Standard and Poor’s has lowered its credit rating for airline Qantas to BB+, which is considered below investment grade.
S&P’s outlook for the group’s credit rating was also negative.
It also lowered the airline’s corporate debt to BB+ from BBB- and placed it on negative watch.
That means the group’s credit rating is at junk status, increasing the cost of financing for Qantas and restricting access to investors that do not invest in lower rated companies.
S&P said in a statement the downgrades reflect its view that intense competition in the airline industry had weakened Qantas’ business risk profile to “fair” from “satisfactory”, and financial risk profile to “significant” from “intermediate”.
“We don’t expect Qantas to recover to a credit profile commensurate with a ‘BBB-‘ rating in the near term,” it said.
Another ratings agency, Moody’s, said it was considering downgrading Qantas’ current baa3 credit rating to junk status.
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Qantas shares last traded at $1.07 per share.
The Flying Kangaroo has had its ups and downs, and this is a definite down.
The airline blames a range of factors it can’t control for its unflattering financial position. These include a strong Australian dollar, high fuel costs and a cashed up competitor in Virgin Australia.
But its current woes aren’t new.
Since 2011, Qantas has shed 3000 full-time jobs. Delivery of new aircraft have been deferred and unprofitable international routes shut.
Now the national carrier is looking for some sort of government support.
But its plea appears unlikely to get off the political tarmac.
By law, the iconic airline must be majority Australian-owned and controlled – limiting its ability to take on cashed-up foreign partners.
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However, competitor Virgin has structured itself so that it can access foreign capital from shareholders Air New Zealand, Etihad and Singapore Airlines.
Other international competitors – more than 100 of which are government-owned – benefit from public subsidies, tax benefits and concessions, preferred access to airports and government business.
Prime Minister Tony Abbott and Transport Minister Warren Truss are waiting to see what Qantas formally puts to the government.
But Truss is talking down the prospect of direct government support. He argues getting the domestic business environment right – by ditching the carbon tax and cutting red tape – is the best thing the coalition can do for Qantas.
The Australian Greens blame Qantas management for its predicament, and point to its use of profitable domestic operations to subsidise loss-making ventures overseas.
But the Greens also believe the government should consider taking a stake in the airline.
Labor wants the airline to remain majority Australian owned – for reasons including national security – while unions think the government should give it a financial guarantee in exchange for a jobs guarantee.
Qantas itself seems to be leaning toward the financial guarantee option.
Other solutions include a government loan, or more controversially, the changing of the Qantas Act to allow majority foreign ownership.
But Qantas also believes action should be taken against competitor Virgin Australia.
This includes the government not giving Virgin the benefits of “Australian carrier designation” while it only has 20 per cent Australian ownership, and a Foreign Investment Review Board review of its ownership structure.
“Government action will be key in enabling us to keep competing effectively on a level-playing field,” Qantas chief Alan Joyce said on Thursday.
The question is: what government action?
