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Government rumblings on Qantas offer a buying opportunity

by Gavin Madson | Dec 02, 2013

Key points:

  1. Government considering Qantas’ role as Australia’s “national carrier”
  2. Treasurer publicly considers whether, and in what form, the government could support the airline
  3. Positives for credit provide a buying opportunity for bondholders

Qantas continues to face pressure from its domestic rival Virgin. Last week, Qantas chief executive Alan Joyce went public with his complaint (through an email to all Qantas employees) that Virgin was receiving an unfair competitive advantage via its ownership structure, and in particular through the cross subsidy of its domestic business by its international business.

In short, Mr Joyce feels that the Virgin Australia domestic business is being run below competitive margins in order to secure domestic market share. In particular he suggests the Virgin International business (which enjoys significant ownership from government backed competitors like Etihad and Singapore Airlines) is covering the losses of the domestic business in an attempt to hurt its major competitor, Qantas. Further, Mr Joyce suggested that should this be allowed to continue, the very existence of Qantas may come into question Qantas’ position as Australia’s “national carrier” (emotionally, if not by ownership) forced the Treasurer to respond and he began with the basic question of “Does the Australian public want a national carrier?” If so, what are they prepared to pay to support it.

A number of options have been canvassed publically as to how the government could support Qantas:

  • Lifting foreign ownership levels (which would be politically difficult)
  • The government taking an equity stake in Qantas
  • The government guaranteeing some or all of Qantas’ debt allowing it to access funding at lower costs

The debate carries on; however the adoption of any of these options would be a credit positive for the BBB- rated airline. In the end, it does not matter how the government would show its support of Qantas, the fact that it shows some support would undoubtedly be a positive for the credit.

Based on the Treasurer’s comments, Qantas’ 5 year credit default swaps (CDS) moved in from 209bps to 195bps, a fairly significant move for a single day. This shows the professional markets liking of the government’s moves however the bond spreads have still yet to follow the CDS, thus the upside in the credit which has not been priced in and the opportunity for bondholders.

Qantas is the highest yielding corporate bond currently available offering a yield to maturity of 6.05% for a $50,000 parcel. Should any form of government support materialise we would expect the margins to tighten further. Qantas is the best investment grade trading opportunity in the current market.

Key terms

Credit default swap – is an insurance contract used as a proxy of credit risk. A lower number represents less risk. The trading in the Qantas CDS suggests that after the announcement from the Treasurer, the market trading CDS saw Qantas as less risky, than before the announcement.