Qantas Credit Downgrade Sparks Call For Government Action

 - January 10, 2014, 1:44 PM
Qantas has again called for political reform in response to the latest downgrading of its credit rating. (Photo: Airbus)

The January 9 decision by Moody’s Investor Service to downgrade the credit rating of Qantas Airways to Ba2 (from Baa3) has prompted fresh calls for the Australian government to provide emergency debt guarantees for the country’s flag carrier. The move, which followed Standard & Poor’s downgrading of Qantas in December and confirms its debt rating as “junk” status, has also spurred new demands for the government to remove restrictions that currently cap foreign investment in the airline at no more than 49 percent of its equity.

Qantas has repeatedly argued that rival Virgin Australia has benefitted from financial support from its foreign shareholders while, at the same time, enjoying domestic market access from its official designation as an Australian carrier. The proposed change would require an amendment to the Qantas Sales Act, which opposition politicians from Australia’s Labor and Green parties have blocked in the past.

“While the removal of the Qantas Sales Act has some political challenges, there are other more immediate measures that can address the fact that Qantas operates with legislative limitations which Virgin does not,” commented an airline spokesman. “We’re in open dialogue with the government about specific measures to level the playing field.” Australia’s acting treasurer Mathias Cormann told The Sydney Morning Herald that the government would help Qantas by abandoning the country’s carbon tax, cutting bureaucracy and strengthening the economy. But he declined to indicate whether it would also provide for emergency debt guarantees. If granted, the guarantees would not cover Qantas’s existing debt (estimated by Moody’s at $737 million) but would serve as a standby facility in case its lack of credit compromises its ability to operate.

Qantas chief financial officer Gareth Evans said the Moody’s downgrade was “not unexpected and underlined the importance of taking decisive action to address an extremely difficult operating environment.” Last year, the airline announced plans to cut around 1,000 jobs and institute pay freezes in a bid to reduce costs. Moody’s said it initiated the downgrade after reviewing Qantas’s finances after the Dec. 5, 2013 announcement that it is expecting an underlying loss before tax of between A$250 and A$300 million ($282 million to $341 million) for the six-month period that ended on December 31.