Delta Air Lines anticipates little new financing activity in to 2014, focusing instead on debt reduction.
The Atlanta-based carrier will meet its $2 billion to $2.5 billion in annual capital expenditures (capex) with either cash or, if the right opportunity arises, capital markets or leasing financing, says Paul Jacobson, chief financial officer of Delta, during an interview with Airline Business.
“2014 is going to be a pretty plain vanilla year,” he says. “The threshold for determining whether or not you should debt finance something is: do you have a use of that cash? With $4 billion to $5 billion of operating cash flow and $2.5 billion of capex, [that] leaves a lot of room in there to potentially pay cash for airplanes too should you need too.”
Jacobson adds: “It doesn’t mean that tactically there aren’t opportunities that will avail themselves from time to time. Whether that’s EETCs [enhanced equipment trust certificates] or potentially leasing some aircraft to balance the portfolio, there are lots of things we can look at.”
Included in Delta’s capex is $1.7 billion in aircraft purchase and lease commitments that it has in 2014, according to its third quarter financial statement.
The airline has 19 Boeing 737-900ER and its regional subsidiary Endeavor Air 28 Bombardier CRJ900 deliveries scheduled in 2014, Flightglobal’s Ascend Online database shows.
Delta had $3.98 billion in cash, cash equivalents and short-term investments, and $10.1 billion in long-term debt and capital lease obligations at the end of September.
The shift away from new financial commitments comes as the carrier has refinanced or paid off most of its legacy high coupon debt.
Delta had about $17 billion in debt with $1.3 billion in annual interest expenses following its merger with Northwest Airlines in 2008, says Jacobson. It has since reduced that debt load to $10 billion with less than $900 million in annual interest expenses by replacing and paying off high coupon debt.
Delta Air Lines
“Where we are right now is we’ve largely gotten the portfolio to where it’s current market based,” he says. “The opportunities to go issue a EETC, even if you can get it at 4% to 4.5%, I’m not going to be able to take out high cost debt like I could before.”
Delta’s current target is $7 billion in net debt by 2018.
The carrier’s last debt issue was its $1.95 billion Pacific routes refinancing where it replaced more than $900 million in in debt with coupons of 9.5% and 12.25% with a $1.1 billion six-year term loan with a coupon of 5.25% in October 2012. The refinancing also included a $400 million four-year term loan with a 4.25% coupon and a $450 million revolving credit facility.
Its last capital markets deal was the $480 million 2012-1 EETC with coupons of 4.75% and 6.875% in June 2012. The debt is secured by 31 aircraft already in Delta’s fleet.
Endeavor is also receiving between Canadian dollars (C$) 500 million ($477.3 million) and C$1 billion in export credit financing from Export Development Canada for its order of up to 70 Bombardier CRJ900s in December 2012. Deliveries began in August.
A Delta unsecured debt issue, like those at United Airlines and US Airways, is a possibility but not an urgent need, says Jacobson.
“There’s doubt that a Delta unsecured would be pretty well received,” he says. “As we look to balance the overall debt-to-equity ratio of the company, it might be something that we look at but there’s certainly no urgency to do anything.”
United closed a $300 million seven-year unsecured issue with a 6% coupon on 8 November, its second such issue this year, while US Airways closed a $500 million five-year unsecured notes with a coupon of 6.125% in May.