Delta Air Lines downgraded to junk at S&P on travel drop

Delta Air Lines Inc. lost its coveted investment-grade status from one rater as S&P Global Ratings cut the company to junk.

“The steep decline in airline bookings due to the coronavirus outbreak will sharply reduce Delta Air Lines Inc.’s revenue and cash flow,” S&P said in a statement Tuesday as it lowered the carrier two notches to BB, or two steps below investment grade. The carrier’s efforts to cut costs probably won’t be enough to offset the lost sales, S&P said.

Airlines around the world are contending with what a trade group called the industry’s worst crisis ever, as the coronavirus pandemic torpedoes travel demand. Global carriers may lose $252 billion in sales this year, the International Air Transport Association said, and U.S. passenger counts are down 86% from a year ago as Congress weighs a bailout for the industry.

“We expect passenger air traffic to begin to recover in late 2020,” S&P said. “However, any further delays will prolong the weakness in the company’s credit metrics.”

If the shutdowns and travel restrictions start to improve by May, airlines should have sufficient cash to weather the storm and will make it through, Raymond James analyst Savanthi Syth said on Bloomberg TV. Anything beyond the summer and Labor Day, however, will require government support for carriers to continue employing at current levels, Syth said.

A cut to junk from a second rater will make Delta a so-called fallen angel and its $4.9 billion of debt would leave the Bloomberg Barclays investment-grade index. Moody’s Investors Service said in a statement last week that it was considering cutting the airline to junk from the lowest investment-grade rating. Fitch also rates the company one step above high yield with a negative outlook.

The cost to protect Delta’s debt from default for five years has soared over the past month, increasing more than fivefold to above 700 basis points, according to ICE Data Services. It retreated a bit Tuesday amid optimism for government aid. In the same time, its most actively-traded bonds, the 2.9% notes due 2024, have fallen to 80 cents from above par.