Qantas Says Profit Must Improve To Fund Aircraft Buys

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The FINANCIAL — Qantas Airways said Monday it's relying too heavily on debt to fund new aircraft purchases and may have to cancel orders if it can't boost profits.


According to Borsa Italiana – London Stock Exchange Group, the comments by Chief Executive Alan Joyce will stoke concerns that soaring jet fuel prices and ongoing global economic uncertainty will threaten large orders placed with aircraft manufacturers including Boeing Co. and European Aeronautic Defence & Space Co. unit Airbus.

They could also fan speculation by some analysts that funding pressures could force Australia's flag carrier to issue new shares to afford looming purchases of Boeing Co., Airbus and Bombardier Inc. aircraft without losing its investment-grade credit rating.

To replace some of the oldest planes in its fleet, Qantas plans to spend A$2.5 billion on aircraft in the current financial year to June 30 and A$2.8 billion next year. It is currently funding purchases through borrowings, which Joyce said it "shouldn't be doing" and is "not sustainable long term."

"If Qantas cannot get its free operating cash flow up to that A$2.5 billion, so we don't have to borrow, it will go into a vicious circle of losing its investment-grade credit rating, of not being able to fund the replacement of the aircraft, and that is unbelievably detrimental to the airline," he said.

A Qantas spokesman declined to comment on the possibility of an equity raising via an issue of new shares.

"We're not going to make predictions about the financial or economic outlook, other than to say we will be doing everything possible to retain our investment-grade credit rating," the spokesman said in an emailed statement.

A Singapore-based spokesman for Airbus and an Australia-based spokeswoman for Boeing both said that they don't comment on customers' orders.

Although Qantas remains one of the world's most profitable airlines, largely thanks to Australia's resources boom supporting demand for business travel, its international flights unit is haemorrhaging money as fuel costs bite and state-backed Middle East rivals compete for market share.

In an attempt to turn the business around, Qantas in August unveiled plans to launch separate premium and low-cost airlines outside its home market and ordered up to 110 new Airbus planes valued at more than US$9 billion at list prices. It also cut poorly performing routes and terminated 1,000 jobs.

Since then it's had to ground its entire fleet for several days to ward off industrial action. Moody's last week cut its credit rating on Qantas to one notch above junk status and Standard & Poor's in November reduced the outlook on its investment-grade rating for the airline to "negative" from "stable".

Commonwealth Bank analysts last week downgraded Qantas to hold from buy, citing the increased likelihood of an equity raising in the next two years.

Joyce made the comments Monday at a parliamentary committee in Canberra that's considering rule changes that could hamper Qantas' ability to expand offshore. The proposed regulatory overhaul would force Australian airlines to offer foreign-based cabin crews the same pay and conditions as Australian crews, among other conditions.

Repeating comments he made to the same inquiry in November, Joyce said the changes could threaten Qantas' survival and would probably force it to break up the group by selling units including low-cost subsidiary Jetstar.

The Labor government nor the main Liberal-National opposition have publicly backed the suggested changes, canvassed last year by independent lawmaker Nick Xenophon.



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