Qantas Airways could risk a further credit rating downgrade if it fails to meet its promise of improved earnings and lower debt over the next six months, Moody's says.
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In January the ratings agency downgraded Qantas to a Ba1 credit rating, which is a notch below investment grade.
It has a negative outlook on the rating, and Moody's senior analyst Matthew Moore said the financial results for the financial year ended June 30 had been weaker than what it had factored into the ratings.
"We will continue to closely monitor the carriers plans to execute on its cost reduction initiatives, improve profitability in its core domestic business and gain traction in returning its mainline international operations to profitability", Mr Moore said.
"We expect to see improvements in earnings and leverage level, and any lack of progress in this area over the next six months would likely lead to a rating downgrade."
Qantas shares closed 7 per cent higher at $1.385 after the airline forecast it would report an underlying profit in the first half of the financial year.
Standard & Poor's, which has a BB+ credit rating on Qantas, said the airline's $2.84 billion bottom line loss, driven by impairments to its international fleet, would not have an immediate impact on its ratings. However, it has kept the negative outlook on its rating.
"There are early indications that some key drivers are moving in Qantas's favour: yields are expected to improve through more manageable capacity additions in both domestic and international markets, and the improved unit costs provide evidence of progress with Qantas's transformation program," S&P said. "Nevertheless, we are mindful of the speed at which Qantas's operating environment can change, as well as the sizeable restructuring task still ahead."
Merrill Lynch analyst Matthew Spence said in his estimates, the airline's first half profit would be driven by lower depreciation charges and a lower fuel bill than expected rather than better operating conditions.
Fat Prophets chief executive Angus Geddes said while the airline was still facing some headwinds, he remained encouraged by the transformation program.
"Qantas has endured a number of tumultuous years but we believe the company's fortunes are set for a significant turnaround," he said. "The prospect of a capacity war abating in the domestic market could prove a tailwind with the economy also getting back on the up. The latter would also of course be significantly aided by a RBA-induced fall in the Australian dollar."
