Back in business

Last year, Flag Telecom, the global submarine cable operator, became the latest telecoms group to fall foul of the so-called 'bandwidth glut' and the costly process of building infrastructure. But Patrick Gallagher, who was appointed chairman and CEO at Flag in March, tells CommsMEA that the operator has emerged from bankruptcy protection in better shape.

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By  Richard Agnew Published  August 31, 2003

|~||~||~|Last year, Flag Telecom, the global submarine cable operator, became the latest telecoms group to fall foul of the so-called 'bandwidth glut' and the costly process of building infrastructure. But Patrick Gallagher, who was appointed chairman and CEO at Flag in March, tells CommsMEA that the operator has emerged from bankruptcy protection in better shape.


CommsMEA: Could you detail Flag's new structure since exiting Chapter 11 and how you were able to cut back on costs?
Patrick Gallagher: During that process, a number of things happened. The network, globally, is intact and was untouched by the restructuring. The asset base, which cost US$4billion to build up, has now been written down on our books to US$360million. We had about US$1.4billion of debt, but that's now down to about US$77million and I've just given notice to pay off about half of that. On the people side, the numbers went down from around 460 [employees] to about 235. The cuts in operating costs [were] in two main areas. We've cut the build side of the business and in the future we'll sub-contract it out. We've also centralised a lot of functions and services in London so we've managed to gain a lot of economies of scale.
CMEA: Your cash position (US$100m, Q1 2003) suggests that you won't be investing in new networks in the near future?
PG: Our cash position is fairly healthy, but the investment needed to upgrade existing networks is just a fraction of what it costs to build a new cable system. We don't need financing or anything like that, but our upgrades are going to be through electronics. That doesn't mean that we're never going to build a new cable system. There's clearly going to be demand where there are unreliable systems or there is a need for capacity, but at the moment we have sufficient financing to cover our investment plans going forward.
CMEA: How are you looking to position Flag considering the telecoms crash and bandwidth surplus, and what's your new business model?
PG: Now, bandwidth supply and demand are not completely in kilter, but they are coming back into balance. Globally, the balance is not there yet with regard to certain routes. On the Atlantic route between New York and London, there is still over-supply. But if you operate on a global basis like Flag, then you can ride it out. Also, nobody ever said that there was a lack of demand for communications services as a whole. Internet traffic on average is growing at 50% annually, so there's a huge demand for bandwidth coming through. At Flag, we are focusing on what we're good at. We're going to continue to press our independence in terms of capacity-type services. Secondly, we have already overlaid them with a very strong IP network, which connects into 11 of the top internet exchanges throughout the globe. We will continue to overlay flexible services, such as managed bandwidth, to give customers greater options.
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CMEA: What's the state of play with the upgrade of the Europe-Asia stretch of your network to 80Gbits/s?
PG: We've completed phase one, from London down into Egypt, and we will have phase two completed, which is going down into Fujairah, by the end of September.
CMEA: What's your assessment of the threat from the planned Sea-We-Me 4 project?
PG: In terms of the lead-time of introducing Sea-We-Me 4, you're probably talking about two years at a minimum. Also, if you look at independent studies of business growth out of the [Middle East] region, there's no reason why a second cable system could not be successful and why two cable systems could not sit side-by-side and prosper.
CMEA: Do you have any other partnerships on the horizon with operators in the region?
PG: I'm not allowed to make any predictions or forward-looking statements. What I would say is that our cable systems going in and out of the Middle East are absolutely fundamental. We understand that the Middle East wants to operate within a global environment. We are focused on the Middle East and we want to prosper in that market.
CMEA: Jordan Telecom says it is attempting to renegotiate its contract with you to help cut its costs. Would you be prepared to lower your prices?
PG: I'm not aware that there are negotiations. I think, generically, as we get greater capacity into the region, that will drive prices down, providing our partner relationships allow us to pass on the price benefit.
CMEA: What measures have you put in place to avoid the kind of outages seen after the Algerian earthquake?
PG: It was the largest cable break in our history and, I think, in the industry's history. Our cable shifted 3.5km on the seabed, so it was a phenomenal shift, and we had to repair an 80km fault zone. [But] all customers that wanted restoration were restored within 24 hours. We re-routed traffic over our European network and took other traffic and routed it the other way through our network into the US. Because we can go East and West on our global network, restoration was fast and quality stood up. But what we have done is to look at where there are potential weak spots, and we will have a stronger, tighter policy in restoring traffic to go East and West, instead of trying to restore the same route or relying on a competing system.


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