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Rating Action:

Moody's upgrades Delta Air Lines; CFR to B1, outlook stable

27 Jun 2013

New York, June 27, 2013 -- Moody's Investors Service raised its debt ratings of Delta Air Lines, Inc. ("Delta"): Corporate Family to B1 from B2, Probability of Default to B1-PD from B2-PD, Senior Secured to Ba1 from Ba2 and senior unsecured to B2 from B3. Moody's raised by one notch its ratings assigned to all of the company's Enhanced Equipment Trust Certificates ("EETCs") except the B-tranche of Series 2010-2 issued by Delta and the G-tranche of Series 2000-1 originally issued by Northwest Airlines, Inc.. The ratings on these two EETC tranches were affirmed as was the SGL-2 Speculative Grade Liquidity rating. The outlook is stable.

RATINGS RATIONALE

The upgrade of the ratings considers the company's steady performance in the years since the most recent recession. Capacity discipline, improvements to the product and to the network that have focused on its strategy for the New York market and to improve its appeal to corporate accounts have supported free cash flow generation and facilitated the de-levering of its balance sheet. Funded debt has declined by almost $5 billion since 2009 while annual fuel spend increased by almost $4.0 billion. On June 29, 2012, Delta and Virgin Atlantic, in which Delta now holds a 49% equity interest and three board seats, will implement a code share covering 107 routes across the companies' networks. Moody's believes this tie-up will benefit Delta's traffic and financial performance as it will significantly improve the appeal of its schedule to London's Heathrow and beyond as well as provide incremental passenger flow to its US domestic network under the code share.

The B1 corporate family rating reflects Delta's leading position in the global passenger airline sector, its steady earnings and free cash flow generation, which Moody's anticipates will continue and the progress it has made towards achieving the prior net debt target of $10 billion. The rating also anticipates modest improvements in credit metrics over the next 12 to 18 months. Moody's believes that Delta will maintain profitability in 2013, notwithstanding slowing growth in demand because of ongoing global macroeconomic headwinds including the impact from sequestration in the U.S., ongoing fiscal and economic challenges in Europe and the weak yen in Japan. Steady demand in premium cabins, ongoing industry capacity discipline, particularly on highly competitive trans-Atlantic routes and Delta's focus on growing ancillary revenues should help unit revenues keep pace with growth in unit costs. Good liquidity, in excess of $5 billion including revolving credit facilities that impose no conditions for drawings and a manageable maturity profile support the B1 rating. The ratings also consider the benefits the global route network should provide in periods of improving demand, anticipated free cash flow as annual capital expenditures for aircraft are modest and that pressure on labor and other non-fuel costs will remain manageable despite near-term pressure in 2013, including from higher pilot labor rates pursuant to the terms of the contract agreed in 2012.

The B1 rating also considers Delta's head start at implementing an airline merger relative to legacy peers. Moody's believes that Delta's revenue management benefits from having a longer history of operating a combined network on a common revenue system, giving it a relative advantage, in the near term, in fare planning. Delta also has had more time to size its labor force to its operations with greater flexibility since its pilots are the only work group represented by a union.

The stable outlook reflects our belief that Delta's credit metrics will continue to strengthen to levels supportive of the B1 rating and maintain its good liquidity profile. Despite an outlook of only modest growth for the U.S. and slowing growth for global economic activity, Moody's anticipates steady passenger demand and a lower average fuel price in 2013, each of which will support the trend in the company's credit metrics. Additionally, Delta's focus on reducing funded debt as it begins its march toward its publicly-announced new net debt target of $7 billion should help mitigate any pressure on leverage and coverage metrics should operating profit decline with weaker economic activity.

Sustained improvement in credit metrics despite economic headwinds and while funding fleet renewal, including deliveries of the Boeing B737-900ER aircraft that begin to deliver in July 2013 could lead to a positive rating action. Moody's would look for Debt to EBITDA to approach 4.0 times, Funds from Operations + Interest to Interest that approaches 4.0 times and an EBITDA margin that approaches 18% before considering an upgrade. Annual free cash flow sustained above $2 billion while funding deliveries of new aircraft including a potential upcoming order for wide-body aircraft could also lead to a positive rating action.

An inability to sustain its EBITDA margin, possibly because of inflation in non-fuel costs and or setting capacity at levels insufficient to help sustain yields in periods when passenger demand waivers could lead to a negative rating action. EBITDA margin that approached 12% or a sustained decline in unrestricted cash to below $2.7 billion would be indicators of a negative shift in the company's credit profile. While not expected, a sustained decline in demand that led to declines in yields of more than 8% with no corresponding offsets to costs, possibly from a commensurate decline in the cost of fuel, could also pressure the ratings as could aggregate liquidity (including availability on revolving credit facilities) of less than $4.5 billion. Debt to EBITDA sustained above 6.3 times or Funds from Operations + Interest to Interest that approaches 2.3 times could pressure the rating.

We anticipate that Delta will place an order for wide-body aircraft within the next 12 months to start a multi-year process to modernize its medium- to long-haul fleet. This will lead to incremental capital expenditures which could reduce the good free cash flow generation the company has achieved in recent years and that it expects to continue to achieve in upcoming years. However, a number of investment projects, such as refurbishments of aircraft cabins including installations of lie-flat seats throughout the wide-body fleet and terminal projects in New York will be winding down in the next 12 to 24 months, freeing up investment dollars for new aircraft without meaningfully impairing free cash flow generation.

The principal methodology used in this rating was the Global Passenger Airlines Industry Methodology published in May 2012 and the Enhanced Equipment Trust And Equipment Trust Certificates Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Delta Air Lines, Inc., headquartered in Atlanta, Georgia, is one of the world's largest airlines, providing scheduled air transportation for passengers and cargo throughout the U.S. and around the world.

Upgrades:

..Issuer: Clayton County Development Authority, GA

....Senior Unsecured Revenue Bonds, Upgraded to B2 from B3

....Senior Unsecured Revenue Bonds, Upgraded to B2 from B3

..Issuer: Delta Air Lines, Inc.

.... Probability of Default Rating, Upgraded to B1-PD from B2-PD

.... Corporate Family Rating, Upgraded to B1 from B2

....Senior Secured Bank Credit Facility Apr 20, 2016, Upgraded to Ba1 from Ba2

....Senior Secured Bank Credit Facility Mar 29, 2017, Upgraded to Ba1 from Ba2

....Senior Secured Bank Credit Facility Oct 18, 2017, Upgraded to Ba1 from Ba2

....Senior Secured Bank Credit Facility Oct 18, 2018, Upgraded to Ba1 from Ba2

....Senior Secured Bank Credit Facility Apr 18, 2016, Upgraded to Ba1 from Ba2

....Senior Secured Bank Credit Facility Apr 20, 2016, Upgraded to a range of LGD2, 15 % from a range of LGD2, 16 %

....Senior Secured Bank Credit Facility Mar 29, 2017, Upgraded to a range of LGD2, 15 % from a range of LGD2, 16 %

....Senior Secured Bank Credit Facility Oct 18, 2017, Upgraded to a range of LGD2, 15 % from a range of LGD2, 16 %

....Senior Secured Bank Credit Facility Oct 18, 2018, Upgraded to a range of LGD2, 15 % from a range of LGD2, 16 %

....Senior Secured Bank Credit Facility Apr 18, 2016, Upgraded to a range of LGD2, 15 % from a range of LGD2, 16 %

....Senior Secured Enhanced Equipment Trust Aug 10, 2014, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust Aug 10, 2022, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust Dec 17, 2016, Upgraded to Ba1 from Ba2

....Senior Secured Enhanced Equipment Trust Jan 2, 2016, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust Oct 15, 2014, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust May 7, 2019, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust Aug 10, 2022, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Dec 17, 2019, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Jul 2, 2018, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Nov 23, 2019, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Apr 15, 2019, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust May 7, 2020, Upgraded to Baa1 from Baa2

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

....Senior Secured Enhanced Equipment Trust Jul 2, 2024, Upgraded to Baa3 from Ba1

....Senior Secured Enhanced Equipment Trust Jul 2, 2024, Upgraded to Baa3 from Ba1

..Issuer: Northwest Airlines, Inc.

....Senior Secured Enhanced Equipment Trust May 20, 2014, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust May 20, 2014, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Nov 1, 2017, Upgraded to Ba1 from Ba2

....Senior Secured Enhanced Equipment Trust Nov 20, 2021, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Nov 20, 2021, Upgraded to Baa1 from Baa2

....Senior Secured Enhanced Equipment Trust Nov 1, 2019, Upgraded to Baa1 from Baa2

Affirmations:

..Issuer: Delta Air Lines, Inc.

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

....Senior Secured Enhanced Equipment Trust Nov 23, 2015, Affirmed Ba3

..Issuer: Northwest Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Apr 1, 2021, Affirmed B1

....Senior Secured Enhanced Equipment Trust Apr 1, 2021, Affirmed B1

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.

For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Root
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Delta Air Lines; CFR to B1, outlook stable
No Related Data.
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