Australia PM spurns Qantas plea for help as carrier cut to junk status

Reuters

* S&P cuts credit rating after shock H1 loss warning

* Moody's reviewing rating on carrier, downgrade possible

* PM hints at flexibility on Qantas foreign ownership

By Jane Wardell and Ian Chua

SYDNEY, Dec 6 (Reuters) - Australia's prime minister TonyAbbott spurned a plea for help from Qantas Airways Ltd on Friday, saying subsidising the embattled airline would be "abottomless pit" as its credit rating was relegated to junkstatus.

The downgrade by Standard & Poor's followed a shock losswarning from the carrier on Thursday that sent its sharesplummeting to their biggest one-day loss in almost 18 months.Moody's also said it may cut its rating on Qantas belowinvestment grade.

Abbott's comments suggested Chief Executive Alan Joyce hadcut little ice with calls to government ministers on Thursdayseeking urgent action to assist Qantas, claiming its aggressiverival Virgin Australia Holdings has an unfairadvantage.

"The point I make is that if we subsidise Qantas, why notsubsidise everyone?" Abbott said in an interview on Melbourneradio station 3AW. "If we subsidise everyone, that's just abottomless pit into which we will descend."

The Australian flag carrier had been one just four airlineswith investment grade ratings from Moody's or S&P. The remainingthree are Deutsche Lufthansa AG, Air New Zealand and Southwest Airlines Co.

S&P's move to cut its main rating on the carrier to BB+, onerank below investment grade, could make it harder fordebt-loaded Qantas to borrow funds. The airline could also losesome shareholders whose rules on investment prevent them fromretaining stock in companies rated at junk level.

Qantas warned on Thursday it expects a pre-tax first-halfloss of between A$250 million ($226 million) and A$300 millionin the six months to Dec. 31. S&P said that warning caused thecarrier's financial risk profile to deteriorate, adding it maycut Qantas's rating again.

The airline has long complained that Virgin Australia'saccess to foreign funding, via its major shareholders Gulfcarrier Etihad, Singapore Airlines and Air NewZealand, has created an unfair playing field.

Qantas CEO Joyce had hinted that subsidies would help, whileanalysts had speculated the government might consider a sharepurchase. Though formerly state-owned, the government owns noshares in the carrier now.

"In the end businesses have to operate profitably, and inthe end they have to operate profitably because of their owndecisions and from their own resources," Abbott said. "Theycan't expect government to do anything other than create thebest possible market conditions for them to operate."

OWNERSHIP OPENING

Abbott did suggest amending the 1992 Qantas Sale Act, whichlimits foreign ownership of the airline to 49 percent, could bea possibility.

"The preference always would be to have the company inmajority Australian hands," Abbott said.

"But if it's a choice between a greater foreign stake inQantas and taxpayer subsidy, I ask the people of Australia,'What do you prefer?'" he said. "Do you prefer to be payingthrough your taxes for Qantas or do you prefer to have itslightly more in foreign hands than it is?"

As well as the prospect of having to pay higher borrowingrates because of the downgrade, Qantas may see an impact on itsA$2.8 billion cash balance. The rating cut could slow thetransfer of revenue from credit card companies for ticket salesbecause additional processing is now required.

Qantas shares closed 3.7 percent lower at A$1.03, just abovea 16-month low of A$1.00 touched on Thursday.

The spread of Qantas' credit default swaps (CDS), whichoperate like an insurance contract that protects against debtdefault, spiked by 60 basis points to 275 basis points onFriday, according to UBS. The corporate CDS market is usuallyvery illiquid, and Qantas especially so.

Qantas Chief Financial Officer, Gareth Evans, said in astatement after the S&P move that the downgrade was notunexpected after Thursday's loss warning, and highlighted the"uneven playing field in the Australian aviation market".

Evans said an accelerated cost-cutting program, to save atotal of A$2 billion over three years, would help the companyleverage its cash balance and asset base.

Analysts speculate asset sales may be part of a structuralreview, also announced on Thursday, along with 1,000 job cuts.

"Notwithstanding Qantas' strong financial flexibility, weexpect the cyclical and structural headwinds facing the airlineto persist, which could hinder a timely recovery of itsfinancial risk profile and credit metrics," S&P said in astatement.

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