Moody’s upgrades Delta to Ba3

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Moody’s Investors Services has upgraded Delta Air Lines’ corporate rating to Ba3 positive, moving the carrier one step closer to investment grade.

The Atlanta-based carrier remains two steps below investment grade but is no longer in the rating agency’s highly speculative range with its previous B1 rating. Its senior unsecured rating improved to B1 from B2 and all but two of its enhanced equipment trust certificate (EETC) ratings improved by one notch, says the agency.

“The rating upgrades reflect Moody's expectation of on-going improvements in the company's earnings, cash flow generation and financial leverage, which Moody's believes will continue to accrue in upcoming years," says Jonathan Root, a senior credit officer at Moody’s, in a report today. “Moody's believes that Delta will maintain its leading credit profile amongst its nearest competitors.”

Root cites Delta’s “significantly” lower aircraft capital expenditures compared to peers American Airlines and United Airlines, effective revenue management, New York City strategy, and strong unit revenue growth among reasons for the upgrade.

Delta is targeting investment grade-like metrics as it seeks to reduce its adjusted net debt to $5 billion by the end of 2016.

“I don’t know whether we will get an investment grade rating or not, but we don’t care about that,” said Paul Jacobson, chief financial officer of the airline, in June. “We care about a balance sheet that has the metrics there comparable to the companies that many of you at an industrial conference are used to see in terms of balance sheet stability.”

Moody’s says that additional upgrades are possible if fuel remains at current levels, Delta’s gross debt approaches $9 billion and it maintains its EBITDA margins.