-haul routes, for they are in the US, but whether in practice they will be is far from clear.

SNC tracks through the implications of all this not just for Eurotunnel but also for the other transport companies involved, including the P&O ferry services (a difficult year ahead, but more stability in 1996), British Airways and BAA (some loss of market share, but still growing revenues overall), the ports (still competitive), and National Express (little change). But its broad conclusion for Eurotunnel should worry its shareholders: 'Certain assumptions look ambitious . . . the balance of risk with near-term Eurotunnel revenue estimates resting on the downside.'