Qantas rating could withstand jet fuel hike, says Moody’s

Qantas could be hit with a 50 per cent hike in the cost of jet fuel and still sustain its investment-grade rating.

Qantas saved $448m in jet fuel costs in the half, thanks to its hedging strategy.

Even if Qantas were to be hit with a 50 per cent increase in the cost of jet fuel it would still sustain its investment-grade rating, says credit rating agency Moody’s.

Moody’s last month upgraded Qantas’s credit rating by one notch to investment grade (Baa 3 stable) and changed its outlook on the airline to stable on the back of a strong set of half-year results that saw the carrier post a record pre-tax profit of $921 million and significantly reduce its debt position.

Moody’s upgrade followed that of Standard & Poor’s, which returned Qantas to investment grade in November.

The continued rout in oil prices — a key driver for the cost of jet fuel — has been a huge boon for Qantas, which saved $448m in the half thanks to its hedging strategy. But Moody’s said the company’s disciplined focus on controlling costs was helping underwrite its investment grade rating.

“Our sensitivity analysis suggests that Qantas’s key credit metrics would remain appropriate for an investment-grade rating, even if fuel prices increased by 50 per cent,” the ratings agency said.

“If fuel prices were to increase, we would expect Qantas to take pre-emptive actions by cutting shareholder distributions, reducing capital expenditure from a growth level of about $1.5 billion a year to a maintenance level of about $1bn a year and, if needed, to raise equity to protect the rating and maintain its targeted capital structure.”

The ratings agency believes Qantas is on track to continue growing earnings, particularly if low fuel prices remain and as the company’s $2bn transformation program continues to take costs out of the business.

However, it said it would wait 12-18 months for Qantas to establish a track record under its new financial policy before considering any further ratings upgrades.

“If Qantas maintains appropriate levels of debt relative to its earnings and builds a track record through evidence of managing shareholder returns and capital expenditure under its new financial framework, positive momentum could emerge,” it said.

Moody’s rationale for the upgrade was released as Qantas yesterday began the first of its on-market share purchases as part of the $500m buyback program announced at its first-half results.

Qantas chief executive Alan Joyce, who is in New York for a series of investor roadshows, rang the opening bell of the NASDAQ exchange yesterday to promote the company’s American Depositary Receipts, which allow US investors to buy and sell the airline’s shares.