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After delaying spending on its fleet for too long during a turnaround program, Qantas Airways Ltd. faces a possible funding squeeze when it’s time to buy new planes, according to S&P Global Ratings.
The Australian flag carrier needs to increase investment in its aging fleet of 309 planes before the sum required is too large to handle, S&P said in a report released Thursday. Shareholder returns may have to be reduced to pay for fleet renewal, the ratings company said.
Qantas doesn’t plan to increase capital expenditure this year or the next, creating a “sizable funding task” from 2020 onward, S&P said. The airline may be restricted by its own target for net debt as well as an Australian law that limits foreign ownership of the carrier’s shares. The carrier has said it will spend a combined A$3 billion ($2.4 billion) in the 12 months ending June 2018 and the following year.
Qantas “rejects the conclusions of this report, because it ignores the fundamentals of our business and our fleet strategy,” the airline said in a statement.
The average age of a Qantas plane is just shy of 10 years, older than a typical aircraft at Singapore Airlines Ltd. and almost double the figure at Emirates, S&P said.
“It’s a big task that needs to be addressed sooner rather than later,” Graeme Ferguson, a Melbourne-based credit analyst at S&P, said in an interview. “Their current level of investment is inadequate.”
Ferguson declined to say what Qantas should spend, but said it should be a “step change” from the current rate.
The carrier’s options for as many as 45 Boeing 787-9 Dreamliners and 99 Airbus SE A320neos are “well-priced” with flexible delivery dates, it said. With plans to start the first non-stop services between Australia and Europe next month, Qantas is already buying eight Dreamliners and is looking to replace its Boeing 747 aircraft.
About 60 percent of the Qantas fleet is debt free and recent plane purchases were made with cash, the airline said. “Our ability to meet our long-term capital expenditure needs are clear,” it said.
Qantas shares rose 2.6 percent to A$5.16 at 12:30 p.m. in Sydney, valuing the company at A$9 billion. The stock has jumped 48 percent in the past 12 months. The company is scheduled to report first-half earnings on Feb. 22.
Qantas Chief Executive Officer Alan Joyce launched a three-year transformation in 2014 that involved cutting jobs and expenses, delaying plane deliveries and axing unprofitable routes. His program delivered record profits and allowed Qantas to hand back more than A$2 billion of capital to shareholders.
The company’s net debt at the end of June 2017 was A$5.2 billion. That’s at the lower end of the airline’s targeted range of between A$4.8 billion and A$6 billion. Qantas has a credit rating at S&P of BBB-, the lowest investment grade.
The longer Qantas delays higher spending, the less room it has to remain in its targeted debt bracket, Ferguson said. The company may also have to tap equity markets.
That task is complicated by a law capping foreign ownership of Qantas shares at 49 percent. Overseas investors owned 43.6 percent of the stock at the end of 2017. That threshold limits the pool of investors that could buy Qantas shares in any fundraising equity sale.
(Updates with comment from Qantas in the fourth paragraph. A previous version of this story corrected the period for the airline’s capital expenditure.)
©2018 Bloomberg L.P.