Feb. 6 (Bloomberg) -- Qantas Airways Ltd., Australia’s biggest carrier, said it may lose its investment-grade credit rating and be forced to sell its Jetstar unit if Australia changes laws affecting the company.
The airline must “adapt or die” in the face of global economic weakness, Alan Joyce, chief executive officer, told the Australian Senate’s Rural Affairs and Transportation committee. Qantas faces an “unsustainable” situation as capital spending to renew its fleet was running ahead of operating cash flows, he said in Canberra today.
Qantas was downgraded one level by Moody’s Investors Services to Baa3, the lowest investment grade, on Jan. 31 because of concerns about rising competition and fuel prices. The airline, trying to turn around its international operations, is being challenged by Emirates Airlines and other Middle Eastern carriers on European routes.
“Carriers in the region have been facing challenging conditions from high fuel prices, fierce international competition and ongoing capital requirements,” said Ian Lewis, an analyst at Moody’s in Sydney. “As a result, a number of them have increased their leverage in recent years, and that’s in turn had an effect on their ratings.”
Amending the Act
Formerly state-owned, the company was privatized in 1993 under the Qantas Sale Act, intended to preserve the airline’s status as an Australian carrier. Joyce was testifying before members of parliament who are seeking to amend the act to stipulate the majority of the carrier’s maintenance facilities must be in Australia rather than overseas.
Forcing the airline to move parts of the maintenance facilities onshore would weaken its position, Joyce said.
Qantas rose 0.6 percent to close at A$1.62 in Sydney trading. The benchmark S&P/ASX 200 index was up 1.1 percent. The stock lost 43 percent last year.
“It Qantas cannot get its operating cash flows up to A$2.5 billion, it will go into a vicious circle of losing its investment grade credit rating, of not being able to fund that fleet replacement,” Joyce told the committee.
The changes “would strangle our capacity to run our business,” he said, forcing it to cut jobs and routes and consider selling off Jetstar, which Joyce founded in 2003 as a division of Qantas.
“Those of us running Qantas would have to face a choice: allow Jetstar to fail within the confines of the Qantas Sale Act, or sell it to allow it to succeed outside it,” he said.
Qantas’s operating cash flow of A$1.7 billion in the year through last June fell A$700 million short of its A$2.4 billion capital spending in the period. Fuel costs in the six months through December rose 26 percent from a year earlier, prompting the airline to levy surcharges of as much A$350 each way on the carrier’s longest routes, Qantas said Feb. 2.
Qantas is one of two airlines worldwide that are rated investment grade by two of the three major credit-rating companies, according to data compiled by Bloomberg. The other is Dallas-based Southwest Airlines Co.
The northern cities of Darwin and Cairns in particular would suffer if changes to the law were passed forcing Qantas to bring some aircraft operating costs on-shore, Joyce said.
“The proposed amendments would quite simply force the Qantas Group to withdraw from services connecting Darwin and Cairns to the tourism and trade markets of Asia and Europe,” he said. “The impact on regional tourism and development would be immediate and negative.”
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