Fitch affirms Delta Air Lines at 'B-'; Outlook to stable

--Issuer Default Rating (IDR) at 'B-';

--First lien senior secured bank credit facilities (Delta Exit Facility) at 'BB-/RR1';

--Second lien secured term loan (Delta Exit Facility) at 'B-/RR4'.

Fitch has also assigned ratings to DAL's other secured bank facilities and notes as follows:

--Senior secured bank credit facilities due 2013 'BB-/RR1';

--First lien secured notes due 2014 'BB-/RR1';

--Second lien secured notes due 2015 'B-/RR4'.

The Rating Outlook for DAL has been revised to Stable from Negative. The ratings apply to approximately $4.5 billion of committed bank facilities and secured notes. Following the full merger of the Northwest Airlines, Inc. subsidiary into DAL at the end of 2009, Northwest no longer exists as a separately-rated entity.

The revision of DAL's Rating Outlook follows a turnaround in free cash flow (FCF) generation witnessed since the beginning of 2010 and the clear upturn in industry revenue performance that should support a meaningful reduction in DAL's debt balances through the remainder of the year. Following a period of extreme operating stress during 2008 and 2009, balance sheet repair will require sustained improvements in cash flow generation and significant leverage reduction over the next several quarters. Management's focus on the importance of positive FCF generation and de-levering the balance sheet suggests that improvements in DAL's credit profile are now more likely in a period of premium air travel demand recovery supported by modest though still uneven economic growth.

The 'B-' IDR captures DAL's still high lease-adjusted leverage, its heavy fixed financing obligations over the next several years, and the airline industry's unique vulnerability to external demand and fuel price shocks. Scheduled debt maturities of over $6 billion between now and the end of 2012, together with substantial cash pension funding requirements, will consume most of the carrier's expected operating cash flow. While DAL's good relative liquidity position (approximately $6 billion of unrestricted cash, investments and revolver availability) opens the door for an extended period of debt reduction, steady progress toward balance sheet repair will depend greatly on a continuation of favorable revenue trends and a relatively benign fuel price environment (jet fuel prices averaging less than $2.50 per gallon).

DAL noted on June 15, 2010 that it expects second quarter passenger revenue per available seat mile (RASM) to increase by 20% as strong growth in business bookings and yields continues into early summer. While RASM comparisons will become more difficult late in the year, the rapid strengthening of premium travel demand should support solid profitability through the remainder of 2010. Assuming jet fuel prices remain near current levels in the second half of the year, Fitch believes that the company's recent forecast of $2 billion in full year FCF is achievable. With unrestricted liquidity now representing approximately 20% of annual revenues, most available cash flow is likely to be directed toward debt reduction. Management has targeted approximately $2 billion of expected net debt reduction this year, with a three-year target of almost $7 billion by the end of 2012.

Stronger unit revenue performance is likely to be supported by capacity constraint at Delta and across the entire U.S. airline industry as carriers focus on the need for better returns linked to passenger yield strength. Management expects essentially flat system capacity for the full year, and DAL has no fleet commitments beyond 2010. Industry capacity is unlikely to grow significantly in 2011, given the absence of large aircraft orders and potential capacity rationalization resulting from the proposed merger of United Airlines and Continental Airlines.

Reduction of DAL's total fleet size by a net 91 aircraft this year reflects management's focus on better asset utilization and labor productivity that will help offset other expense pressures to keep unit costs stable on flat available seat mile (ASM) capacity. Non-fuel unit costs are expected to remain flat in 2010 as higher-cost aircraft are removed from the fleet and active aircraft are deployed more efficiently to match demand across the route network. Stable unit costs will allow DAL to maintain a material cost per available seat mile (CASM) advantage over its legacy carrier competitors.

Fuel prices, while moving higher in recent weeks, remain well below the 2008 levels that drove large losses when crude oil prices spiked to over $140 per barrel. Price volatility, however, remains a major concern, and DAL has built a substantial book of hedges to help protect the carrier from rapid increases in jet fuel costs. As of mid-June, DAL had hedged approximately 49% of projected 2010 fuel consumption, with additional protection purchased for 2011. The average crude oil call option cap is at $82 per barrel for 3Q'10 and $83 per barrel for 4Q'10. DAL is now using call options more extensively to limit liquidity pressure in a declining fuel price scenario. Jet Fuel and crude oil swaps and collars comprise approximately 50% of outstanding hedges, with call options accounting for the remainder.

Although reduced fleet-related capital spending will boost FCF through the cycle, DAL faces a large unfunded defined benefit pension liability that will likely pressure operating cash flow generation over the next few years. The carrier met its 2010 required contribution level of $665 million through cash funding in the first four months of the year. Should plan asset returns mirror the weak performance of the broader markets this year, DAL will have difficulty meeting its expected return assumption of 9% for 2010. This could lead to rising cash funding levels in future years as the carrier seeks to cut the unfunded liability ($9.4 billion at year-end 2009) on its frozen plans.

DAL's launch this week of $450 million in 2010-1 pass-through certificates to refinance the remaining aircraft collateralizing the 2000-1 certificates reflects the carrier's strengthened access to the capital markets and its ability to extend maturities on secured obligations. Sustained capital markets openness should allow DAL to reduce its average borrowing costs as higher-coupon debt is refinanced or paid down.

In light of the turnaround in the revenue environment and FCF generation, leverage reduction could proceed at a rapid pace over the next few quarters. If DAL's operating results track closely to the plan laid out by management, lease-adjusted leverage could fall below 4 times (x) during 2011. This de-leveraging scenario, combined with consistent FCF generation and a favorable fuel and macroeconomic backdrop, would likely support an IDR in the mid to high single 'B' range.

Accordingly, a revision of the Rating Outlook to Positive or an upgrade of the IDR to 'B' could follow if steady improvements in DAL's margins drive the type of solidly positive FCF generation recently projected by management. Fitch will focus on the airline's ability to improve its RASM performance relative to other U.S. airlines, as well as DAL's ability to maintain essentially flat non-fuel unit costs. A negative rating action, while unlikely in the current macroeconomic context, could result from a steep increase in fuel prices or an air travel demand shock that depresses passenger yields and RASM.