Financial News

  • 8 December 2013, 17:19

Qantas Sinks To 'Junk' Status In Airline War

The credit standing of embattled Australian airline Qantas has been downgraded by a leading rating agency to "junk" status.

Standard & Poor's reassessment of the world's second oldest airline comes after the carrier issued a shock profit warning and slashed jobs on Thursday.

Qantas revealed a half-year loss of 165m and said it would axe 1,000 jobs as it struggles under the weight of record fuel costs, fierce competition from subsidised rivals and a strong Australian dollar.

In response, S&P cut the airline's rating from BBB-, the lowest investment grade, to BB+ and placed it on a credit watch with negative implications.

Qantas shares closed 3.74% lower on Friday, having lost more than 10% on Thursday.

At one point on Thursday its share price dropped more than 17%.

The BB+ rating puts Qantas in what is known as "junk" status among professional investors, increasing the cost of financing for the carrier and restricting access for investors that do not put their money in lower-rated companies.

"The downgrades reflect our view that intense competition in the airline industry has weakened Qantas' business risk profile to 'fair' from 'satisfactory' and financial risk profile to 'significant' from 'intermediate'," S&P said.

"We don't expect Qantas to recover to a credit profile commensurate with a BBB- rating in the near term."

The move comes after another ratings agency, Moody's, on Thursday put the airline's investment-grade BAA rating on review for a potential downgrade, saying the forecast conditions were "outside the rating expectation".

Qantas chief executive Alan Joyce admitted the challenges facing the airline were "immense" and "urgent" action was needed.

"Since the global financial crisis, Qantas has confronted a fiercely difficult operating environment - including the strong Australian dollar and record jet fuel costs, which have exacerbated Qantas' high cost base," he said.

"The Australian international market is the toughest anywhere in the world."

As well as axing 1,000 jobs, Mr Joyce said he would take a 38% pay cut while the airline would conduct a review of spending with top suppliers and put in place a salary and bonus freeze.

The airline claims domestic rival Virgin Australia, which is majority-owned by state-backed Singapore Airlines, Air New Zealand and Etihad, is waging a campaign to weaken it in the lucrative domestic market with cheap seats underwritten by foreign cash injections.

Mr Joyce has been lobbying the government for the easing of restrictions that limit foreign ownership in the national carrier to 49%, or state intervention to shore up Qantas.

But Prime Minister Tony Abbott said government help was unlikely and said: "If we subsidise Qantas, why not subsidise everyone?"

Qantas - originally an acronym for Queensland and Northern Territory Aerial Services - was founded in 1920 by two Australian former First World War pilots.

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