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Announcement:

Moody's: Qantas' full year 2013 results within expectation; no impact on rating

Global Credit Research - 29 Aug 2013

Sydney, August 29, 2013 -- Moody's Investors Service says that Qantas Airways Limited's (Baa3/stable) full year results to June 2013 are broadly within expectation and have no immediate impact on its rating.

"Qantas' FY2013 results were broadly within our expectations for the Baa3 rating and while key financial metrics remain appropriate for the rating, underlying performance was assisted by several material one-off's. Key for the rating over the next 12-18 months will be the operating performance of its domestic businesses and continued successful transition of main-line international", says Ian Lewis a Moody's Senior Vice President.

Underlying EBIT for FY 2013 was A$ 372 million (up around 40% compared to FY 2012). The company's performance benefited from a considerable YoY improvement and ongoing cost control within main-line international as well as consistent performance from the Qantas loyalty program, offset by the impact of tougher competition in its domestic business and a materially weaker result for Jetstar where underlying EBIT decreased by 32% YoY. The result was also assisted by a material liquidated damages settlement with Boeing and a permanent change in ticket revenue recognition accounting.

"While the full year results are supportive of Qantas' Baa3 credit profile, we see ongoing challenges for the company in maintaining its underlying operating performance and yield, in a highly competitive domestic market and where the company has drawn a clear line in the sand at 65% market share. The mix of tough competition, significant capacity additions to-date, and persistently high fuel prices, particularly in AUD terms, are key issues for the rating", adds Lewis who is also Lead Analyst for the company.

"Nevertheless there are positive signs within some of Qantas' key businesses and which continue to support the airline's credit profile while it transitions its international business back to profitability. Materially reduced capex on a YoY basis, as well as consistent solid growth in members and earnings in Qantas Loyalty are in this category", says Lewis.

Maintenance of Qantas' financial profile including adjusted leverage below 4.5x Debt/EBITDA as well as strong balance sheet liquidity (cash holding at 30 June 2013 was A$ 2.8 billion) are key supporting factors for the rating.

"Qantas remains one of only a few investment grade rated carriers globally and the Baa3 rating continues to reflect the company's operating model strengths as well as good domestic franchise and sound liquidity, despite evident challenges in the operating environment both domestically and abroad. We continue to see the Qantas/Emirates partnership and joint selling arrangements as a key plank in the airline's strategy and pivotal for its transition back to a level of profitability more in-line with its investment grade rating", adds Lewis.

An upward rating movement is unlikely in the near term, given the operating challenges facing the airlines sector. Over time, a positive rating trend could emerge if Qantas commences to deleverage to levels commensurate with a higher rating level. Financial metrics that Moody's would look for include Debt/EBITDA trending below 3.75x and RCF/Net Debt staying above 25% on a consistent and sustainable basis.

On the other hand, the rating could face negative pressure in the event that the company's operations are further impacted by deterioration in the major economies that it services, including its domestic market. The rating could also be pressured if Qantas faces materially higher fuel prices and/or higher capex. This could be indicated by the ratio of adjusted Debt/EBITDA trending higher than 4.5 x and/or RCF/Net Debt falling below 17% on a consistent basis. A material dilution of Qantas' current cash position - which affords it strong liquidity - could also negatively impact the ratings. The rating could also face negative pressure should Qantas mis-step in executing around its international transformation strategy or should Moody's reach the conclusion that a sustainable break-even for the international main-line business was unlikely to be achieved within a reasonable time period.

The principal methodology used in this rating was Global Passenger Airlines Industry Methodology published in May 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Qantas Airways Limited, based in Sydney, is the largest airline in Australia.

Ian Lewis
Senior Vice President
Corporate Finance Group
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Terry Fanous
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Releasing Office:
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody's: Qantas' full year 2013 results within expectation; no impact on rating
No Related Data.

 

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