Moody's Upgrades Delta Air Lines (DAL) to 'Ba3'; Sees Ongoing Improvement in Profit, Leverage

Moody's Investors Service upgraded most ratings of Delta Air Lines, Inc. (NYSE: DAL), including: the Corporate Family Rating to Ba3 from B1, the senior unsecured to B1 from B2, and all but two of the company's Enhanced Equipment Trust Certificates ("EETCs") by one notch. Moody's affirmed the senior secured rating assigned to the bank credit facilities at Ba1, the Speculative Grade Liquidity rating at SGL-1, and the ratings on the remaining two EETCs. The outlook remains positive.

RATINGS RATIONALE

"The rating upgrades reflect Moody's expectation of ongoing improvements in the company's earnings, cash flow generation and financial leverage, which Moody's believes will continue to accrue in upcoming years," said Senior Credit Officer, Jonathan Root. Delta's fleet plan will require significantly less capital for some time compared to its closest peers, American Airlines Group, Inc. ("AAG", B1 stable) and United Continental Holdings, Inc. ("UAL" B2 positive), which will help support the generation of significant free cash flow in upcoming years. High share of depature ASMs approaching 80% at Atlanta's Hartsfield-Jackson airport, effective revenue management, particularly of corporate accounts, and its strategy in New York with a leading departure share at LaGuardia Airport for its domestic network and a smaller, mainly international franchise at JFK provide Delta a unit revenue premium, driving a leading PRASM less CASM contribution versus its two peers.

"Moody's believes that Delta will maintain its leading credit profile amongst its nearest competitors. The favorable combination of the location of Delta's hubs (which enable competitive if not lower fully-loaded costs per enplaned passenger), benefits of a mainly non-union work-force, effective revenue management practices, and a significantly smaller order book than direct competitors provide a solid foundation for steady improvements in its credit metrics," continued Root.

The upgrades of the ratings of the various EETC tranches reflect the lower probability of default. Six A-tranches issued by Delta are now rated A3. However, Moody's affirmed the Baa1 ratings on the NWA Series 2007-1A and the NWA Series 2002-1 G2. The NWA Series 2007-1A debt is secured by 27 Embraer ERJ 175s, which Moody's believes have less predictability in value over time compared to larger aircraft. The NWA Series 2002-1 debt is secured by one B757-300 and one Airbus A330-200, which Moody's believes has a greater risk of a rejection under a default scenario because of the small collateral pool and because the debt lacks cross-default or cross-collateralization protection.

The affirmation of the senior secured rating at Ba1 reflects changes to the composition of Delta's debt. In particular, less pension underfunding reduces senior unsecured claims, making a smaller first loss position and lowering relative recovery for the secured debt, which is now rated two notches above the corporate family rating.

The positive outlook anticipates that credit metrics could continue to strengthen throughout 2015 if fuel remains around recent levels and there are no significant ill effects on Delta's yields because of strategic pricing actions by other competitors.

The SGL-1 rating signifies very good liquidity, with at least $3.0 billion of cash, $1.9 billion of committed revolving credit that remains undrawn and anticipated free cash flow of about $2.0 billion.

The ratings could be upgraded should gross funded debt approach $9.0 billion and adjusted debt remain below about $28.5 billion while balancing debt pay-down, conservative liquidity management and share repurchases, and Delta continues to strengthen its credit metrics while funding deliveries of new aircraft. Debt to EBITDA that approaches 3.5 times, Funds from Operations + Interest to Interest that approaches 4.5 times and or an EBITDA margin that approaches 20% could support an upgrade. Execution of the hub strategy at Seattle-Tacoma with no degradation in the trajectory of financial results that Moody's projects could also support a ratings upgrade as could maintaining closer to $4.0 billion of cash. The outlook could be returned to stable if Delta was unable to sustain its EBITDA margin, possibly because of inflation in non-fuel costs and or setting capacity too high such that yields decline in periods when passenger demand wanes. Expectation of an EBITDA margin that approached 15% or unrestricted cash to below $3.0 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 could pressure the ratings as could aggregate liquidity (including availability on revolving credit facilities) of less than $4.5 billion. Debt to EBITDA that approaches 5.0 times, Funds from Operations + Interest to Interest that approaches 3.0 times, Retained Cash Flow to Net Debt that approaches 15%, a sustained increase in the cost of jet fuel that is not offset by higher fares and or debt-funding of share repurchases could result in a downgrade.

Upgrades:

..Issuer: Clayton County Development Authority, GA

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B2, LGD5, 72 % from a range of LGD5, 70 %

....Senior Unsecured Revenue Bonds, Upgraded to B1 from B2, LGD5, 72 % from a range of LGD5, 70 %

..Issuer: Delta Air Lines, Inc.

.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD

.... Corporate Family Rating, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust Oct 15, 2014, Upgraded to Ba1 from Ba2

....Senior Secured Enhanced Equipment Trust Nov 23, 2019, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Aug 10, 2022, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Apr 15, 2019, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Aug 10, 2022, Upgraded to Ba1 from Ba2

....Senior Secured Enhanced Equipment Trust Aug 10, 2014, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust Jul 2, 2018, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Jan 2, 2016, Upgraded to Ba1 from Ba2

....Senior Secured Enhanced Equipment Trust Nov 23, 2015, Upgraded to Ba2 from Ba3

....Senior Secured Enhanced Equipment Trust May 7, 2020, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust May 7, 2019, Upgraded to Ba1 from Ba2

....Senior Secured Enhanced Equipment Trust Dec 17, 2019, Upgraded to A3 from Baa1

....Senior Secured Enhanced Equipment Trust Dec 17, 2016, Upgraded to Baa3 from Ba1

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

....Senior Secured Enhanced Equipment Trust Jul 2, 2024, Upgraded to Baa2 from Baa3

..Issuer: Northwest Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Apr 1, 2021, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust Nov 1, 2017, Upgraded to Baa3 from Ba1

Outlook Actions:

..Issuer: Delta Air Lines, Inc.

....Outlook, Remains Positive

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

....Outlook, Remains Positive

..Issuer: Northwest Airlines, Inc.

....Outlook, Remains Positive

Affirmations:

..Issuer: Delta Air Lines, Inc.

....Speculative Grade Liquidity Rating, Affirmed SGL-1

....Senior Secured Bank Credit Facility Oct 18, 2017, Affirmed Ba1, LGD2, 17 % from a range of LGD2, 15 %

....Senior Secured Bank Credit Facility Oct 18, 2018, Affirmed Ba1, LGD2, 17 % from a range of LGD2, 15 %

....Senior Secured Bank Credit Facility Apr 18, 2016, Affirmed Ba1, LGD2, 17 % from a range of LGD2, 15 %

....Senior Secured Bank Credit Facility Apr 20, 2016, Affirmed Ba1, LGD2, 17 % from a range of LGD2, 15 %

....Senior Secured Bank Credit Facility Mar 29, 2017, Affirmed Ba1, LGD2, 17 % from a range of LGD2, 15 %

..Issuer: Northwest Airlines, Inc.

....Senior Secured Enhanced Equipment Trust Nov 20, 2021, Affirmed Baa1

....Senior Secured Enhanced Equipment Trust Nov 1, 2019, Affirmed Baa1

The principal methodologies used in rating Delta Air Lines, Inc. were the Enhanced Equipment Trust And Equipment Trust Certificates published in December 2010 and Global Passenger Airlines published in May 2012. 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.

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