Standard & Poor’s decision to downgrade Qantas’ credit rating to junk status this morning comes with a grim outline of the various pressures facing the airline. You can read it in full here.
Qantas said in response a short time ago that the downgrade was “not unexpected”.
Critically, S&P expects the business to start seeing a turnaround in 2015. From the note:
However, we expect a slow recovery of Qantas’ key credit metrics from fiscal 2015 onward, due to the benefits of Qantas’ cost-cutting initiatives, capital expenditure deferral, as well as our expectation that a less intense competitive environment will lead to improvement in yields.
Here’s the problem. Apart from it having extremely costly operating base, much of Qantas’ deteriorating domestic performance has been due to the increasing competition from Virgin. The evolution into the current full-blown crisis over the past week was precipitated by Virgin announcing a capital raising that will allow it to continue the capacity war.
Where’s the evidence that the competitive environment will have improved for Qantas by that point? It could be even worse.
Qantas is going to shed 1000 jobs, is embarking on a cost-cutting drive and has even been asking staff for ideas on ways to save the airline money but this idea of a “slow recovery” is cold comfort for Qantas in the current circumstances.
Which is why the key question still remaining is this: what, if anything, is the federal government going to do?