Qantas shares fall below A$1 for first time on S&P warning
SHARES in Qantas have dipped below A$1(79c) for the first time after credit ratings agency Standard & Poor's placed the Australian airline on watch for a downgrade.
S&P said that if the airline's international business does not improve earnings in a reasonable timeframe, Qantas' risk profile would weaken.
"In our view, Qantas' international operations are a key factor to the group's long-term competitiveness," S&P credit analyst May Zhong said in a statement.
The shares fell 8.7pc to 97 cents at 06.50am.
S&P's move comes just two days after Qantas, which is headed up by Dubliner Alan Joyce, warned profits could nosedive 90pc this year.
The flag carrier said it had been confronted with its “highest ever” fuel bill, which is likely to hit A$4.4bn for the year to June 30, an increase of about A$700m.
The economic storm in Europe, one of Qantas’s key markets, has also exacerbated problems at its international division, where losses are likely to have more than doubled to A$450m.
As a result, the carrier on Wednesday warned pre-tax profit for year could plummet as low as A$50m. Even in the best case scenario, profits are only likely to reach A$100m - an 82pc decline on last year’s A$552m haul.
Rocketing fuel prices have caused a number of European airlines to go to the wall this year, including Hungary’s Malev and Denmark’s Cimber Sterling. The International Air Transport Association (IATA) has forecast that oil costs could push the global aviation industry to a £3.5bn loss for 2012 from a £5.1bn net profit last year.
British Airways-owner International Airlines Group has said it will struggle to make a profit this year due to a combination of a €1bn jump in its fuel bill and the costs of integrating loss-making carrier bmi, which it bought from Lufthansa earlier this year.
However, analysts pointed out that Qantas has faced headwinds at its international division for some time. The operation has suffered from high operating costs, growing competition from the Middle Eastern carriers such as Emirates and economic pressures in key markets like the UK.
The international operation has also been dogged by industrial strife in the last year and strikes in October forced the carrier to take the extraordinary step of grounding its entire fleet. Qantas estimates industrial action has cost it as much as A$100m over the last 12 months.
Aviation analyst John Strickland of JLS Consulting said: “Qantas suffers from the high price of fuel like everybody but it is also going through a lot of industrial pain.
“Much of its international traffic is dominated by the leisure market. The Kangaroo route [between the UK and Australia]…is very competitive and if you are operating in that market with high costs of operating then your days are numbered.”
Qantas had already signalled its intention to split its costly international arm from its profitable domestic business as Mr Joyce seeks to push through reforms as part of a five-year transformation plan.
The domestic business is expected to deliver improved profits of A$600m for the 12 months to June 30.
Mr Joyce said in a statement: “We remain focused on returning Qantas International to profitability in 2014 and for Qantas International and Domestic combined to exceed their cost of capital on a sustainable basis within five years of August 2011.”
The update saw Qantas shares lose 18pc at one point in trading on the Australian Securities Exchange.
Indian airline Kingfisher last week cited high fuel costs as one of the reasons behind its biggest ever quarterly loss.
Meanwhile, Etihad, the ambitious Middle Eastern airline, announced on Wednesday it had taken a 3.96pc stake in Virgin Australia. Etihad has been building up holdings in a number of other carriers this year, including a 3pc stake in Ireland's Aer Lingus.