Oceania > Australia > Moody's downgraded Qantas

Australia: Moody's downgraded Qantas

2014/01/11

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 by presently prompted Standard and Poor's to assign it junk status.

Qantas is presently 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 estimate 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 presently face some of the majority challenging circumstances in our history, inclunding 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 at the same time as it was privatised in 1995 have put it at a disadvantage in relation to Virgin, which is presently majority-owned by national-backed Singapore Airlines, Air New Zealand and Abu Dhabi-based Etihad.

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

December's grim estimate doused hopes that Qantas had turned a corner by signing a major partnership with Dubai-based Emirates and reversing its 2012 annual loss - the initial 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 statement 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 presently - however tough they may be - to ensure we remain strong and disciplined in the years ahead."

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

Evolution was being made on a before announced $2 billion cost-reduction programme, inclunding on the structural review, he added.

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