Fitch downgrades Delta, warns U.S. airlines could default

Fitch downgrades Delta, warns U.S. airlines could default    Fitch Ratings said it has downgraded Delta Air Lines' $3.3 billion secured debt and credit line loans because of continued declines in passenger revenue, and warned that rivals United Airlines, American Airlines and US Airways could face bankruptcy as early as this winter.
   The ratings agency said it expects Delta, which also uses its passenger planes to move a large amount of cargo, to have $400 million in negative free cash flow in 2009 as operating results deteriorate in the second half of the year. It rated various debts in the 'B-' to 'BB' range. Delta has $5 billion in cash and other liquid assets that provides a larger buffer than other carriers to meet operating and financing obligations. But it will be difficult for the airline to maintain reserve levels and pay $5 billion in notes that are scheduled to mature between now and the end of 2011 without improved access to credit markets to refinance loans and better airline industry economics next year, Fitch said. Delta also has cost advantages over other air carriers due to its recent restructuring and emergence from bankruptcy in 2007.
   Fitch said United, American and US Airways are more vulnerable to failure if the operating environment does not improve. The loss of a competitor would further reduce industry capacity and give surviving carriers such as Delta more time to ride out the current economic downturn by stabilizing passenger yields per available seat mile.
   Delta has made progress integrating Northwest Airlines since their merger last October. Labor and seniority issues have been mostly resolved. The two fleets are being used interchangeably, consolidation of airport facilities is nearly complete and the Atlanta-based carrier is expected to receive a single airline operating certificate from the Federal Aviation Administration by early 2010. It also terminated Northwest's freighter operations due to the poor global trade environment.
   '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. This has forced Delta, as recently as early June, to announce more planned cuts in international capacity to minimize losses on under-performing routes,' Fitch said.
   Delta's revenue in May was also impacted by the H1N1 flu scare that impacted bookings in Mexico and Asia. Fitch said Delta could lose $250 million in sales this year because of traveler concerns about the pandemic.
   Fitch said Delta needs cash reserves of at least $4 billion to meet its debt maturities of more than $2.9 billion in 2010, but there are recent signs that banks are more willing to refinance loans for better capitalized airlines. Also on the positive side, Delta has financing in place for near-term aircraft orders and has few aircraft capital commitments in 2010. Delta is also unwinding some fuel hedging contracts that cost it extra money as fuel prices remain below last year's record highs. ' Eric Kulisch