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Rating Action:

Moody's affirms B2 CFR's of Delta and Northwest; outlook negative

14 Sep 2009

Approximately $4.1 billion of rated credit facilities and EETC's affected

New York, September 14, 2009 -- Moody's Investors Service affirmed its B2 corporate family and probability of default ratings of Delta Air Lines, Inc. ("Delta") and of Northwest Airlines Corporation ("Northwest", together "DAL"). Moody's changed the outlook to negative from stable. Moody's affirmed its ratings on each of these companies' first lien and second lien senior secured credit facilities and on the respective rated tranches of certain of their Enhanced Equipment Trust Certificates ("EETC"). Moody's also affirmed the SGL-2 speculative grade liquidity ("SGL") ratings of each of Delta and of Northwest.

"Despite the current weak credit metrics profile, Moody's is maintaining the B2 corporate family ratings of Delta and of Northwest because of the potential for merger synergies to offset pressure from ongoing weak industry fundamentals," said Moody's Vice President, Jonathan Root. Since the October 29, 2008 merger (whereby Northwest became a subsidiary of Delta), management has been focused on executing its merger plan which contemplates obtaining a single operating certificate from the FAA. This is a requirement for completing the legal merger of Northwest and Delta, whereby Delta would effectively assume the contractual obligations of Northwest, and to commence the full-scale integration of single operating systems (e.g. flight scheduling, revenue management, crew scheduling, and aircraft management). DAL expects the achievement of these two milestones to drive the realization of the planned merger synergies. Increasingly, Delta and Northwest are being managed on an enterprise basis. Nonetheless, Moody's maintains a corporate family rating for each airline, and will continue to do so until the formal merger of the airlines occurs. This is because of the Enhanced Equipment Trust Certificates at each airline.

The change in outlook to negative reflects Moody's belief that DAL could be challenged in upcoming periods to restore credit metrics to levels indicative of the B2 rating category. Debt to EBITDA and EBIT to Interest approximated 13 times and 0.2 times, respectively, at June 30, 2009. These weak levels were largely due to 2008's high fuel cost environment and ongoing weak yields. Moody's expects metrics in upcoming quarters to strengthen from these levels as 2008's Q3 and Q4 and 2009's Q1 fuel expense annualizes, as long as oil prices do not meaningfully increase from current levels or yields take another leg down, particularly if there is a wide outbreak of the H1N1 virus this fall. Merger synergies should also positively contribute, particularly after DAL receives a single operating certificate from the FAA. However, even with expected improvement, the company's overall credit metrics will remain particularly vulnerable to downside risks until a sustained economic recovery occurs.

Moody's anticipates that the recovery of airline yields, including those of DAL, is likely to lag any recovery in economic activity, and the magnitude of the recovery in yields will be smaller than those the sector realized in other post-recession periods. Unemployment rates are likely to remain meaningfully higher than those after other recent post-recession periods, which should constrain the pace of recovery of leisure demand. Similarly, recovery of demand for forward cabins is also likely to lag because businesses are likely to continue to focus on cost containment measures. Moody's believes that these factors are likely to continue to maintain pressure on the sector's yields. This could challenge DAL to fully achieve the revenue synergies it plans to realize as it executes its merger strategy, leading to lower than planned operating cash flow.

The affirmation of each of the SGL ratings of SGL-2 reflects the sufficient cash balance Delta and Northwest have maintained to date and the expectation of positive free cash flow generation in upcoming periods.

The ratings could be downgraded if credit metrics do not show meaningful improvement from the June 30, 2009 levels. Debt to EBITDA that remains above 7.0 times, Funds from Operations + Interest to Interest that remains below 2.0 times or an EBITDA margin of less than 12.5% could result in a downgrade as could unexpected large increases in the barrel price of oil from the current trading range that hovers at about $70 per barrel. The planned merger synergies can help mitigate pressure on earnings and operating cash flow from potentially worse than expected fundamental conditions. Any meaningful shortfall, particularly related to intended revenue benefits of the merger, which account for a majority of the planned synergies, could adversely affect the credit profile and could result in a downgrade of the ratings. The inability to maintain unrestricted cash above $3.5 billion could also pressure the rating.

Demonstrated improvement in credit metrics relative to the levels at June 30, 2009 would be required for Moody's to consider returning the outlook to stable. Moody's would look for Debt to EBITDA of less than 7.0 times, Funds from Operations + Interest to Interest greater than 2.0 times and an EBITDA margin above 13%. Annual Free Cash Flow that is sustained above $1.0 billion could also lead to an outlook change to stable.

The principal methodology used in rating Delta and Northwest is Global Passenger Airlines, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating these two issuers can also be found in the Credit Policy & Methodologies directory.

The last rating action was on December 24, 2008 when Moody's confirmed the respective B2 corporate family and probability of default ratings of Delta and of Northwest and changed the outlooks to stable.

Upgrades:

..Issuer: Delta Air Lines, Inc.

....Senior Secured Bank Credit Facility, Upgraded to LGD4, 54% from LGD4, 56%

..Issuer: Northwest Airlines, Inc.

....Senior Secured Bank Credit Facility, Upgraded to LGD3, 32% from LGD3, 35%

Outlook Actions:

..Issuer: Delta Air Lines, Inc.

....Outlook, Changed To Negative From Stable

..Issuer: Delta Air Lines, Inc. (Old)

....Outlook, Changed To Negative From Stable

..Issuer: Northwest Airlines Corporation

....Outlook, Changed To Negative From Stable

..Issuer: Northwest Airlines, Inc.

....Outlook, Changed To Negative From Stable

Delta Air Lines, Inc., headquartered in Atlanta, Georgia, is the world's largest airline, providing schedule air transportation for passengers and cargo throughout the U.S. and around the world. On October 29, 2008, a subsidiary of Delta merged into Northwest Airlines Corporation. Northwest and its subsidiaries, including Northwest Airlines, Inc. are wholly-owned subsidiaries of Delta.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jonathan Root
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms B2 CFR's of Delta and Northwest; outlook negative
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