Qantas' credit rating drops to 'junk' status

A Qantas aeroplane landing at Wellington airport photo/NZ Herald

Airline Qantas' credit rating has been reduced to junk status in the wake of Thursday's announcement of mass job losses and an expected first half loss of up A$300 million.

Ratings agency Standard and Poor's has lowered its credit and debt rating for Qantas to BB+, which is considered below investment grade, and means the group is at junk status.

That will cut the company's shares off from institutional investors that don't buy junk-rated stocks and also increase its borrowing and general finance costs.

The airline on Thursday announced it would cut 1,000 jobs as increased competition led by Virgin Australia hurts Qantas.

S&P has placed Qantas on negative watch while fellow ratings agency Moody's has put its Baa3 credit rating for Qantas on review for downgrade.

Qantas shares fell sharply after coming out of a trading halt and were 3.5 cents, or 3.3 per cent, weaker at A$1.035 at 3.45 (NZT). The fall follows Thursday's 11.2 per cent plunge.

Analysts have said that for Qantas to recover in the short term it needs to make substantial asset sales, a capital raising or get government support, something chief Alan Joyce is believed to want.

Prime Minister Tony Abbott on Friday all but ruled that out but, hinting that there could be a relaxing of the foreign ownership laws that limit foreign investment in the airline to 49 per cent or less.

S&P said, in a statement, it did not expect Qantas' rating to improve soon and that the downgrades reflected a view that intense competition and the cyclical nature of the airline industry had weakened the company's business risk profile and increased its financial risk profile.

"A structural shift in the domestic competitive landscape has weakened Qantas' business risk profile," it said.

S&P said it recognised that Qantas has strong financial flexibility and a good track record of responding to earnings pressures through cost cutting and other measures.

"However, we believe, in the current circumstances, the benefits would take time to realise and the positive impact would not be sufficient to outweigh the pressure on Qantas' stand-alone credit profile," it said.

Qantas defended its financial position as strong but did complain about an uneven playing field in the Australian aviation market.

Virgin is not restricted on foreign investment and Qantas has called on the federal government to block Virgin's planned $350 million equity raising, which will see its three major shareholders - Air New Zealand, Etihad and Singapore Airlines - increase their ownership stake.

"We are in continuing discussions with the Australian government regarding the uneven playing field in the local aviation sector, which has distorted the fundamentals of the market," said chief financial officer Gareth Evans.

Qantas says it is looking to find $2 billion in savings over the next three years.

It is also considering possibly selling off part of its profitable frequent flyer division or no-frills unit Jetstar as it tries to unlock capital and find a path back to profitability.