Delta Gets a Lift on Its Credit Rating

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From Standard & Poor's RatingsDirect

Projections in Delta's disclosure statement foresee further, albeit slowing, revenue gains and achievement of parity with peer-average revenue per available seat mile by 2009. Management reiterated recently the plan's forecast $800 million of pretax earnings in 2007, rising to $1.9 billion by 2010. Recent economic softness poses risks to that forecast, in that pricing improvements (particularly in the domestic market) may be less than forecast. Standard & Poor's considers also that there is further risk in the later years of the forecast (2009 and 2010), by which time a cyclical downturn may be underway.

On Target for Aircraft Deliveries

Delta had unrestricted cash and short-term investments of $2.9 billion at Mar. 31, 2007, and expects that to increase to $3.4 billion by the end of 2007. Delta's scheduled debt maturities (excepting repayment of the debtor-in-possession [DIP] credit facility upon bankruptcy emergence) range from about $500 million to over $1.4 billion (in 2010). Capital expenditures are forecast in the $1 billion to $1.9 billion range annually, a larger amount than UAL projected upon its emergence from Chapter 11, due to planned additions of aircraft to support international expansion and continue fleet simplification and modernization.

Even so, the company forecasts free cash flow of over $1 billion annually. Our assumptions of more moderate revenue growth would result in somewhat lower free cash flow, particularly in 2009 and 2010. Still, we consider that Delta should not face difficulties in financing its remaining aircraft deliveries, given the types of planes being acquired.

S&P Ratings' stable outlook on Delta incorporates expectations of improving earnings and credit measures, though not necessarily at the levels forecast in Delta's disclosure statement. The outlook could be revised to positive if the company is able to generate better than expected earnings and cash flow, allowing it to prepay debt and/or finance aircraft deliveries internally. An outlook revision to negative is considered less likely, barring external shocks to the aviation industry that cause materially weaker performance by Delta.

A managing director in Standard & Poor's Corporate and Government Services, Philip Baggaley analyzes airlines and aircraft leasing companies, and manages S&P's transportation, aerospace, and defense rating team.