Examination of witnesses (Questions 56
- 79)
WEDNESDAY 9 DECEMBER 1998
MR W WHITEHORN
and MR M FURLONG
Chairman
56. Good afternoon.
May I ask you to identify yourselves and perhaps make any general
remarks you wish to begin with?
(Mr Furlong) My name is Mark Furlong from Virgin
Group and I am Project Director for Regional Eurostar. With me
is my colleague Will Whitehorn, who is the Director of Corporate
Affairs for the Virgin Group. May I first of all thank you for
the opportunity to assist the Committee with their inquiry today.
Our starting point is that the British taxpayer, as we have already
heard, has paid not just £180 million for the regional Eurostar
trains but a further £140 million in infrastructure clearances
to allow them to run. We believe it is a national tragedy that
these trains have been sitting idle for the last three years whilst
yet more financial analysis has been undertaken. They have yet
to carry a passenger north of London. We believe there is a market
for direct rail services linking the Midlands, the north and Scotland
with continental Europe. Our vision is that the whole of Britain
should benefit from the Channel Tunnel and the future rail link,
not just London and the south east. It is surely inconceivable
that the nation would abandon an investment of £320 million
to link the Midlands, the north of England, Scotland and Wales
to mainland Europe leaving only London and the south east as the
beneficiaries. Virgin remains committed to running a regional
Eurostar service, indeed this is why we responded so quickly to
the Deputy Prime Minister's call in June to identify some useful
services which could start right away. We did so because we believe
regional Eurostars represent a viable business opportunity. Virgin,
by virtue of our long distance services across virtually the whole
country, is in a unique position to make regional services work
without the need for additional public subsidy. We recognise that
there are other potential uses for Eurostar's regional assets
and indeed we have accepted the Government's initial priority
for a Heathrow to Paris service, if technically feasible. However,
we wish to state our willingness to work with Eurostar UK to achieve
a solution which is both technically and economically viable as
well as meeting the wider public interest. We have been delayed
in completing our plans by the decision to transfer ownership
of the seven regional Eurostar trains from London and Continental
Railways to the new Eurostar Consortium. We are now waiting to
learn whether or not the Consortium intends to use the trains
for a Heathrow service, a regional service or indeed at all. We
are prepared to enter into immediate negotiations with Eurostar
UK and if these proceed swiftly we believe services could begin
within six months. Virgin would like to start running regional
services as soon as possible. We believe the regional trains have
been parked in the sidings for too long. You have also received
our written evidence and we should be delighted to answer any
questions you may have.
Mr Olner
57. Do you accept that regional Eurostar
services are unlikely to attract business customers because the
journey times are too great?
(Mr Furlong) Yes; certainly. Our business plan
assumes that there would be some business traffic in the more
southern locations, certainly Watford, Milton Keynes, Peterborough
and even Birmingham should pick up a reasonable amount of business
traffic.
58. What is reasonable?
(Mr Furlong) The current inter-capital service
picks up about 15 per cent; of the passengers it picks up from
north of London about 15 per cent of them are travelling on business.
We would see similar sorts of levels. Certainly as you move north
of that we see it as predominantly a leisure product and very
low levels, if any, of business traffic.
59. You used to be partners with LCR did
you not?
(Mr Furlong) That is correct; we still are.
60. How come the Consortium are turning
round and saying to us, whether we have spent £320 million
or not, that it is money badly spent and they cannot make a profit
on the service and now you say you can?
(Mr Whitehorn) Have the Consortium actually talked
to you already about this issue?
Chairman
61. We are taking evidence from you, Mr
Whitehorn. In this Committee we ask the questions.
(Mr Furlong) As we understand from the report
which was made available this morning, the Consortium are saying
that they believe, putting aside the £320 million which has
already been spent, that they do not believe that they could operate
viably. I believe, however, that they do indicate in their report
that there may be operators who could do so. Certainly Virgin's
position is that we believe that the opportunities to get passengers
and customers from the rest of the UK is greater for us than the
Consortium and certainly our position as a national rail operator
does allow us certain synergies in operating costs which make
a difference.
Mr Stevenson
62. The fundamental question here is whether
your company can operate regional Eurostars viably without public
subsidy and that seems to me to be the fundamental question. What
I have read in your submission and heard from you so far would
beg the question: what makes you think you can do this? As a member
of parliament for a north Midlands constituency, I have certainly
got no enthusiasm for what one might call half-cocked schemes.
What makes you think that when the Consortium says it cannot really
be made to pay, it is not viable, you can come along and say you
think it is, in fact you are so sure it is viable that you do
not need any public subsidy to run it?
(Mr Furlong) Virgin's involvement with the Eurostar
service has been for many years and I believe we have considerable
experience not just of the inter-capital service but understanding
how traffic builds up. Certainly with respect to a regional service,
Virgin included in its bid to the Deputy Prime Minister early
in the year for the whole Eurostar service plans to run the regional
service also. We have done a considerable amount of work. We have
had lots of people working on the project. We have done our own
research and we remain confident and willing to operate the service.
63. Is that research available to this Committee?
(Mr Furlong) Certainly.
64. I am sure you appreciate this is the
crucial point here. You have identified two possible levels of
service, a full service on Glasgow via Edinburgh, East Coast Main
Line, daily service from Birmingham, two services from Manchester
and so on or a parcel service to be run in conjunction with the
possible Heathrow service.
(Mr Furlong) That is correct.
65. You said you have done a lot of research
and I understand that the Consortium's report was only available
yesterday. Can you give us some idea of what your profit and/or
losses would have been on those options?
(Mr Furlong) Ultimately we believe it is going
to be profitable because otherwise Virgin would not be interested
in operating the service.
66. One year, two years, five years, ten
years, twenty.
(Mr Furlong) We believe that breakeven will occur
somewhere around year three, but there will be substantial losses
in the early years. That is based upon evidence from both the
inter-capital services and from air line start-up services, but
over the period of a ten-year franchise, which is what we were
talking about, we believe that ultimately the service will be
viable.
67. Do you have the figures to back that
up?
(Mr Furlong) Yes; certainly.
68. Could you produce the profits and losses
based on this comprehensive research which you undertake?
(Mr Furlong) Yes. As I said in the opening statement,
we have had to make some assumptions with regard to what assets
will be available.
69. In your submission, if I read it correctly,
one of the assumptions you have made is that the rolling stock
would be available, the sets would be available.
(Mr Furlong) Yes; that is correct.
70. That is no big deal because the others
are assuming that as well and they are there. That is one assumption
which can reasonably be put into anybody's plans because they
are there, they have used a lot of public money.
(Mr Furlong) That is correct.
71. Can you give us some idea of what other
significant assumptions you have made in coming to those conclusions
other than the one which we have already identified?
(Mr Furlong) In terms of the operation of the
business?
72. I am just a simple politician. I am
not a business person at all. I am interested in how you reach
the conclusions that this service can be viable. You say you have
built in certain assumptions. We have identified one. I am extremely
interested in what other—not small assumptions not marginal
ones—significant assumptions you have built into your assessment.
(Mr Furlong) There are two sides to that: the
revenue side and crudely what assumptions we have made there and
then what assumptions have been made on the cost side and when
you take the two together whether it produces a favourable result
at the end of that. On the revenue side, we have done a lot of
work on the likely level of demand, both in terms of new generated
demands and abstraction. We have done a lot of work on pricing
and maybe we will come onto that later but certainly in terms
of pricing, we are looking at lower levels than the Consortium
and certainly we would see very attractive levels against the
coach market.
73. We are going to have to wait until the
company submit their detailed research to us and I hope, through
you Mrs Dunwoody, we can reiterate that request. To help me a
little further, you say that in year three you would break even.
(Mr Furlong) Yes.
74. That assumes you would start to make
a profit in year four onwards. What would be your profit in years
four and five?
(Mr Furlong) If it is okay, I would have to submit
the business plan. I do not have the details to date.
75. You see the difficulty I have. I understand
your difficulty as well but when you are saying in answer to questions
that you know you can break even in year three then I think it
is reasonable for people like me and members of the Committee
to ask you whether that assumes profit after then. What is your
profit in year four? How can you conclude you are going to break
even in year three if you do not know how much you are going to
make in year four? I think that is a reasonable question.
(Mr Furlong) The business plan will first of all
be very dependent upon any negotiations we are able to have, and
as of today we have not been able to have, with the Consortium
and any restrictions or requirements they put upon us or any availability
of the sets and that will affect that number. In year four, you
will be talking somewhere in the order of half a million pounds.
76. May I ask one last question on your
interest in running services parallel to the planned service from
Heathrow? Would you accept the proposition that the Eurostar services
from Heathrow are going to be quite dependent on air feeder services
to Heathrow from the regions? Would you accept that proposition?
(Mr Furlong) Yes. Virgin's analysis of a Heathrow
to Paris service showed that we did not believe it was economically
viable and we stated that in our initial submission and in the
written evidence we have provided. Therefore it is difficult to
assess what conclusions the Consortium may make. Certainly I would
accept that for it to have any chance of success it would have
to be fairly heavily dependent on feeders from all sources.
77. Air feeder services to Heathrow.
(Mr Furlong) Air feeders.
78. Therefore if you accept that proposition,
would you accept what seems to be the compelling logic of that
proposition that if regional air services to Heathrow are reduced
or removed, then the viability of operating Eurostar train services
from Heathrow become less attractive?
(Mr Furlong) Yes; certainly.
Mr O'Brien
79. May I put to you the issue involving
the possible services down the East Coast Main Line, the line
which serves my constituency? You have obviously outlined the
fact that you have done some research on these matters. What is
your understanding of the current readiness for the East Coast
Main Line to take Eurostars?
(Mr Furlong) We had been advised that the position
was that it would be ready for early 1999, within the first quarter.
However, we have recently heard that there is still a significant
amount of work to be undertaken by Railtrack and it could potentially
be as late as the year 2000 before services will be able to operate
on the East Coast. They are currently only cleared as far as Doncaster.
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