Qantas has cleared another hurdle in its massive turnaround — Moody’s just lifted its credit rating.
Moody’s Investors Service lifted Qantas to Baa2 with a stable outlook from Baa3, a rating it gave the airline in January 2014 because of a “sharp deterioration” in its domestic business.
In the same year, the national airline reported a $2.8 billion loss.
Last year, Qantas posted a record full year underlying profit of $1.53 billion, a 57% improvement, completing one of Australia’s biggest corporate turnarounds.
The result was on top of an ongoing transformation program to strip out $2 billion in costs, lower fuel prices and an end to a domestic seat price war with Virgin Australia.
Moody’s today cited Qantas’s strong domestic position, its fuel hedging and the frequent flyer loyalty program for the better score and outlook score.
“While we expect Qantas’ credit metrics to remain fairly stable for the next 12-18 months, the upgrade reflects our greater focus on qualitative factors,” says Ian Chitterer, a Moody’s Vice President.
“This includes the unique traits of the Australian continent and airline market, Qantas group’s strong domestic position, and diversification provided by the loyalty program.”
Moody’s says the Australian market dynamics are relatively unique, with significant distances between large cities and no viable substitute modes of transport.
Qantas and Virgin are the only two competitors in the market, and both have a full service and low-cost airline offering, reducing the probability of a new domestic competitor.
Moody’s says Qantas has a domestic capacity share of 62% and domestic EBIT (earnings before interest and taxes) market share of 86%.
“With its greater scale, far higher margins and a significantly stronger balance sheet, Qantas is in a very strong competitive position,” says Chitterer.
And Qantas margins are well ahead of its main competitor, Virgin Australia, as this chart shows:
The Qantas frequent flyer business in 2016 accounted for 20% of group EBIT. The loyalty segment’s EBIT has grown at double digits for the past eight years and is forecast to grow at 7% to 10% for the next five years.
And Moody’s says the fuel-hedging strategy reduces cash-flow volatility and provides the business time to adjust to fuel price spikes.
Business Insider Emails & Alerts
Site highlights each day to your inbox.