Qantas pays price for grounding

Qantas Airways risks reversing improvements in its perceived creditworthiness after grounding its fleet amid a labour dispute.

Credit-default swaps tied to Qantas jumped 14 basis points to 269 yesterday, the biggest increase in almost a month, according to data provider CMA.

The contracts had dropped 50 basis points last month as of October 28 and were declining at a faster pace than global peers, with an index of airlines worldwide falling to 604 from 621 on September 30.

"The uncertainty over longer-term reputational damage this has created for Qantas is heightened," said Vivek Prabhu, an asset manager at Perpetual in Sydney. They face "increased competition from international airlines and domestically from Virgin Australia, who are chasing the more lucrative business traveller".

Qantas' debt rating may be lowered by Moody's Investors Service after the airline stranded about 80,000 people by grounding 108 planes on October 29. The carrier, whose net income slumped 83 per cent in the six months to June 30 after natural disasters reduced travel, is among Australian companies hampered by the developed world's highest interest rates and a record high currency.

"The industrial relations issues and significant grounding of the Qantas mainline fleet are likely to also have longer term implications for Qantas' brand and reputation," said Ian Lewis, Moody's lead analyst on the airline.

The potential for "incremental earnings loss and impact on Qantas forward bookings are likely to exert additional pressure on the ratings", he said.

Qantas is rated Baa2 by Moody's, the second-lowest investment grade.

It has an equivalent BBB at Standard & Poor's, which changed its outlook on the company yesterday to "negative."

Qantas' US dollar-denominated bonds lost 0.04 per cent last month, Bank of America Merrill Lynch data shows.

Qantas shares rose 1.8c yesterday to $1.63 on the ASX200.

- Bloomberg

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_a4 at 29 Jul 2014 22:06:06 Processing Time: 258ms