Once-mighty Delta Air Lines has gone from the envy of the airline world to a company whose credit rating was just downgraded to junk status.
S&P Global Ratings has lowered Delta’s long-term rating from BBB- to BB. Translation: it’s going to be a long, tough road to recovery.
The S&P has 12 subcategories within its broader “junk” rating and the BB rating is near the top of that subcategory. It doesn’t mean that S&P is predicting Delta will fail nor even necessarily discouraging any investment in it. Rather, it is just a reflection of the financial hurdles Delta faces in the new COVID-19 world.
Betsy Snyder, the S&P analyst who issued the report, said:
“While the company is reducing its capacity and some associated costs, and will benefit from the steep decline in oil prices, we expect these supporting factors to be more than offset by its much weaker traffic. However, we expect the volume of passenger traffic to begin to recover later this year and continue improving into 2021.”
“Much weaker traffic” is a bit of an understatement at this point, as Delta projected last Friday that its second-quarter revenue would drop 80% ($10 billion) compared to same period last year. Delta is now in survival mode, suspending buybacks and dividends and securing additional lines of credit to stay liquid.
This rating was issued before Congress agreed to bail airlines out, but even a cash infusion from the federal government won’t solve the systematic problem, especially as some models credit demand will recover very slowly even after COVID-19 is contained.
Responding to the S&P report, Delta said:
“The actions by the S&P underscores the need for swift relief for airline employees that is currently being considered by the government.”
But the credit downgrade doesn’t change much directly; it will be business as usual for Delta going forward (if “as usual” is even such a thing in this new world). Its stock price was up 16% today as investors reacted positively to the $2 trillion bailout package.
CONCLUSION
Delta likely won’t be alone very long…Delta was in a stronger position than other airlines before COVID-19 decimated most traffic. Expect similar downgrades for other airlines in the days ahead. The credit downgrade underscores how hard airlines have been hit by coronavirus.
Yeah but it’s stock is doing well.
Self made men getting their swagger back by the day.
Very pooy written article Matthew. It would be much better if you compared Delta’s rating with the ratings of United and American Airlines. Delta’s rating aline doesn’t mean anything if you look at the airline industry overall. BTW, you should mention that UA’s credit rating is also junk. Delta stock had the lowest YTD decline vs UA and AA. Also, even with their rating down to “junk” Delta’s stock price went up 16% today.
Santastico, the point was not to attack Delta…I think I went out of my way to avoid that. Rather, it was to demonstrate that even the strongest airline has hit severe turbulence. That the stock is up today after the government agreed to print $2TN and dole out obscene amounts of corporate welfare is not surprising. There’s not even a correlation between stock price and junk credit rating. I’m simply trying to demonstrate what a serious issue this has become for U.S. airlines and in this article, I demonstrated it by showing how it has hurt even the strongest U.S. airline.
@Santastico : you gotta tell us what your secret us for such oblivious bliss that rivals Dr. Tedros and Rand Paul, like thinking an airline’s debt level actually matters here. Lemme guess, chloroquine with a side of home-made remdesivir ?
Any airline’s credit rating, liquidity ratios, cash flow statements, balance sheet as of Dec 31 2019 simply does not matter ONE single bit in today’s environment. Those only matter if travel is down 20% ish, not 80% 90% 95%. This should be painfully obvious but i guess bears repeating –
*words of bluster are something that intubates better than it incubates.*
*ONLY* to junk ?? geeez talk about grading on a curve. i guess it’s true in the sense the Venezuelan bolivar is better than weimar republic marks.
The airlines are fine even though they actually have paid very low taxes the past few years. At least they are incorporated in the US.
But the cruise lines are not even US. They all incorporated in low tax countries like Bermuda. Why are they being bailed out? Maybe because the executives and friends give campaign contributions to the Republicans? No bloody outrage on the Republican side about this? Hypocrites.
Debit, the cruise industry provides direct jobs to Americans in Florida and other states as well as indirect jobs through revenue to ports, orders to suppliers, providing passengers to airlines, guests to hotels, income to travel agencies, etc. and etc.
As I recall, Seattle and the state of Washington, where Holland America is headquartered, as well as Santa Clarita and the state of California, where Princess is headquartered, are Democrat strongholds. But if If you Democrats wish to kill jobs in these cities and states, why should any Republicans be outraged? Instead they should be laughing at Democrats turning on their own constituents.
How much stock do you have in the cruise industry Dave? No one expects Republicans to be outraged. Your only ideology is making money for yourself and you will rely on whatever argument to take money from others.