Opportunities for European operators to achieve further cost savings through headcount reductions are diminishing, according to a leading ratings agency.

Telcos have used staff cutbacks as their main source of cost savings and to ease pressure on revenues, Moody’s claims in a new report.

However, achieving further gains in this area will be more challenging, particularly for companies that are already close to peak levels of efficiency, according to company VP and report co-author Ivan Palacios.

"The operators' fading ability to keep cutting staff costs is credit negative for our rated European telecoms service providers because cash flow generation will come under increasing pressure if revenues continue to decline," said Palacios.

"In addition, reducing their headcount beyond certain levels could result in compromised customer service, which could in turn affect brand perception and the long-term prospects of the business."

The agency predicts that UK-based BT is the only telco it has come across that could continue to cut staff costs in order to mitigate pressure on revenues.

France Télécom, Deutsche Telekom, Telekom Austria, Telekom Slovenije and OTE have room to improve their efficiency levels but will be constrained by government influence, Moody’s claims.

Meanwhile, Belgacom, TeliaSonera, Telenor, Telecom Italia, KPN and Portugal Telecom have reached their efficiency “ceiling”.

The report, "European Telecommunications Service Providers: Opportunities To Cut Costs Are Diminishing", measured telcos’ ability to cut staff based on annual revenues per employee and staff costs as a percentage of revenues.