Moody's cuts Qantas rating

Ratings agency Moody's has downgraded Qantas Airways Ltd's senior unsecured rating to junk, following a review into the airline's announcement late last year that it was expecting an underlying loss before tax of $250 million to $300 million for the six months December 31, 2013.

Moody's cut Qantas' rating to Ba2, or junk status, from Baa3. The airline's short-term rating was also downgraded to NP (Not Prime) from P-3.

The agency said the outlook for the ratings is negative.

Standard & Poor's also downgraded Qantas's rating to junk status last month a day after the airline's announcement.

Moody's Senior Vice President Ian Lewis said the downgrade reflected a worse than expected impact on Qantas' credit profile from a marked sharp deterioration in the company's core domestic business, which has been a key supporting factor of its previous investment grade rating.

"As a consequence, we expect these conditions to exacerbate an already high financial leverage," he said.

"Furthermore, the downgrade of the rating to Ba2 incorporates notching, given the material secured debt in Qantas' capital structure."

Mr Lewis said the cause of the deterioration in the operating profile is largely due to the aggressive competitive actions by Qantas' key domestic competitor, Virgin Australia Holdings Ltd.

"These actions, which include capacity additions, have shifted the market dynamic against Qantas in a structural way," he said.

"As such, we expect that Qantas' business risk and financial leverage will remain at elevated levels and inconsistent with an investment grade rating."

Downgrade not unexpected: Qantas

Responding to the downgrade, the airline's chief financial officer Gareth Evans said the downgrade was not unexpected.

Mr Evans also emphasised the importance of Qantas taking decisive action to address an extremely difficult operating environment.

"Qantas is a strong business with a track record for disciplined financial management," Mr Evans said.

"We will make the necessary decisions now – however tough they might be – to ensure we remain strong and disciplined in the years ahead."

“In addition to cost-cutting, substantial reductions to our planned capital expenditure pipeline will be vital to ensure a return to positive free cash flow in FY15 and beyond."

But Mr Evans warned earnings conditions had deteriorated rapidly in recent months and the national carrier was currently facing some of the most challenging circumstances in its history, including what it calls "an uneven playing field in Australian aviation".

"We continue to talk to the Australian Government about options for resolving this situation," he said.