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
