Qantas Slumps to Record Low on 91% Profit Drop Forecast

Qantas Cancels Order for Dreamliner, Adds Short-Haul Aircraft
Qantas Airways Ltd. canceled one of the 15 orders it has for Boeing Co.’s 787 aircraft and added eight short-haul planes to its domestic fleet. Photographer: Sergio Dionisio/Bloomberg

Qantas Airways Ltd., Australia’s largest carrier, plunged to a record low in Sydney trading after saying annual profit may fall as much as 91 percent because of losses on overseas routes and higher fuel costs.

The carrier, which listed in 1995, tumbled a record 19 percent at the close and its credit-default swaps rose to an eight-month high. The stock slump cut the airline’s market value to A$2.6 billion ($2.5 billion). Shareholders rejected an A$11 billion takeover offer for the Sydney-based company in 2007.

Underlying profit before tax may be A$50 million to A$100 million in the year ending June because of a A$700 million increase in fuel bills and a doubling of losses at Qantas International, the airline said today. The carrier could lose its investment-grade credit rating at Standard & Poor’s following the profit warning, said National Australia Bank Ltd.

“It’s bleeding,” said Peter Esho, chief market strategist at City Index Ltd. in Sydney, a provider of equities, bonds and currency trading. “It’s very disappointing, especially the extent of the decline for the international business.”

The group will make a net loss for the full year, Chief Executive Officer Alan Joyce said on a conference call, without providing a specific forecast. Qantas hasn’t made a full-year loss since listing, according to data compiled by Bloomberg.

The carrier has tumbled 41 percent in the past year. That’s the worst performance among the 16 stocks in the Bloomberg Asia Pacific Airlines Index, which has dropped 29 percent.

Qantas closed at A$1.155 in Sydney. Australia’s benchmark S&P/ASX 200 Index rose 1.5 percent, the most since Jan. 17.

Virgin, Etihad

Virgin Australia Holdings Ltd., the nation’s No. 2 carrier, also today said that Abu Dhabi-based Etihad Airways PJSC had bought a 4 percent stake, cementing ties between the companies. Etihad would like to raise the stake to 10 percent, if regulators approve, its CEO James Hogan said by phone.

Competition from Etihad, Emirates Airlines and Qatar Airways Ltd. has contributed to losses at Qantas International as the Middle East-based airlines are able to offer a wider range of one-stop flights to Europe. Virgin has also expanded its international reach by cooperating with Etihad, Singapore Airlines Ltd., Delta Air Lines Inc., and part-owner Air New Zealand Ltd.

Second-Half Loss

Qantas expects an underlying group loss of at least A$177 million in the six months ended June, based on today’s forecast. First-half underlying earnings were A$277 million. Last fiscal year, the carrier posted annual earnings of A$552 million.

“The deterioration in international and domestic has only started to come through in recent weeks,” Joyce said. A demand slowdown has also contributed to Cathay Pacific Airways Ltd. forecasting “disappointing” first-half earnings and Singapore Air posting a quarterly loss.

At Qantas International, losses will jump to more than A$450 million from A$216 million last fiscal year, the carrier said in a statement. The unit will also suffer a A$100 million cost from a labor dispute, it said. Joyce has cut loss-making flights and divided the operations into a separate unit with dedicated management in a bid to return it to profit by 2014.

In the domestic market, Qantas and budget arm Jetstar will boost profit this fiscal year to a combined total of more than A$600 million, according to the statement.

“Outside Possibility”

Qantas five-year credit default swaps jumped 17 basis points to 368 basis points at 4:16 p.m., according to Westpac Banking Corp. That’s set for the highest close since Oct. 5, according to data provider CMA. S&P downgrading the carrier from BBB is likely and a two-grade cut to a non-investment level is an “outside possibility,” National Australia Bank said in a research note.

“It’s difficult to see how S&P would not downgrade Qantas at least one notch,” the bank said. The carrier is the highest-rated by S&P, according to data compiled by Bloomberg. Southwest Airlines Co. and Deutsche Lufthansa AG, both ranked BBB-, are the only other airlines rated investment grades the ratings company.

S&P placed a ‘negative’ outlook on Qantas’s credit rating in October, days after Joyce grounded the carrier’s main unit for about 48 hours in a showdown with unions.

“The profit numbers are potentially weaker than what we thought,” said Anthony Flintoff, S&P’s Melbourne-based managing director of corporate ratings. He declined to comment specifically on whether S&P would cut its rating on the carrier.

Moody’s Investors Service said the outlook for its Baa3 rating on Qantas was stable and that the carrier should be able to maintain its financial profile at that level for at least the next year. The ratings company cut Qantas to Baa3, its lowest investment grade, in January, according to a statement.

Maintenance Closure

Qantas has slowed the introduction of new planes to pare costs, accelerated the retirement of older aircraft and announced plans to shut a heavy-maintenance base.

Fuel costs will probably rise to a record A$4.4 billion in the current fiscal year, the airline said. Jet fuel has averaged $127.50 a barrel in Singapore trading since June 30, 19 percent higher than a year earlier.

“The biggest issue for this airline at the moment is the fuel bill,” Simon Fitzgerald, an analyst at Moelis & Co., said by phone from Sydney. He rates the stock a buy.

Macquarie Bank Ltd. and TPG Inc. offered to buy Qantas for A$11 billion in 2007 in what would have then been the largest airline takeover. The bid lapsed after less than 50 percent of investors accepted an offer of A$5.45 per share.

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