Delta’s debt rating sinks

As business travel slumps and cuts into the benefits of Atlanta-based Delta Air Lines’ merger with Northwest Airlines, Fitch Ratings on Thursday downgraded Delta’s debt.

Fitch, one of three big ratings agencies, downgraded Delta’s debt to B- from B, further into the speculative or “junk” category, with a negative outlook. Such a downgrade can make it more costly for companies to borrow.

Delta’s revenue weakened in May, particularly in “hard-hit international markets” that Delta has heavily focused on for growth since 2007, the report said. Delta earlier this month said that it will further cut flight capacity this year, particularly on international routes.

Fitch said many of the benefits of the Delta-Northwest merger last October are “being offset by the collapse of premium business travel demand and intense fare competition across the entire industry.”

According to the Fitch report on Delta’s $2.4 billion of debt and Northwest’s $904 million outstanding credit line, Delta’s declining cash balances could make it difficult to repay debt without better access to financing. Fitch estimated Delta’s negative free cash flow could exceed $400 million this year and said Delta may need to refinance.

Fitch also said Delta has an “extremely heavy” debt burden, including leases, but still has an advantage over United, American and US Airways, all of which still have lower Fitch ratings than Delta.

The report also noted that Delta has indicated it will likely record $500 million in losses from past fuel hedges this quarter.

Delta’s rating could be further downgraded to CCC later this year or next year if airline revenues don’t stabilize, Fitch said. If that happens, it noted, bankruptcy filings and capacity cuts by more vulnerable carriers could put Delta in a better position.

The International Air Transport Association said Thursday that international passenger demand declined 9.3 percent in May compared with a year earlier. “We may have hit bottom, but we are a long way from recovery,” said the association’s chief executive Giovanni Bisignani in a written statement.