2014 opened for Qantas Airways Limited (ASX: QAN) with a second credit downgrade, this time from Moody's. The airline was put on credit watch by the agency in December. Standard & Poor's rating agency reduced the company to BB+, or below investment grade at that time.
Moody's has followed suit by lowering its credit rating by two levels to Ba2 with a negative outlook. That is below investment grade and will increase the cost of debt when the company has to borrow. Net interest payments were already $187 million in 2013. Long-term debt stands at about $5.2 billion and gross gearing was slightly above 100% at the June 30, 2013, reporting date. Despite heavy write-downs of about $674 million over the past two years, the company reported $2.83 billion in cash in its annual report.
The $1.12 share price didn't fall on the day of the announcement and is a little under its $1.25 cash per share value.
The company is forecasting an underlying loss before tax of $250 – $300 million for the six months up to December 31. To drive cost savings, it announced a $2 billion cost-reduction program for the next three years and about 1000 jobs will be shed within 12 months.
Virgin Australia Holdings Ltd (ASX: VAH) has been changing its own air fleet, adding more business class seats and extra services in the hope of drawing more business class customers. It also has to contend with other discount airlines, so it is turning to flyers with higher profit margins.
Its November $350 million capital raising was to fund what the company called its Game Change Program, and major shareholders Etihad Airways, Air New Zealand (ASX: AIZ), and Singapore Airlines (SP: SIA) all took up their full entitlements.
Foolish takeaway
Qantas has been running on razor-thin net profit margins of 1%-2% since 2009. Other metrics like return on equity have descended from normal 12% levels in 2008 to 3.73% in 2013.
With high levels of debt and passenger loads and yields trending downward, investors should wait on the sideline and see if the government either relaxes the foreign ownership restrictions or goes the opposite way with subsidies to bolster its revenues. This chapter of the ongoing story hasn't played out completely yet.
