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

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, which 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.

 

"They are in a complete freeze, worrying about paying interest rather than spending capex on where it should be going -- a new fleet, upgrading facilities, etc," said IG Markets analyst Evan Lucas.

 

The downgrades follow a dire forecast in December of a half-year loss of up to Aus$300 million (US$267 million) and the decision to axe 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.

 

Its shares closed 2.27 per cent higher at Aus$1.125 on a broadly buoyant market, with investors already pricing in a downgrade after Moody's put Qantas on credit review last month.  

 

"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."

 

Qantas claims foreign ownership restrictions of 49 per cent 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 Aus$5 million full-year profit announced in August.

 

Competitive pressures were singled out as a key concern by Moody's senior vice president Ian Lewis in Thursday's downgrade.

 

"The downgrade to Ba2 reflects a worse-than-expected impact on Qantas's credit profile of a marked sharp deterioration in the company's core domestic business, which has been a key supporting factor of its previous investment-grade rating", said Lewis.

 

"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."

 

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 Aus$2 billion cost-reduction programme, as well as on the structural review, he added.

 

As at December 31, the airline said it had "strong liquidity" including substantial cash reserves and undrawn committed bank facilities totalling approximately Aus$3 billion, with gross debt reduced by Aus$1 billion during the 2013 financial year and "no significant debt refinancing due until mid-2015."