Fitch Downgrades Debt Ratings of Delta Air Lines (DAL); Outlook is Negative

June 25, 2009 10:50 AM EDT

Fitch Ratings has downgraded the debt ratings of Delta Air Lines, Inc. (NYSE: DAL) and its wholly owned subsidiary Northwest Airlines, Inc. (NYSE: NWA) as follows:

DAL: Issuer Default Rating (IDR) to 'B-' from 'B'; First-lien senior secured credit facilities to 'BB-/RR1' from 'BB/RR1'; and Second-lien secured credit facility to 'B-/RR4' from 'B/RR4'.

NWA: IDR to 'B-' from 'B'; Secured bank credit facility to 'BB-/RR1' from 'BB/RR1'.

The ratings apply to $2.4 billion of funded secured debt at DAL and $904 million of outstanding credit facility borrowings at NWA. The Rating Outlook is Negative.

MERGER: Steady progress toward complete integration of NWA into DAL has been made since the merger closed last October. Most of the key labor representation and seniority issues have been resolved, and DAL appears on track to meet its goal of receiving a single airline operating certificate from the FAA by early 2010...Unfortunately, many of the projected revenue synergies offered by the creation of a truly global route network are being offset by the collapse of premium business travel demand and intense fare competition across the entire industry.

CASH FLOW/REVENUE: The downgrade of DAL's ratings reflects the continued erosion of the airline's near-term cash flow generation potential that has resulted from extremely weak business travel demand and large year-over-year declines in passenger revenue per available seat mile (RASM). Despite large 2009 cost savings driven by the sharp decline in jet fuel prices from last summer's peak, Fitch expects DAL to report another year of substantially negative free cash flow in 2009 as the airline struggles to adjust capacity to a diminished level of demand.

The revenue outlook has shown no signs of real improvement over the last few weeks, even as hopes for a slow economic recovery moving into 2010 have increased.

LIQUIDITY: DAL's relative liquidity strength within the U.S. legacy carrier group has been pressured over the past year as a result of poor operating trends and the outflow of cash driven by the need to post fuel hedge margin collateral with hedging counterparties.

Absent strong free cash flow, extensive capital markets activity will be required to refinance maturing obligations. One positive is the fact that all near-term aircraft orders have committed financing in place,
and aircraft capital commitments in 2010 are relatively light.

FUEL: Like the other large U.S. airlines, DAL paid a steep price for aggressive fuel hedging undertaken in 2008 as energy prices soared before pulling back sharply. By 4Q08, after crude oil and jet fuel prices had dropped from their July highs, DAL began to unwind some of its remaining fuel hedge exposure. Even after the early termination of many fuel swaps, DAL was required under GAAP hedge accounting rules to recognize large losses in 4Q08 and 1Q09. This will continue over the next two quarters, and the company has indicated that it will likely book $500 million in hedge-related losses in the current quarter.

Delta Air Lines, Inc. (Delta) is an airline service provider. The Company from its hubs in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Salt Lake City, Paris-Charles de Gaulle, Amsterdam and Tokyo-Narita, Delta, its Northwest subsidiary and Delta Connection carriers, offers service to 370 destinations in 66 countries and serve more than 170 million passengers each year.

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