Updated: 12/06/2013 14:15 | By Agence France-Presse

Qantas downgraded to 'junk' status by ratings agency S&P

Embattled Australian carrier Qantas' credit rating was downgraded by Standard & Poor's to "junk" status Friday after the airline issued a shock profit warning and slashed jobs.


Qantas downgraded to 'junk' status by ratings agency S&P

This file photo taken on April 22, 2013 shows the tail of a Qantas Airline Airbus A380 at Sydney Airport

Qantas on Thursday flagged a half-year loss of up to Aus$300 million (US$271 million) and said it would axe 1,000 jobs as it struggles under the weight of record fuel costs and fierce competition from subsidised rivals.

In response, S&P cut the airline's rating from BBB-, the lowest investment grade, to BB+ and placed it on a creditwatch with negative implications. Qantas shares closed 3.74 percent lower at Aus$1.03, having lost more than 10 percent on Thursday.

The rating puts Qantas in what is known as "junk" status among professional investors, increasing the cost of financing for the carrier and restricting access for investors that do not put their money in lower rated companies.

"The downgrades reflect our view that intense competition in the airline industry has weakened Qantas' business risk profile to 'fair' from 'satisfactory', and financial risk profile to 'significant' from 'intermediate'," S&P said in a statement.

"We don't expect Qantas to recover to a credit profile commensurate with a 'BBB-' rating in the near term."

The move comes after another ratings agency, Moody's, on Thursday put the airline's investment-grade Baa rating on review for a potential downgrade, saying the forecast conditions were "outside the rating expectation".

Qantas chief executive Alan Joyce on Thursday said the challenges facing the airline were "immense".

"Since the global financial crisis, Qantas has confronted a fiercely difficult operating environment -- including the strong Australian dollar and record jet fuel costs, which have exacerbated Qantas' high cost base," he said.

"The Australian international market is the toughest anywhere in the world."

As well as axing 1,000 jobs, Joyce said he would take a 38 percent pay cut while the airline would conduct a review of spending with top suppliers and put in place a salary and bonus freeze.

Qantas chief financial officer Gareth Evans said the downgrade was not unexpected.

"It highlights the unprecedented pressures that the Qantas Group is facing from several external forces but particularly from an uneven playing field in the Australian aviation market," he said.

The airline claims domestic rival Virgin Australia, which is majority-owned by state-backed Singapore Airlines, Air New Zealand and Etihad, is waging a campaign to weaken it in the lucrative domestic market with cheap seats underwritten by foreign cash injections.

Joyce has been lobbying the government for the easing of restrictions that limit foreign ownership in the national carrier to 49 percent, or state intervention to shore up Qantas.

But Prime Minister Tony Abbott said government help was unlikely.

"If we subsidise Qantas, why not subsidise everyone?" he told commercial radio.

"If we subsidise everyone, that's just a bottomless pit into which we will descend and if we offer a guarantee to Qantas then why not offer a guarantee to everyone?"

Despite the downgrade, Evans said Qantas retained a strong financial position, including a large cash balance and a significant asset base.

"The cost cutting and structural review we announced yesterday is aimed at leveraging these strengths to ensure the Qantas Group continues to deliver for its shareholders and customers," he said.

"It remains business as usual across the Qantas Group."

An update on the structural review is expected in February, prompting speculation a sell-off of its Jetstar assets in Asia could be on the cards.

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