Qantas struggles as Moody's downgrades airline to 'junk'

Thursday 09 January 2014 08.52
Moody's downgrades Qantas credit rating to junk
Moody's downgrades Qantas credit rating to junk

Australian carrier Qantas said it was facing some of its toughest-ever challenges as Moody's downgraded its credit rating to junk, with the airline battling intense competition and spiralling costs.

Moody's cited "a sharp deterioration in the company's core domestic business" following the airline's shock profit warning and announcement of job cuts in December.

This had already prompted Standard and Poor's to assign it junk status.

Qantas is now rated Ba2 by Moody's and BB+ by Standard and Poor's, meaning it is considered a "junk" product by professional investors.

It will increase the cost of financing for the carrier and restrict access for investors that do not put their money in lower-rated companies, deepening woes for the cash-strapped airline.

The downgrades follow a dire forecast in December of a half-year loss of up to $300m and the decision to cut 1,000 jobs due to "immense" cost pressures.

Qantas chief financial officer Gareth Evans said the news was not unexpected and underscored the difficulties faced by the company, which include record fuel costs and fierce competition from domestic rival Virgin Australia.

"Earnings conditions have deteriorated rapidly in recent months and we now face some of the most challenging circumstances in our history, including an uneven playing field in Australian aviation," Evans said in a statement to the Australian stock exchange.

"We continue to talk to the Australian government about options for resolving this situation," he added.

Qantas claims foreign ownership restrictions of 49% imposed when it was privatised in 1995 have put it at a disadvantage in relation to Virgin, which is now majority-owned by state-backed Singapore Airlines, Air New Zealand and Abu Dhabi-based Etihad.

It has been lobbying Canberra to ease the foreign investment cap or intervene with a capital injection to shore up its business.

December's grim forecast doused hopes that Qantas had turned a corner by signing a major partnership with Dubai-based Emirates and reversing its 2012 annual loss - the first since privatisation - with a modest $5m full-year profit announced in August.

Competitive pressures were singled out as a key concern by Moody's in its downgrade. "The cause of the deterioration in the operating profile is largely due to the aggressive competitive actions by Qantas's key domestic competitor, Virgin Australia Holdings," the agency stated.

Qantas is undertaking a structural review, which is due to report back next month on options speculated to include the potential divestment of its Jetstar assets in Asia.

Evans said Qantas stood ready to take "the necessary decisions now - however tough they might be - to ensure we remain strong and disciplined in the years ahead."

"In addition to cost-cutting, substantial reductions to our planned capital expenditure pipeline will be vital to ensure a return to positive free cash flow in FY15 and beyond," he said.

Progress was being made on a previously announced $2 billion cost-reduction programme, as well as on the structural review, he added.