EIRCOM YESTERDAY warned that it could breach the covenants on its €3.8 billion net debt within the next 12 to 18 months as the company’s revenues continue to shrink in the recession.

It also wants a reduction in labour costs of €90 million over the next three years to make the business more competitive.

This is all against a backdrop of declining sales across the group. Revenues fell by 8.5 per cent in the year to the end of June to just more than €1.8 billion.

On a positive note, Eircom trimmed its operating costs by 11.5 per cent. This helped the company to keep the reduction in its earnings before interest, tax, depreciation and amortisation (Ebitda) – a key metric for its lenders – to just 3.3 per cent at €669 million.

Eircom lost 70,000 fixed-line customers during the year – more than 1,300 a week. Fixed-line revenues fell by 8.5 per cent to €1.4 billion.

Its Meteor mobile phone business also suffered “tough” trading with revenues down 7.7 per cent at €458 million.

In the fourth quarter, Meteor’s average revenue per unit (Arpu) fell by 15 per cent to €31.69. Its Arpu has declined almost every month for the past two years.

Eircom chief executive Paul Donovan is battling to stabilise Eircom’s Ebitda to avoid triggering a default on its debt covenants.

When asked about the potential for a debt default, Mr Donovan told The Irish Times: “We’re saying this is something that may occur if we don’t take action during the next 12 to 18 months.

“Clearly, some of those actions are relating to the business in terms of it running better.

“Equally, there are other things we can do. We can engage our lenders in a dialogue around those covenants and seek to achieve some relief.

“Or, under our senior [debt] financing arrangements, we can work with our shareholders on some kind of equity cure where they put in equity and it counts as Ebitda.”

Mr Donovan declined to comment on whether its shareholders, Singapore-based STT and the employee Esot, would provide fresh equity for the business.

The company is being advised on its financial options by JP Moran and Gleacher Shacklock.

“We haven’t reached any definitive conclusions; it’s an incredibly complex exercise with many different ways forward,” Mr Donovan said.

“It’s not something that has to happen next week or next month because a likely covenant breach would be some time down the road. We have plenty of room to manage that.”

Mr Donovan said Eircom has close to €400 million in cash available to the business.

In terms of reducing its labour costs, Mr Donovan said no target has been set for jobs cuts. The matter is under discussions with its unions.

By the end of June, Eircom had reduced its headcount by 1,531 staff – well ahead of the 1,200 target set for March 2011.

“We have to have a cost base which is competitive and we are some way away from that yet,” he added.

Eircom plans to launch a new mobile brand in the coming weeks in what is already a crowded market.

“Meteor is an incredibly strong brand but its core target market is effectively 16 to 20-year-olds,” Mr Donovan said.

“The Eircom brand also has inherent strengths and we are really lacking a meaningful option in terms of triple play.

“So the ability to bundle Eircom mobile together with voice and DSL [broadband] makes absolute sense and enables us to appeal to a broader demographic.”

Eircom had 140,000 next-generation broadband customers in June and expects this to rise to 280,000 by the end of 2010.