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Qantas
Cut to Lowest Investment Grade by S&P on Losses
Qantas
Airways Ltd., the Australian carrier that yesterday struck a
10-year alliance with Emirates to turn around losses on international
routes, had its credit rating cut to the lowest investment grade by
Standard & Poor’s.
7
September, 2012
The
airline’s debt grade was lowered by one level to BBB- with a stable
outlook, according to an e-mailed statement from the ratings company.
“Qantas’s
business risk profile has weakened because of the structural
pressures affecting the airline’s international business,”
Melbourne-based analyst May Zhong said in the S&P statement.
“Persistent pressures have eroded Qantas’s market share and
inflicted losses on the airline’s international operations in the
past few years.”
The
carrier yesterday announced a revenue and cost-sharing tie-up with
Emirates, the world’s largest airline by international passenger
traffic. Sydney-based Qantas lost A$450 million ($465 million) on
international routes in the year to June 30, dragging the company to
its first annual loss in at least 17 years.
It
may take some time for the benefits of the Emirates partnership to be
seen, and Qantas still faces increased competition on Asian routes
from carriers with lower cost bases, S&P said in its statement.
‘Underlying
Strengths’
Qantas
has “significant underlying strengths,” the airline said in a
statement responding to the downgrade, pointing to its free cash flow
and dominant share of the Australian market.
“It’s
a very tough industry,” said Brendon Cooper, head of credit
strategy at Westpac Banking Corp. (WBC) in Singapore. “You’ve got
private-sector airlines competing against ones with other means of
support.”
Still,
the deal with the Gulf carrier is a “positive” for Qantas and may
allow it to conserve more cash, Cooper said. Emirates is owned by the
government of Dubai.
Credit-default
swaps on Qantas closed at 400 basis points yesterday, up from a 2012
low of 270 basis points reached in March, according to data provider
CMA. That’s the highest level among the 25 companies in Australia’s
benchmark bond risk gauge.
Qantas
has A$3.2 billion of bonds and loans maturing by 2021, according to
data compiled by Bloomberg. It holds a Baa3 grade from Moody’s
Investors Service, also the lowest investment grade ranking. The
carrier is one of just two airlines worldwide, with Southwest
Airlines Co., to be judged investment grade by two separate rating
companies.
The
airline’s shares rose 5 percent to A$1.26 in Sydney trading today
before the downgrade was announced, paring this year’s loss to 14
percent.
Spending
Cuts
Qantas
has cut its forecast of capital spending by pushing out orders of
Airbus SAS A380s and canceling a delayed order of 35 Boeing Co. (BA)
787 Dreamliners. Capital spending was A$2.13 billion in the year
through June, according to data compiled by Bloomberg, and the
company forecasts A$1.9 billion to be spent next year and again in
2014.
Qantas
said Aug. 24 it would get $433 million from Boeing, including more
than $300 million in compensation payments, as a result of delays.
Alan
Joyce, Qantas’s chief executive officer, said yesterday the
benefits of the Emirates deal to its European operations and an
ability to expand its Asian network should be seen positively by
rating companies.
“That’s
extremely positive news for the rating agencies and I think they’ll
see it in that light,” he told a media conference
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