After delaying spending on its fleet for too long during a turnaround program, Qantas faces a possible funding squeeze when it’s time to buy new planes, according to S&P Global Ratings.
Qantas 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 on Thursday. Shareholder returns may have to be reduced to pay for fleet renewal, the ratings company said.
The average age of a Qantas plane is just shy of 10 years, older than a typical aircraft at Singapore Airlines and almost double the figure at Emirates, S&P said.
Qantas doesn’t plan to increase capital expenditure this year or the next, creating a “sizable funding task” from 2020 onward, S&P noted in its report. But Qantas 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$3 billion on capital expenditure in the 12 months ending June 2018, and the same amount the following year.
“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. Qantas said in its 2017 annual report it has “significant flexibility” around fleet management to respond to competitors and changes in the market.
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.
With plans to start the first non-stop services between Australia and Europe next month, Qantas is buying eight Boeing 787-9 Dreamliners. It has options and purchase rights for a further 45. The carrier is also looking to replace its Boeing 747 aircraft at some stage.
Qantas’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.