Qantas relegated to junk status after shock loss warning

Tags: Qantas, Companies
Embattled Qantas Airways Ltd was relegated to junk status by credit rating agency Standard & Poor's on Friday, a day after the Australian carrier issued a shock loss warning that sent its shares to a 16-month low.

S&P cut its ratings on Qantas by a notch to BB+/B, one rank below investment grade, and placed a negative outlook on the airline that means ratings could be cut again. The agency said a structural shift in the domestic competitive landscape had weakened Qantas' business risk profile.

The downgrade means that Qantas could lose some shareholders whose rules on investment prevent them from retaining stock in companies rated below investment grade. It also means the carrier will have to pay higher rates when it borrows money.

Qantas also faces the prospect of losing a chunk of its $2.8 billion cash balance: the rating downgrade could slow the transfer of revenue from credit card companies for ticket sales because additional processing is now required.

Adding to Qantas's headaches, ratings agency Moody's on Thursday placed its Baa3 rating on the airline, the lowest investment grade, under review for a possible downgrade.

S&P said on Friday the pre-tax first-half loss of between A$250 million and A$300 million expected by the airline in the six months to December 31 had caused the company's financial risk profile to deteriorate.

Highlighting the scale of Qantas's problems, Chief Executive Alan Joyce said on Thursday he placed calls to government ministers seeking urgent action after the loss warning. The airline has long complained that rival Virgin Australia Holdings Ltd's (VAH.AX) access to foreign funding has created an unfair playing field.

The airline said it would accelerate a cost-cutting programme following a "marked deterioration" in market conditions, axing 1,000 more jobs as it braces for ongoing volatile conditions.

Anticipating the impact of its surprise loss forecast, Qantas had warned on Thursday that a re-rating by the agency was "likely to be materially price-sensitive". Qantas shares were 2.3 percent lower at A$1.05 at 0230 GMT, above the 16-month low of A$1.00 they sank to on Thursday.

The Australian flag carrier had been one of a few airlines around the world with an investment grade rating. But it has been under threat since S&P and Moody's downgraded it to just a notch above junk last year.

"Notwithstanding Qantas' strong financial flexibility, we expect the cyclical and structural headwinds facing the airline to persist, which could hinder a timely recovery of its financial risk profile and credit metrics," S&P said in a statement.

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