Qantas’s credit rating has been downgraded to junk status by Moody’s – the second ratings agency to do so in a month.
Moody’s cited a sharp deterioration in the airline’s core domestic business, due to aggressive competition from rival Virgin Australia.
“As such, we expect that Qantas’ business risk and financial leverage will remain at elevated levels and inconsistent with an investment grade rating.”, said Ian Lewis a Moody’s senior vice president.
Standard & Poor’s also downgraded Qantas’s rating to junk status last month a day after the airline announced the axing of 1,000 staff and warned that it could post a $300 million first half loss.
Moody’s has downgraded Qantas’s rating to a below investment grade Ba2 from Baa3 with a negative outlook, casting doubt on its ability to repay its debt.
A downgrade brings a raft of negative consequences for the cost of doing business and attracting investors.
Some investors do not buy stocks in companies rated below investment grade, the airline faces higher interest bills on its debt and aircraft leasing costs and the transfer of ticket sales revenue from credit card companies will be delayed.
Mr Lewis said the downgrade reflected Moody’s opinion about Qantas’s ability to honour its financial obligations including $US737 million ($A829.39 million) in debt securities, or improve its earnings.
He cited Virgin’s emergence as causing negative structural changes for Qantas.
“Qantas’s domestic business will remain challenged as Virgin’s actions,” he said.
A stable rating outlook would be restored if Qantas returned the profitability of its international and domestic operations to levels that would sustain appropriate levels of debt.
Qantas released a response in which chief financial officer Gareth Evans said the downgrade was not unexpected and underlined the importance of taking decisive action to address an extremely difficult operating environment.
The airline regards the playing field in aviation as unfair given majority foreign-owned Virgin attracts high levels of foreign investment from other airlines but Qantas is restricted from doing do.
The airline would update the market on its $2 billion cost cutting program and capital expenditure and structural review next month, he said.
Qantas shares were a quarter of one cent down at $1.0975 at 1100 AEDT.