Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


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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