Airline to cut costs and capital spending to improve cash flow Qantas Airways Ltd , Australia's largest carrier, had its debt rating cut to junk by Moody's Investors Service after flagging a record first-half loss and 1,000 job cuts amid increased competition on domestic routes. Competition from Virgin Australia Holdings Ltd is causing a "sharp deterioration in the company's core domestic business," Moody's senior vice-president Ian Lewis wrote in a rating opinion on Thursday, lowering Qantas's senior unsecured debt to Ba2 from Baa3. Standard & Poor's cut the airline's debt to non- investment grade last month. The downgrades may boost interest costs for Qantas, adding to challenges for chief executive officer Alan Joyce , who forecast a first-half loss of as much as A$300 million ( $267 million ) on December 5 . The carrier, which had a near-monopoly in Australia's non-budget domestic aviation market for a decade after the 2001 collapse of Ansett Holdings Ltd , is struggling to defend its market share as Virgin buys smaller rivals, adds business-class seats and builds airport lounges to compete. "It's a bit of a war of attrition," Sean Fenton , who helps manage about A$4.7 billion in assets at Tribeca Investment Partners Pty, said by phone from Sydney . Joyce's decision to fight for Qantas's 65 per cent market share "is probably best in the long run, but they won't make any money in the short term. Qantas shares rose 1.8 per cent to A$1.12 at the close in Sydney , their best performance since December 20 . The cost of insuring the carrier's debt through credit-default swaps has risen 69 basis points since the December 5 announcement to close at 263 basis points on Wednesay. Air New Zealand , Singapore Airlines and Etihad Airways collectively own almost 70 per cent of Virgin. The three airlines provided cash for the fight with Qantas by offering to spend as much as A$316 million on new shares under a capital raising that Virgin announced in November. "It's a little bit hard to work out exactly what the game plan and the motivations are in terms of that consortium of international airlines," Fenton said. Joyce's strategy of protecting Qantas's market share "would probably have worked quite well" if the carriers hadn't stepped in to support Virgin, he said. Virgin's actions and Qantas's responses "have shifted the market dynamic against Qantas in a structural way," Lewis wrote. "As such, we expect that Qantas' business risk and financial leverage will remain at elevated levels and inconsistent with an investment-grade rating." Joyce has called for the government to assist the company by revising a 1992 law restricting foreign investment in Qantas, and the carrier has said it's in talks with the government in Canberra about how to "level the playing field," without specifying measures it would like to be enacted. "We're not seeking a handout from the taxpayer," Andrew McGinnes , a spokesman for the airline, said in an e-mailed statement on December 18 . Any government support could "provide support for Qantas's liquidity position and/or credit profile," Lewis wrote on Thursday. Before the downgrades, Qantas was one of just two airlines globally, along with Southwest Airlines , to be judged investment-grade by more than one ratings company. It's now slipped behind Southwest , as well as Deutsche Lufthansa and Air New Zealand , which both have a single investment-grade rating. The downgrade "was not unexpected," Qantas Chief Financial Officer Gareth Evans said in a statement after Moody's announcement, adding that the company will cut costs and capital spending to improve cash flow.
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