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.
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.