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.

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. 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. 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 in Sydney yesterday.

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