If you are in a business like ours, then obviously fuel is a very important part

Lord Sterling, chairman, P&O

A strong performance by the company's ports operations, which are set to handle almost a third more cargo this year, helped P&O beat city expectations by posting pre-tax profits of �192.1m for the first half of 2000.

Earnings growth of 8% at P&O's cruise division, which is to be demerged next month, also helped offset setbacks such as the rise in fuel prices.

P&O's fuel bill, �150m in 1999, is set to rise to up to �230m this year.

"If you are in a business like ours, then obviously fuel is a very important part," P&O chairman Lord Sterling said on Tuesday.

Ferry profits hit

The firm's ferries arm, hit by the abolition of duty free, reported an operating loss of �7.4m, compared to a �19.2m profit for the first six months of 1999.

Lord Sterling: seeking further cost savings

But ferry operations are to be reviewed to help the division exploit growth of 5% a year in the market, Lord Sterling said.

"We will continue to upgrade our product through new investment, extend our e-commerce and systems capabilities and seek further opportunities to reduce costs," he said in P&O's profits statement.

He also restated interest in the flotation of Anglo-Dutch P&O Nedlloyd venture, in which P&O has a 50% stake.

"We are continuing to examine options for a listing," he said. P&O has within the last 18 month floated its Bovis homes subsidiary, and sold its investment in Earls Court Olympia.

Cruise line demerged

Operating profits at the cruise division, which will be demerged as P&O Princess Cruises, would have risen 20% year on year but for the rise in fuel costs, Lord Sterling said.

The division reported record passenger figures on Alaskan tours and, thanks to the addition of new ships, increased passenger capacity by almost one-fifth in the first half of 2000.

"Competitive pricing conditions" held back profits from Caribbean operations, Lord Sterling said.

But the demerged company will benefit from a "strong and dynamic" cruise sector, boosted by growing disposable incomes and the increasing number of elderly people, who represent the market's main customers.

"We also expect to see the industry stimulate demand by stepping up its market and sales efforts to attract more of the 80 million Americans that surveys indicate would consider taking a cruise," Lord Sterling said.

Ports expansion

Revenue in the rump P&O will be supported by growth in cargo through container terminals, which the firm, with stakes in 28 terminals, is targeting for investment.

Container traffic volumes have grown by nearly 10% per annum over the last decade as world trade expands

Lord Sterling

"Container traffic volumes have grown by nearly 10% per annum over the last decade as world trade expands, barriers to trade are reduced and an increasing proportion of goods becomes containerised," Lord Sterling said.

"The prospects for P&O Ports for the remainder of the year are highly positive."

The firm three weeks ago announced it is to redevelop former Shell refinery on the Essex coast into a container port, creating up to 10,000 jobs.

"Exaggerated" reports

Lord Sterling also on Tuesday dismissed as "highly exaggerated" reports that he has become a leading adviser to the Labour government, which is drawing up a strategy for guaranteeing fuel deliveries should protestors for a cut in duty renew blockades.

He said of the refinery blockades earlier this month: "Another couple of days and people would have been badly hurt."

Lord Sterling, who has advised former Tory trade secretaries including Cecil Parkinson and Nicholas Ridley, takes the Conservative whip in the House of Lords.

P&O shares closed 6.5p lower at 588p in London.