Moody's has downgraded Qantas Airways from Baa2 to Baa3because of high fuel prices and strong competition. The significance of this is that the new rating is Moody's lowest investment-grade rating. This has understandably has shocked many investors. One more slip due to increasing fuel costs and competition pressures and the airline’s shares will have to be dumped by a significant section of investors as they no longer conform to the minimal requirements of their portfolios. Moreover and far more importantly the investment rating is crucial to cheap financing of operations.
Understandably, Qantas sought to reassure investors that its financial position remained strong despite the downgrade. It said in a statement that it remained in a strong funding position with a cash balance of more than $3 billion, improving cash flows this financial year and the ability to adjust investments.
It is planning an ambitious expansion program in Asia but has been favouring a so-called ''capital light'' option for an ultra-premium carrier as part of a joint venture with Malaysia Airlines.
Moody's stated that the outlook for Qantas's rating was stable, but is it? Investment grade airlines are a rare thing indeed; Qantas, Air New Zealand and Southwest in the USA are the only airlines to still retain an investment-grade credit rating from Moody's. The heat on Qantas from fuel prices and competition will only intensify over the next year as oil price will undoubtedly rise unless Europe sends the world into a depression, which is unlikely. And of course Tiger Airways, the airline thought dead (by us) last year is now running seven out of ten aircraft in Australia with fares at rock bottom prices, damaging Qantas’s bottom line. Tiger Airways suffered a $S17.4 million ($13 million) loss in the third quarter. The result included an operating loss of almost $S9 million from its Australian business. If they can continue to take this kind of loss then Qantas will be in trouble. I gave Tiger six months 12 months ago and so will keep my mouth shut on their chances.
Meanwhile airline shares staged a strong rally in heavy trading in Taiwan today after China Airlines, Taiwan's flag carrier said that the New Year revenue forecasts look very strong indeed. China Airlines closed up 3.60% at NT$14.40, with 54.36 million shares changing hands in the process, while rival EVA Airways gained 5.29% to end the day at NT$20.90, on trading volume of 35.86 million shares.
China Airlines said the average load factor over the holiday during the last week of January reached 78%, while the load factors on routes serving Japan, Australia and New Zealand were just under 95%. This in part is significant as it could mean that Japan traffic is fully returning to health after last year’s disasters. China Airlines is planning to add new Japanese destinations in March and given the load factors of the past weeks the market is upbeat about its revenue growth for this year.
In the first nine months of last year, CAL posted NT$0.05 in net profit per share, compared with NT$2.19 recorded a year earlier, while EVA registered NT$0.49 in earnings per share, down from NT$3.39 a year ago.
Share gains were not limited to Taiwan though. India – yes India – saw a great day in airline trading today with some very optimistic investors indeed throwing money behind Jet Airways, Kingfisher Airlines, and SpiceJet. All three traded higher a day after the country's biggest oil refiner Indian Oil Corp (IOC) said it will cut jet fuel prices by up to 3.1% to 63,864 rupees. At one point SpiceJet was up 5.2% at 22.50 rupees, Jet Airways up 4.4% at 261.20 rupees and Kingfisher Airlines 4.26% at 25.70 rupees. The problem in India at the moment is systemic and the ticket price war, so long as it continues, will destroy the balance sheets of airlines no matter the reductions in fuel prices.