Assignment
Channel Tunnel revenues collapse The Channel Tunnel in 2004 is still only carrying half the number of passengers it was built to carry some 10 years after it began operations. Price cuts in 2003 had been introduced by Eurotunnel, the operator of the Channel Tunnel, to raise revenues. These price cuts for using the Channel Tunnel reduced the costs for operators and resulted in around 20% cuts on average in fares on Le Shuttle, which is owned by Eurotunnel, and transports cars, buses and trucks through the tunnel. The result of these lower fares did indeed allow Le Shuttle to take a greater share of the cross-Channel market, with the number of cars on its shuttle services expanding by 4%, to around 1.1 million in the six months following the price cuts. However revenues did not rise, they actually fell by 11% to £149m. Eurotunnel expressed great disappointment at this outcome.
Eurotunnel, as well as operating Le Shuttle itself, is the owner of the Channel Tunnel and allows other train operators to use its infrastructure - including Eurostar, EWS and SNCF. These companies pay Eurotunnel a fee in proportion to the number of passengers and vehicles they carry - but they too have been unable to increase passengers and vehicles significantly even after passing on the lower costs of using the Channel Tunnel as lower fares to users.
For example, Eurostar alone had been hoping to carry more than 13 million passengers annually by 2004 but by that date the figure had reached little more than 7 million passengers. Indeed the price cuts introduced by Eurostar following the reduction in Channel Tunnel costs seemed to have had little effect, with the Eurostar services between Waterloo and Paris carrying just 2.8 million passengers in the first half of 2003, compared with 3.2 million in the first half of 2002 when it charged higher prices for passengers. Of course, one of the problems facing Eurotunnel is the competing means of crossing the Channel, in particular the use of ferries and low cost airlines. These have also been involved in price cutting strategies with what has in effect been a ‘price war' between the tunnel, ferries and low-cost airlines to capture cross-Channel passengers
Questions
1 Use your knowledge of price elasticity of demand to help explain the ‘disappointment' of Eurotunnel and other Channel Tunnel transporting companies in seeing their revenues fall from price-cutting strategies.
2 As well as price elasticity of demand, what other reasons might explain this fall in revenue of Channel Tunnel transporting companies after cutting their prices?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.