Fitch Ratings has upgraded Delta Air Lines’ IDR to 'BB+'. The Rating Outlook is Positive.
The ratings upgrade reflects on-going improvements to Delta’s balance sheet, continued solid operating performance, better than expected free cash flow (FCF), and successful efforts to combat operating cost inflation. The ratings are also supported by underlying improvements in the airline industry including consolidation among the legacy carriers and capacity constraint, which have led to an improved risk profile and better profitability for the industry as a whole.
The Positive Outlook reflects Fitch’s view that Delta’s credit profile will continue to improve over the intermediate term. Delta continues to focus on debt reduction and addressing its underfunded pension plan as key priorities. Fitch may upgrade Delta if adjusted debt/EBITDAR is maintained below 2.0 - 2.5x (2.2x at June 30, 2015) and as Fitch gains further comfort that Delta’s metrics and financial health will be sustainable through future downturns. A ratings upgrade could also follow maintenance or improvement of profitability metrics from current levels over the next 18 months as the industry absorbs some of the capacity expansion that the market is experiencing in 2015.
Delta’s underfunded pension plan remains a concern, though Fitch believes this concern is manageable. The plans were underfunded by $12.5 billion at year end 2014, leading to sizeable required annual cash contributions. These risks are partially mitigated by Delta’s cash flow generation, which enables the company to fund its pension requirements while still generating positive FCF, and by Delta’s efforts to make pension contributions over and above the required minimums.
International markets continue to present a concern with U.S. airlines reporting broad-based unit revenue weakness, which has been exacerbated by the rise of the U.S. dollar. Other rating concerns are primarily reflective of risks inherent in the airline industry. Cyclicality, exposure to exogenous shocks (i.e. war, terrorism, etc.), capital intensity, operating leverage, and sensitivity to global oil prices remain key considerations.