Standard & Poor's has upgraded Qantas to stable from negative

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Standard & Poor’s has revised the rating outlook for Qantas to stable from negative.

The ratings agency says conditions have improved for the airline but warns that underlying demand is still weak.

Qantas, in the middle of a $2 billion restructure, has recently benefited from lower oil prices flowing through to better fuel costs, a weakening Australian dollar and an easing in the price war with Virgin.

The airline share price has been on a tear, more than doubling over 12 months. Today the shares are trading at $2.63, up 1.5%.

“The outlook revision to stable reflects our view of the meaningful improvement in Qantas’ operating environment, which we expect to translate to improved credit metrics,” says Standard & Poor’s credit analyst Graeme Ferguson.

“However, we expect underlying demand conditions to remain weak for the Australian airline industry. In our opinion, Qantas remains somewhat vulnerable to sudden changes in its operating environment that are a common and recurring feature of the airline industry.”

Standard & Poor’s also affirmed the ‘BB+’ long-term issue rating on Qantas and the airline’s senior unsecured debt, and the ‘B’ short-term rating on Qantas.

Underpinning the corporate credit rating on Qantas is its strong domestic market position.

“However, we view Qantas’ competitive position within the Australian market to have structurally deteriorated over the past few years,” says Ferguson.

“Competition from Virgin Australia Holdings has highlighted its susceptibility to periodic bouts of aggressive competition. Despite Qantas conceding some market share, we expect the airline to retain its dominant position within the Australian market. However, we assess underlying demand conditions to remain weak, weighing on Qantas’ yield and load.”

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