Fitch Ratings has upgraded Delta Air Lines' Issuer Default Rating (IDR)
to 'BB+' from 'BB'. Fitch has also upgraded Delta's Seattle project
bonds to 'BB+' from 'BB' and assigned ratings of 'BBB-' to Delta's 2015
secured credit facility. The Rating Outlook is Positive.
The ratings upgrade reflects on-going improvements to Delta's balance
sheet, continued solid operating performance, better than expected free
cash flow (FCF), and successful efforts to combat operating cost
inflation. The ratings are also supported by underlying improvements in
the airline industry including consolidation among the legacy carriers
and capacity constraint, which have led to an improved risk profile and
better profitability for the industry as a whole.
The Positive Outlook reflects Fitch's view that Delta's credit profile
will continue to improve over the intermediate term. Delta continues to
focus on debt reduction and addressing its underfunded pension plan as
key priorities. Fitch may upgrade Delta if adjusted debt/EBITDAR is
maintained below 2.0 - 2.5x (2.2x at June 30, 2015) and as Fitch gains
further comfort that Delta's metrics and financial health will be
sustainable through future downturns. A ratings upgrade could also
follow maintenance or improvement of profitability metrics from current
levels over the next 18 months as the industry absorbs some of the
capacity expansion that the market is experiencing in 2015. Further
improvement in fixed charge coverage ratios and evidence that Delta will
be able to maintain its solid cash flow generation over the longer term
despite increasing payments to shareholders could also support an
Delta's underfunded pension plan remains a concern, though Fitch
believes this concern is manageable. The plans were underfunded by $12.5
billion at year end 2014, leading to sizeable required annual cash
contributions. These risks are partially mitigated by Delta's cash flow
generation, which enables the company to fund its pension requirements
while still generating positive FCF, and by Delta's efforts to make
pension contributions over and above the required minimums. Pension risk
is also mitigated by the Pension Protection act which governs Delta's
minimum required cash contributions into the next decade.
International markets continue to present a concern with U.S. airlines
reporting broad-based unit revenue weakness, which has been exacerbated
by the rise of the U.S. dollar. Certain international markets also
remain weak, such as Brazil, Venezuela and Russia. Other rating concerns
are primarily reflective of risks inherent in the airline industry.
Cyclicality, exposure to exogenous shocks (i.e. war, terrorism, etc.),
capital intensity, operating leverage, and sensitivity to global oil
prices remain key considerations.
KEY RATING DRIVERS
Improving Credit Metrics: Credit metrics at Delta have continued to
improve since Fitch upgraded Delta's rating to 'BB' in 2014. Fitch
expects further improvement going forward supported by a solid domestic
demand environment and by Delta's commitment to future debt reduction.
Fitch calculates Delta's adjusted debt/EBITDAR at 2.2x as of June 30,
2015, which is down from more than 9x at year end 2009. Adjusted
leverage is now notably lower than all other large North American
competitors with the exception of Southwest Airlines and Alaska Air
Group, both of which Fitch rates in the 'BBB' category. Fitch believes
that Delta's improved credit profile puts it in a much stronger position
to weather future market downturns. Delta intends to further reduce debt
in the near-term, setting a net adjusted debt target of $4 billion to be
reached by year end 2017. Fitch views this goal as achievable given the
company's capacity to produce free cash flow, and track record of
bringing down debt since the previous recession.
Managing Costs: The ratings upgrade is supported by Delta's successful
efforts to manage its unit costs. CASM ex fuel was essentially flat in
2014 and decreased slightly through the first half of this year. Fitch's
forecast includes moderate cost inflation in the 2016 - 2017 time frame
largely related to pilot wages and salaries. Delta's pilot contract
becomes amendable later this year, and any new contract will likely
include raises particularly given the profitability of the airline
industry in recent years. Union contracts aside, Delta is focused on
maintaining its annual CASM inflation below 2%.
The success of Delta's cost containment program has pushed profit
margins higher. EBITDAR margin for the LTM period ended June 30, 2015
totaled 18.6%, higher than the 18% margin posted FY 2014, and a large
improvement over margins in the high single digit/low double digits that
were seen in 2008 and 2009. Note that margins would have been much
higher through the first six months of the year setting aside Delta's
Strong FCF and Financial Flexibility: Fitch expects Delta's healthy
operating profits and manageable upcoming capex will allow the company
to produce sizeable free cash flows for the foreseeable future. In our
base forecast, Fitch anticipates that FCF will top $3 billion this year
and approach or exceed $3.5 billion/year in 2016 and 2017. Delta has now
produced positive cash flow in each of the past six years, with
cumulative FCF totaling more than $10.5 billion over that time period.
The capacity to consistently produce positive free cash flow is a key
consideration in the recommendation to upgrade the ratings.
Total liquidity as of June 30, 2015 was equal to 14.1% of LTM revenue.
Liquidity consists of $2.3 billion of cash & equivalents, $1.5 billion
of short-term investments, and $2.0 billion of revolver availability.
While some of Delta's airline peers have a higher liquidity balance on a
cash/revenue basis, Fitch considers DAL's current liquidity balance to
be more than adequate to fund near-term requirements, particularly since
the company is consistently generating solid cash flow. Fitch's base
case forecasts that DAL will generate cumulative cash flow from
operations of more than $20 billion between 2015 - 2017, exceeding
anticipated capex, dividends, and debt maturities.
Manageable Cash Obligations: Fitch expects capital expenditures to
approach $3 billion annually for the next several years, the majority of
which will consist of new aircraft deliveries as Delta takes 737-900ERs,
A330-300s in 2015 and A321s starting in 2016. Debt maturities range from
$1.0 to $2.1 billion annually over the next three years. These
obligations are manageable in light of Delta's expected cash generation.
Returning Cash To Shareholders: Fitch does not expect shareholder
friendly actions to harm Delta's credit profile in the near-term, as
evidenced by management's continued public statements about reducing net
debt, contributing to pension plans, and improving its credit profile.
Delta announced a 50% dividend increase in May 2015, increasing the
payout to roughly $430 million per year. Delta's board also authorized a
$5 billion share repurchase program to be completed by year end 2017.
This comes after the company's 2014 announcement that it would complete
a $2 billion repurchase program by the end of 2016. It completed that
program more than 18 months ahead of schedule prompting a much larger
authorization. Although the planned cash outflows are sizeable, they
should be manageable given Delta's strong cash generation. Share
repurchases are also flexible and can be scaled back or cancelled in the
case of a downturn. Fitch would have a negative view of any future
dividends or buybacks that were to occur at the expense of Delta's
balance sheet health or at the expense of necessary investments in the
--Fitch's key assumptions within the rating case for DAL include;
--Low single digit capacity growth through the forecast period;
--Continued stable/slow growth in demand for US domestic travel;
--Mid-single digit PRASM decline in 2015 followed by low growth
--Conservative fuel price assumption which includes crude oil
approaching $80/barrel in 2016 and rising incrementally thereafter.
Future developments that may, individually or collectively, lead to a
positive rating action include:
--EBIT margins sustained in the low to mid-teens (at June 30, 2015:
--Sustained free cash flow margins of 5% of revenue or higher
--Continued progress towards reducing underfunded pension balance
--Sustained FFO fixed charge coverage ratio above 4x (at June 30, 2015:
--Expectations for mid-cycle debt/EBITDAR to be sustained below 2.0 -
A negative rating action is not anticipated at this time. However future
actions that may individually or collectively lead to a negative rating
--Increased operating costs, either fuel or non-fuel related, that are
not adequately matched by higher ticket prices leading to substantially
reduced operating margins;
--A substantial increase in dividends or stock repurchases that comes at
the expense of a healthy balance sheet;
--An unexpected and protracted drop in the demand for air travel.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Delta Air Lines, Inc.
--IDR upgraded to 'BB+' from 'BB';
--$450 million senior secured revolving credit facility due 2018
upgraded to 'BBB-/RR1' from 'BB+/RR1';
--$1.1 billion senior secured term loan B-1 due 2018 upgraded to
'BBB-/RR1' from 'BB+/RR1';
--$400 million senior secured term loan B-2 due 2016 upgraded to
'BBB-/RR1' from 'BB+/RR1'.
Industrial Development Corporation (IDC) of the Port of Seattle special
facilities revenue refunding bonds series 2012 (Delta Air Lines, Inc.
--$66 million due April 1, 2030 upgraded to 'BB+' from 'BB '.
Fitch has assigned the following ratings;
Delta Air Lines, Inc.
--$1.5 billion senior secured revolving credit facility due 2020;
--$500 million secured term loan B due 2022; 'BBB-/RR1';
The Rating Outlook is Positive
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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