Fitch Expects Continued Cost Cutting at European Telcos as Margins Get Squeezed

by: Research Recap

Operational cost-cutting will become an increasingly important factor in the financial metrics and ultimately the credit profiles of Europe’s incumbent telcos over the next five years as market growth becomes increasingly challenging to achieve, Fitch Ratings says.

“Increasingly, Fitch is seeing incumbents resort to cost-cutting to underpin margins,” says Michael Dunning of Fitch’s TMT group in London. “This is because the sector has reached a growth inflection point as broadband and telephony take up levels are at saturation point, and the effects of competitive pricing will erode future margin levels on new data and content offerings.”

“However, the good news is that these entities are able to make significant cuts in operating costs, which Fitch estimates could represent as much as 30% in some cases,” added Dunning.

Furthermore with the plethora of “free” or unchargeable on‐line services such as mobile GPS, VOIP services, IPlayers and mobile apps growing by the day, it also looks unlikely that the network operators will benefit from new service revenues in the way they did from SMS data.

The report notes BT Group (NYSE:BT) (’BBB/F2″ Stable) and Royal KPN (KPN) (’BBB+’ Stable) as leading examples of incumbents well on their way to achieving these sorts of efficiency gains. However, it cautions that not all incumbents will be able to achieve the same scale of cuts as BT Group and KPN, or that they will take more time to do so. For example, Deutsche Telecom (DT) and France Telecom (FTE) employ a high percentage of civil servants and operate under more restrictive domestic labour laws than KPN and BT.

Fitch continues to have a “Stable” rating outlook on the European telecom sector.