Dépêches

Fitch Affirms Delta Air Lines' IDR at 'B-'; Outlook Revised to Positive

Dépèche transmise le 21 juin 2011 par Business Wire

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the debt ratings of Delta Air Lines, Inc. (DAL). The airline's Issuer Default Rating (IDR) has been affirmed at 'B-', and the Rating Outlook has been revised to Positive from Stable. The ratings apply to approximately $2.7 billion in outstanding debt. A list of all rated debt is provided at the end of this release.

Delta's 'B-' IDR reflects the airline's still highly leveraged capital structure, volatile cash flow generation through the cycle, and exposure to sharp increases in jet fuel costs against a backdrop of turmoil in world energy markets in 2011. The carrier has made significant progress toward lease-adjusted debt reduction over the past 18 months as the U.S. airline industry revenue environment has strengthened. Moving into this summer's peak demand period, the outlook for passenger revenue per available seat mile (RASM) growth remains good, and Fitch expects DAL to report solid passenger yield growth, helping to offset significantly higher fuel costs during the summer.

Despite persistent fuel cost pressure, Fitch expects DAL to generate substantially positive free cash flow (FCF) in 2011, driven in large part by relatively modest capital spending commitments. FCF in the first half of the year will likely exceed $1.0 billion, and continued strength in unit revenue trends in the fall and winter would allow the airline to push balance sheet debt down to approximately $14 billion by the end of the year. Forecasted 2011 capex of $1.2 billion reflects the absence of fleet growth as older, less fuel-efficient aircraft are retired.

Liquidity remains sufficient to guard against significant follow-on fuel price shocks. Following the refinancing of the airline's exit credit facility, total unrestricted liquidity (including $1.8 billion of total revolver availability) exceeds $5.5 billion. Scheduled debt maturities are relatively heavy but manageable over the next three years, providing DAL with an opportunity to direct FCF toward debt reduction and de-levering through 2013. Scheduled maturities total $1.9 billion in 2012 and $1.6 billion in 2013.

DAL's competitive position in the global airline industry remains strong, with the integration of Northwest Airlines and the implementation of the trans-Atlantic joint venture with Air France KLM completed. Given its expansive global route network and strengthened presence in key high-yielding business markets, Fitch views DAL's ability to expand margins through the cycle as stronger than that of most other global carriers. DAL's unit cost position remains competitive, and ongoing initiatives to reduce headcount and park older, high-cost aircraft should help the airline achieve relatively flat non-fuel unit operating costs by year-end.

Recently announced schedule cuts for the fall reflect managements' willingness to reduce scheduled flying in the face of higher fuel costs. Particularly across the Atlantic and in its small Memphis hub, capacity adjustments were necessary to restore route profitability. The planned 4% pull-down of post-Labor Day capacity should help maintain a relatively strong 2H'11 RASM performance. Industry capacity discipline and a series of fare hikes rolled out earlier in the year have helped boost yields for all U.S. carriers, and as yet there are no clear signs of significant demand destruction. A weaker economic growth scenario in the second half of the year, however, could begin to erode unit revenue growth and squeeze second half margins.

Unlike 2008, when energy prices ran up quickly in the face of flagging air travel demand and a weak economy, DAL and the other large U.S. airlines have been successful in recovering much of the fuel cost pressure via fare hikes and modest capacity trimming in the 2H'11 schedule. DAL's revenue performance has been generally solid through the first five months of 2011, with Q1 passenger RASM growing by 7% on a 5% increase in available seat mile (ASM) capacity, 12% higher yields and weaker load factors. The weak link in DAL's route network this year has been in the Atlantic, where PRASM fell by 1% year over year in the first quarter. Actions to adjust capacity have been targeted at Atlantic markets (together with SkyTeam partners Air France KLM, which have also announced capacity cuts).

DAL has altered its fuel hedging approach somewhat in recent weeks, as the spread between West Texas Intermediate and Brent crude prices has widened. As of early May, all WTI-based derivative positions had been terminated in favor of a hedge book consisting primarily of Brent crude and heating oil cashless collars. The Q1 average fuel price of $2.86 per gallon compared with $2.23 per gallon paid a year earlier.

DAL's unrestricted liquidity position has been stable in recent quarters as FCF generation rebounded in 2010 and the company successfully refinanced some maturing debt while paying down other obligations. In April, the carrier closed on a new secured revolver and term loan totaling $2.6 billion. Relative to United Continental, which holds more cash on the balance sheet, DAL has favored a thinner liquidity cushion; however, revolver availability provides ample room to respond in the event of a more extreme fuel shock or a sharp deterioration in demand patterns.

DAL retains defined benefit (DB) pension plans for pre-merger Delta non-pilot groups as well as pre-merger Northwest's unionized employees. All of these plans have been closed to new entrants and frozen for future benefit accruals. Under the 2006 Pension Protection Act, airlines were allowed to apply special funding rules that allow under-funded benefit liabilities to be amortized over a 17-year period. DAL's unfunded DB liability of $9.3 billion as of 12/31/10 was down slightly from YE09's $9.5 billion, driven primarily by better 2010 plan asset returns. Fitch assumes that DAL will cash fund DB plans at approximately $700 million annually over the next several years, in line with actual 2010 cash pension contributions. Significant asset return shortfalls, however, could widen the unfunded gap materially and force the company to direct more cash toward pension contributions. While the extended amortization period provides airlines with more time to address unfunded gaps, a funded status below 50% cannot be sustained for an extended period, given assumed volatility in plan asset returns.

An upgrade in the IDR to 'B' could follow later in 2011 or next year if DAL remains on track to de-lever in line with its plan to reduce lease-adjusted debt by an additional $3.5 billion by the second half of 2013. This would likely require a leveling off of fuel prices or a decline in jet fuel to less than $3.00 per gallon in coming quarters. A return of the Rating Outlook to Stable could follow if a sharp follow-on fuel price spike or revenue shock undermines DAL's FCF outlook in 2012.

Issue ratings affirmed in this action are as follows:

Senior Secured Bank Credit Facilities:

--$1.225 billion Senior Secured Revolving Credit Facility due 2016 'BB-/RR1';

--$1.375 billion Senior Secured Term Loan due 2017 'BB-/RR1';

--$500 million Revolving Credit Facility (Pacific routes) due 2013 'BB-/RR1';

--$750 million Senior Secured First Lien Notes due 2014

'BB-/RR1';

--$600 million Senior Second Lien Notes due 2015 'B-/RR4'.

Additional information is available at 'www.fitchratings.com'.

The issuer did not participate in the rating process, or provide additional information, other than through the medium of its public disclosure.

Applicable Criteria and Related Research:

--'Corporates Rating Methodology' (Aug. 13, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.