Qantas credit rating demoted to junk

Another blow for Qantas.

A Qantas flight landing at Adelaide airport. AFP PHOTO / Saeed KHAN

Qantas Airways, the Australian carrier that became a global partner of Emirates Airline last year, has had its credit rating cut to junk in the face of intense domestic competition.

Moody’s blamed a sharp deterioration in its core business following a profit warning last month that had already led Standard and Poor’s to issue a similar downgrade.

It means Qantas is now rated Ba2 by Moody’s and BB+ by Standard and Poor’s, which will increase the cost of financing for the carrier and restrict access for some investors.

“The downgrade to Ba2 reflects a worse than expected impact on Qantas’ 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 Ian Lewis, a Moody’s analyst.

“As a consequence, we expect these conditions to exacerbate an already high financial leverage.”

Last year’s partnership with Emirates was widely expected to help Qantas to improve its competitive position against Virgin Australia, now majority-owned by Abu Dhabi’s Etihad, Singapore Airlines and Air New Zealand.

Under the alliance, Qantas flights to Europe stop over in Dubai rather than either Asia or London Heathrow. But the benefits of linking into the rapidly expanding global route network of Emirates were not enough to avoid a dire operational review last month when the carrier forecast a half-year loss of A$300 million (Dh978.7m) and decided to axe 1,000 jobs.

In an email to staff sent in November, the Qantas chief executive Alan Joyce said that the three big airline investors in Virgin were “trying to terminally weaken Qantas”. Qantas argues that foreign ownership restrictions of 49 per cent imposed at the time of its 1995 privatisation have put it at a competitive disadvantage against Virgin Australia – and its big three backers.

It wants the government to ease the restrictions to help it to attract fresh investment or provide such investment itself.

“Whilst the issue is currently a matter of discussion and the government has not yet detailed how it plans to proceed, a form of government support would, depending on form and structure, also potentially provide support for Qantas’ liquidity position,” said Mr Lewis.

“Moody’s will observe any potential for positive credit impact when and if such counter-measures are announced and depending on the form of the support.”