British Airways has had its debt reduced to junk status by credit rating agency Moody’s over mounting fears of its rising investment cost and weakening passenger demand.

The downgrade also comes in the wake of BA’s warning that it would make an operating loss of ?150m this year compared to a previous estimate of break even.Moody’s said BA would be “challenged” to improve its credit rating in the near term and was “subject to substantial credit risk”. It also described the UK flag carrier as “a speculative investment.”

The agency expressed concerns over BA’s placing of a ?4billion order for 36 planes against a backdrop during potentially the worst downturn in the history of aviation. The carrier plans to invest ?750m in the year to March 2010, up from ?550m this year.

A BA spokesman said some of this would be spent on new planes, with 10 Boeing 777s due to be delivered by 2012.

Moody’s concern about BA’s plan to buy new planes comes amid one the worst climates the aviation sector has ever experienced. It view were recently echoed by easyJet founder Sir Stelios Haji-Ioannou, who said the no-frills carrier may be growing too fast for current demand.

The board of BA met yesterday to review progress in merger talks with Spain’s Iberia amid growing optimism that agreement can be reached soon. The Iberia board is meeting today on Thursday.

The two airlines are close to agreeing estimates for the synergy benefits that could be made from a merger that could reach up to €600m, although the size of the split could prove the main sticking point due to BA’s recent slump in share price.

Rival ratings agency Standard & Poor’s also recently warned it may cut the BA’s debt to junk.
——-