Qantas has started 2014 facing even tougher times as the second of the world's leading credit rating agencies downgraded the beleaguered airline to 'junk status'.
Moody's today joined Standard & Poor’s in knocking Qantas from medium-risk investment grade to the high-risk junk category, placing Qantas in a precarious financial position.
Moody’s senior vice-president Ian Lewis parked the cause for his agency's downgrade squarely at the doorstep of Virgin Australia as the challenger continued to eat into Qantas' share of the domestic market "far more extensively and rapidly than our previous expectations."
"The cause of the deterioration in the operating profile is largely due to the aggressive competitive actions by Qantas' key domestic competitor, Virgin Australia" Lewis explained.
"Qantas’ domestic business will remain challenged as Virgin’s actions, and Qantas' response to maintain market share, continue to pressure yield."
Also read: Is Qantas still the world's safest airline?
The high cost of 'junk'
The downgrade could see the airline hit with higher interest rates on future borrowings, along with higher leasing and exchange rate hedging fees, due to it being classified as a high risk.
Qantas could also see hundreds of millions of dollars in airfare purchases wiped from its cashflow.
Credit card companies have to date allowed Qantas to include money paid for tickets as part of its $2.8 billion cash balance before flights were taken.
However, airlines in the high-risk category – which includes almost every airline in the world, including Virgin Australia – must put these forward funds into escrow until the flight takes off.
This would compound the pressure on Qantas' now-declared 'negative cashflow' – in plain English, Qantas is spending more than it’s earning.
Qantas facing a record loss
Qantas is expected to face a record loss this financial year, with analysts forecasting the beleaguered airline will post a 'loss before tax' of $868 million.
In an investor note issued late last year Merrill Lynch dramatically lowered its projection for Qantas' 2013-2014 financial year from a previously pegged loss of $150 million, in response to Qantas' flagging a loss as high as $300 million in the six months from July to December 2013.
Like Moody's, Merrill Lynch analyst Matthew Spence singled out pressure on Qantas' domestic operations as coming from Virgin Australia "aggressively chasing corporate market share, continued excess capacity, and weak underlying demand."
Conditions are not expected to improve in the first half this year, which is historically the weaker portion of the financial year, with oil prices, foreign exchange rates, passenger demand and increased capacity cited as "key swing factors" in pushing Qantas further into the red.
Qantas reported a $244 million 'loss after tax' in the 2011-12 financial year – its first since being fully privatised 18 years ago – although twelve months later it managed to rebound to a thin post-tax profit of $6 million.
The airline could offset its high expected losses through partial sales of profitable business units including Jetstar Australia and the Qantas Frequent Flyer scheme.
Another option is to sell its terminals at Sydney, Melbourne, Brisbane and Perth airports back to the airport authorities.
Although the leases on those sites have many years left to run, Morgan Stanley analyst Julia Weng recently estimated "the collective value of these terminals could be more than A$500 million."
Qantas can also count $30 million from the already-announced March 2014 closure of the airline's Avalon maintenance base in its favour.
One analyst has even suggested that Qantas should hang onto its lucrative frequent flyer scheme but sell as many as 42 billion (yes, billion) frequent flyer points for a $500 million cash windfall.
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