Perhaps the most remarkable aspect of Moody’s downgrading of Qantas is that it had – and still has – an investment-grade credit rating to begin with.
That’s despite the endlessly dysfunctional and stressed state of the global aviation industry, the traumatic confrontation with three of its unions that cost it almost $200 million in the December half and soaring fuel costs that have stripped a further estimated $450 million from its earnings in that six months.
Qantas has been fiercely protective of its investment-grade status and can be expected to do whatever it takes to hang onto it, even if that means further deferrals of a badly-needed fleet renewal program whose timetable has already been significantly stretched out.
Alan Joyce has demonstrated – not only in the stoush with the unions that led to the grounding of the entire Qantas fleet but in the quite radical decisions it made last year to re-make its loss-making international network to try to reduce the flow of red ink – that Qantas can’t take its privileged position and its remarkable (for its industry) record of overall profitability for granted.
It is that history – built on strong and flexible management, Qantas’ dominance of the domestic market and the diversity of its cash flows – that led to Qantas being one of only two airlines in the world with investment grade ratings from both of the major credit ratings agencies. Southwest Airlines is the other airline not owned or supported by government with an investment grade rating from either of the major agencies.
Despite the traumas of the December half, Qantas still expects to generate an underlying pre-tax profit of between $140 million and $190 million (or at least it did late last year), which would be a very creditable effort given not only the industrial disputes and fuel cost increases but the economic issues in Europe that have impacted global aviation generally.
Its positive cash flows and $3 billion-plus hoard of cash should enable it to fund its near-term aircraft deliveries.
While the strength of its frequent flyer program in particular, the continued profitable growth of Jetstar and its freight business provide some diversity and resilience to its cash flows, the resurgence and repositioning of Virgin Australia under former senior Qantas executive John Borghetti and the almost daily announcements of new entrants or increased services to Australia by foreign competitors are, however, steadily ratcheting up the pressure on Qantas’ aviation businesses.
The boldest aspect of the new strategy for the international business that Joyce outlined last year – a new premium airline based in Asia – has yet to materialise, with Qantas still talking to Malaysia and Singapore about the location of its Asian hub and, in Malaysia, a relationship with Malaysia Airlines and its major shareholder, Air Asia.
While there is a degree of impatience in the market about the lack of apparent progress in those discussions, Qantas appears to be hastening slowly, perhaps because of concerns about the capital requirements that the venture might add during a period of global economic and financial uncertainty and risk. Joyce does, however, appear committed to that strategy.
Moody’s, in downgrading Qantas, was concerned about the external environment created by the economic instability emanating from Europe, the fleet renewal program, fuel costs and the intensity of the competition it is experiencing. It would be even more concerned if Borghetti was able to prise loose significant chunks of Qantas’ dominant share of premium domestic travel.
With the industrial disputes almost certainly behind it, a stable if subdued domestic economy, the truncation of its international network, the flexibility provided by the dual brand strategy and the continuing focus on cost reduction, Qantas remains for the moment – as its retention of the investment grade rating suggests – a first-rate performer in a third-rate industry.