Negative rating for Qantas
Thurs "The Australian"
Negative rating for Qantas
Richard Gluyas
June 08, 2006
FUEL prices and the unwinding of hedge positions have taken a toll on Qantas, with credit rating agency Standard & Poor's switching its outlook for the airline to negative.
While falling short of a downgrade, S&P's action anticipates a possible one-notch demotion from BBB-plus in the next year to 18 months if Qantas is unable to achieve targeted cost reductions. Such a move would put Qantas just two notches above non-investment grade, or "junk" status.
The news is likely to put pressure on Qantas shares this morning. Yesterday they closed steady at $3.18.
Qantas chief financial officer Peter Gregg said yesterday that he did not expect S&P's revised outlook to have any immediate effect on borrowing costs.
"This has come off the back of the higher fuel price," Mr Gregg said. "We have already signalled to the market that fuel costs would have an impact on our profitability and that we'd need to undertake a more aggressive program to accommodate the higher cost."
Qantas has warned that its fuel bill will increase by about $1 billion this financial year, and possibly more in 2007, because of the roll-off of fuel hedges enjoyed in the 2005 financial year.
S&P analyst Jeanette Ward said Qantas's finances were expected to remain under pressure next financial year from fuel costs and restructuring charges, despite "considerable inroads made on the cost front".
These factors were expected to more than offset the airline's "highly defendable" domestic market share of 65 to 70 per cent, as well as its satisfactory yields and further cost reduction initiatives.
"Although one of the best-hedged airlines globally for fuel, Qantas's earnings are particularly sensitive to the current high fuel prices because of the roll-off of its very favourable fuel hedges in fiscal 2005," Ms Ward said. Qantas's credit position, even with the airline's strong liquidity, was vulnerable to any faltering of its growth or cost reduction moves.
It was important for Qantas to restore its credit benchmarks to BBB-plus standards before a capital investment program in new aircraft ramped up in the 2009 financial year, she said.
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