BRITAIN'S P&O and Stena Line of Sweden have launched a plan to merge their Channel ferry businesses vowing to fight back against competition from the Channel tunnel.

They said the move would also help deal with problems of high financing costs on the routes, which ship millions of cars, trucks and passengers between Dover and Calais every year across the world's busiest sea lane. P&O will hold 60 per cent of the shares in the new P&O Stena Line and Stena will have 40 per cent.

Both companies have extensive operations on the Irish Sea route between Ireland and Britain, but these will not come under the new joint venture company and will operate independently and in competition with one another.

"The new company will offer more vigorous competition to Eurotunnel and improved scheduling, as well as maintaining the present high standards on the existing ferry services and providing for eventual future investment," the companies said.

The two lines, whose profits from the Dover Calais corridor have been cut to the bone by a fierce price war with Eurotunnel, added that a priority would be to reduce capacity and costs. The parent companies will contribute 14 ships to the venture, which will have gross assets worth £410 million and be "significantly cash generative".

P&O and Stena predict they can slash at least £75 million off the initial fixed cost base of £280 million and see profits rebounding as a result.

P&O said the new line would absorb £173 million of its group borrowings, helping to trim its overstretched balance sheet. In return, it will receive 60 per cent of the new line's shares and £51 million in new preference shares.

Stena's deal will be slightly different, as it intends to transfer assets and businesses into the new company in exchange for £134 million in cash and 40 per cent of the shares. This transaction should cut its debt by £120 million.

P&O and Stena believe that their combined operations would have matched Eurotunnel for size, based on calculations for Dover/Calais traffic in August this year. They would have had a combined 41 per cent of the market for cars, equal to Eurotunnel's share, and 40 per cent of the freight market, compared with Eurotunnel's 44 per cent.