Negative rating for Qantas

[Wirraway]

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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[Pass-A-Frozo]

Interesting.. employees resisting pay and conditions changes, whilst their credit rating is down graded:

BBB
An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions

Probably explains the poor stock price outlook.

[Sunfish]

Well of course if there was some level of trust and cooperation between all Qantas employees, including Jetstar and its management, and its Board, it might be possible to make some cost saving changes in a relatively painless manner.

Pay freezes, profit sharing schemes, stock options immediately come to mind. Then of course there are the mindless wastes of money that certain posters have talked about as well as highly unimaginitive marketing and human resources policies.

However with a rigid management structure, and a Board that doesn't appear to be filled with the greatest talent on the planet, its probably no surprise that "they" have adopted a "divide and rule" strategy.

However, I don't think thats going to work either, perversely because Dixon hasn't thumped the Qantas workforce hard enough - yet. Incremental cost reductions don't work in such situations, you get too much resistance.

The old joke "if it aint broke don't fix it" has another part to it "If you need to fix it, break it first and then fix it." There is an organisational behaviour concept about how management and corporate culture goes through a "freeze, unfreeze, then freeze" cycle.

The structure of a company is generally frozen, change in this state is difficult. If the organisation gets a big enough shock, its culture "unfreezes" and change is not only regarded as possible, but desirable. After a while (maybe a year) the culture freezes again.

Best example I know was Jeff Kennets whirlwind reorganising of Victoria's Government when he was elected. The state was broke and in shock. Nobody offered more than token resistance to his changes, asset sales, sackings whatever. Of course he forgot about the "refreezing" thing.

My guess is that Qantas will continue its long slow, painful descent until at some stage sufficient shock is applied to allow its entire hidebound structure to be shaken up.

[newsensation]

Obviously time to sack another 1000 employees, not from the top mind you just the workers, those lazy no good scum....

[Lagrange]

Quote :
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."


I am sorry but the CFO is not being honest.

He has repeatedly stated the it would be disasterous for Qantas if they lost the BBB+?A2 rating. Disasterous

On one of the Threads someone quoted Rod Eddington "the purchase of Ansett by AirNZ will be good for the airline and staff". This statement by Peter Gregg has the same ring......"believe me I am telling porkies"

Isn't it an offence to mislead the Stock Exchange?

[Eagleman]

I agree with you lagrange. The CFO is telling porkies. With the share price @ 3.18 he must be sh1tting himself. Remember a lot of the EXCO bonoses are paid in shares. That means personal hurt, but hang on...the staff...bugger them

Geoff write another letter, tell the scum they have to work harder, go with out, we have lost a fortune with the drop in share price. It is their fault, they work here..

I fear Qantas is at the top of the big slippery dip :sad:

[lowerlobe]

Quote "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."

How about Instead of or at the very least in conjuction with the cost cuttingmeasures we put the ticket price up...There comes a point when there will be no more staff to retrench when costs rise and the employees they are getting rid of are the ones that directly deal with our passengers.

QF staff profile is getting more and more like an inverted pyramid everyday.If the cost of steel increases then the cost of cars and other products using steel also rises.

If the cost of fuel increases then the cost of the ticket has to rise as well not the unemployment rate.No wonder the credit agencies are lowering QF's credit rating...

[Hugh Gorgen]

The price of fuel goes up; price of fuel at the bowser goes up ;cost of supermarket goods rise due to increase in transport cost, etc
The cost is passed onto the consumer.

I fail to understand why the airline industry (as a whole) is not passing on this rising fuel cost to the travelling public. ??
:confused:

[Keg]

Because then they wouldn't have an excuse to target the pay and conditions of all the workers!

Interesting that BA and a few others can increase pax numbers and more importantly yield at this time but QF keep screaming poor.

[Pass-A-Frozo]

Raising the ticket price can actually result in lowering your profit. It's not that simple.

Costs are not necessarily passed on to the consumer. It depends on the relationship between price elasticity of demand and price elasticity of supply if my memory serves me correctly. The least flexible party bares the expense or the majority of it.

I wouldn't be joking about job losses either. :eek:

[rescue 1]

More cuts have been planned and changes/transfer of flying has already been determined.

Watch for announcement...wish I was wrong.

[tobzalp]

LOL. BBB. best I go and buy some .com stuff as well.

[captain_cranky]

Definitely time to appoint Bruce Byron to the board of QANTAS.:D