Fitch downgrades Delta on continued weakening demand

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Ratings agency Fitch today issued a downgrade for Delta Air Lines after determining the carrier would log negative free cash flow in 2009 as a revival of weak demand remains uncertain.

Fitch believes the general revenue outlook during the last few weeks has remained week, and Delta in particular has seen weakness in international markets at the centre of its growth strategy since 2007. The ratings agency says monthly trends in May weakened compared with April. May was particularly challenging due to the H1N1 virus, whose effects spread to Delta's Asian markets.

"Unfortunately, many of the projected revenue synergies offered by the creation of a truly global route network [from the Delta-Northwest merger] are being offset by the collapse of premium business travel demand and intense fare competition across the entire industry," Fitch explains.

Delta has made additional capacity cuts in under-performing international routes, and Fitch believes the combined network with Northwest could give Delta a unit revenue advantage once a recovery occurs. However, "a continuation of substantial unit revenue declines could, in Fitch's view, drive full year 2009 negative free cash flow in excess of $400 million".

Any hopes of a free cash flow rebound during the second half of 2009 are being dashed by US legacy carriers engaging in deep fare discounting to offset weak premium cabin load factors on transatlantic and transpacific routes.

Delta management has recently estimated liquidity at the end of the current quarter of $5.3 billion. But Fitch warns a cash position of greater than $4 billion is "critical for Delta as it faces negative free cash flow in the second half of the year and heavy scheduled debt maturities of over $2.9 billion in 2010".

Fitch is reserving the right of a further downgrade for Delta later this year or in 2010 if airline revenue stabilization fails to materialize, "increasing the risk that Delta's total liquidity position could slip below $4 billion with forecasts of continuing negative free cash flow next year".