Price war threatens Telecom

By PETER GRIFFIN

Telecom's ability to improve its performance across the Tasman may be hampered this year by aggressive price reductions from competitors following the long-anticipated launch of Hutchison 3G.

Ratings agency Fitch says the rating outlooks for the region's main telecommunications companies remain stable at present, but that could change as a period of intense price competition hits cashflows and ultimately creditworthiness.

The launch of third-generation (3G) services by Hutchison, in which Telecom is a 19.9 per cent stakeholder, is seen by Fitch as a potential catalyst for "tough mobile competition, with probable ramifications beyond that of mobile data pricing".

"We would expect knock-on effects to mobile voice and even to fixed voice tariffs ...

"A return to the aggressive pricing behaviour witnessed in 2001 could lead to rating action."

Fitch has an A outlook rating on Telecom and SingTel Optus. Telstra has an AA- rating and Hutchison has not yet been rated.

Expected to enter the market with heavily subsidised offers designed to encourage mobile users to upgrade their phones, Hutchison is likely to be met head on by Telstra, Optus and AAPT's mobile partner Vodafone.

Telecom's Australian business generated $773 million in the second half of last year, down nearly 18 per cent on the previous corresponding period.

AAPT, which is wholly owned by Telecom, also cut tens of thousands of low value customers.

But the business has produced positive cashflow for the past six months and Telecom has been praised for its discipline in cutting costs and improving cashflows overall.

"I'm reasonably happy with developments at AAPT's cashflow level, though growth in top-line revenues is flat if not negative," said Fitch analyst Jonathon Cornish.

But gains made at the cashflow level through capital expenditure reductions and other cost-cutting could be quickly erased by a telecoms price war.

Cornish said some stability was offered in Telecom's home market, where a lack of competition had enabled the telecom to increase its line rental charges.

Fitch was expecting growth for the telecoms sector of between 3 and 5 per cent this year.

Telecom chief executive Theresa Gattung has signalled that AAPT will undertake a major promotional drive this year, increasing its advertising spending in an attempt to pick up profitable customers.

"We're now about to increase the profile again of AAPT," she told ABC's business breakfast show. "It's been some time since we had advertising programmes on air."