Qantas faces downgrade after profit warning

Qantas Airways, one of just two airlines globally to be judged investment-grade by more than one ratings company, risks losing that status as losses mount amid a market share battle with Virgin Australia.

Moody’s Investors Service yesterday said it may reduce its Baa3 rating on Qantas after Australia’s largest carrier forecast a record first-half loss and announced 1,000 job cuts.

Qantas is looking to save two billion Australian dollars in costs in three years as it contends with falling ticket prices and higher fuel costs.

A rating downgrade could boost expenses for the carrier, which paid A$265 million in interest last year after expanding domestic capacity to fend off competition from second-ranked Virgin.

Rising fuel costs and a drop in domestic ticket prices will drive losses of between A$250 million and A$300 million before tax and one-time items in the six months ending December 30th next, Qantas said in a regulatory statement today.

A first-half loss may leave Qantas shareholders sitting on aggregate net losses over the five years since Irish chief executive Alan Joyce took over, compared with A$3.31 billion of profits posted in the previous five years.

Qantas has called for support from Australia's government as Virgin is raising funds through a share sale that could bolster the stakes of its foreign backers, including Etihad Airways and Singapore Airlines.

“You have three state-owned enterprises pumping money in to a loss-making business,” Joyce said on a call with journalists. “Market choice should dictate who the winners and losers are; not government intervention from state-owned airlines.”

Qantas will review capital spending that’s already been cut 37 per cent below the company’s original plans and look for “structural changes that could potentially unlock sources of capital and value”, the carrier said.

"The model's broken and they keep on doggedly doing the same thing," Neil Hansford, chairman of consultants Strategic Aviation Solutions, said. "It's about time Joyce stopped complaining and actually got on with running the business."

Mr Joyce and Qantas’s board will have their pay cut and executives won’t take a bonus for the current financial year, the company said.

Its shares plunged 11 per cent – the most in 18 months – to A$1.07 at the close of trade in Sydney. – Bloomberg