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Qantas will get no help from Australia government

Canberra: Australia’s prime minister Tony Abbott spurned a plea for help from Qantas Airways Ltd, saying subsidising the embattled airline would be “a bottomless pit” as its credit rating was relegated to junk status. The downgrade by S&P’s followed a shock loss warning from the carrier on Thursday that sent its shares plummeting to their biggest one-day loss in almost 18 months.

Abbott’s comments suggested Chief Executive Alan Joyce had cut little ice with calls to government ministers on Thursday seeking urgent action to assist Qantas, claiming its aggressive rival Virgin Australia Holdings has an unfair advantage. “The point I make is that if we subsidise Qantas, why not subsidise everyone?” Abbott said in an interview on Melbourne radio station 3AW. “If we subsidise everyone, that’s just a bottomless pit into which we will descend.”

The Australian flag carrier had been one just four airlines with investment grade ratings from Moody’s or S&P. The remaining three 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+, one rank below investment grade, could make it harder for debt-loaded Qantas to borrow funds. The airline could also lose some shareholders whose rules on investment prevent them from retaining stock in companies rated at junk level.

The airline has long complained that Virgin Australia’s access to foreign funding, via its major shareholders Gulf carrier Etihad, Singapore Airlines and Air New Zealand, has created an unfair playing field.

Qantas CEO Joyce had hinted that subsidies would help, while analysts had speculated the government might consider a share purchase. Though formerly state-owned, the government owns no shares in the carrier now.

“In the end businesses have to operate profitably, and in the end they have to operate profitably because of their own decisions and from their own resources,” Abbott said. “They can’t expect government to do anything other than create the best possible market conditions for them to operate.”

Abbott did suggest amending the 1992 Qantas Sale Act, which limits foreign ownership of the airline to 49 per cent, could be a possibility. “The preference always would be to have the company in majority Australian hands,” Abbott said.

“But if it’s a choice between a greater foreign stake in Qantas and taxpayer subsidy, I ask the people of Australia, ‘What do you prefer?’” he said. “Do you prefer to be paying through your taxes for Qantas or do you prefer to have it slightly more in foreign hands than it is?”

As well as the prospect of having to pay higher borrowing rates because of the downgrade, Qantas may see an impact on its A$2.8 billion (Dh9.3 billion) cash balance. The rating cut could slow the transfer of revenue from credit card companies for ticket sales because additional processing is now required.

The spread of Qantas’ credit default swaps (CDS), which operate like an insurance contract that protects against debt default, spiked by 60 basis points to 275 basis points on Friday, according to UBS. The corporate CDS market is usually very illiquid, and Qantas especially so.

Qantas chief financial officer, Gareth Evans, said in a statement after the S&P move that the downgrade was not unexpected after Thursday’s loss warning, and highlighted the “uneven playing field in the Australian aviation market”.