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Why Investors Were Disappointed with Delta's 2Q17 Results

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Part 4
Why Investors Were Disappointed with Delta's 2Q17 Results PART 4 OF 7

How Delta’s Debt Position Looked in 2Q17

DAL’s debt

During the first quarter of 2017, Delta Air Lines (DAL) increased its debt by ~2 billion in order to fund its pension plan. To some, this might sound like a good strategy, as funds are available at a very cheap rate now, but the Fed could continue to increase rates. Delta’s move will reduce its future liability, but increase its current interest expense and leverage ratio.

How Delta&#8217;s Debt Position Looked in 2Q17

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However, thanks to its strong cash generation, Delta can now start reducing its debt. For the second quarter of 2017, DAL generated cash flow from operation of $2.4 billion, which led to a free cash flow of $1.4 billion. At the end of 2Q17, cash on the balance sheet was at $2.8 billion. Debt for the quarter has fallen by $213 million. Total debt at the end of the quarter was at $9.0 billion.

As a result, the leverage ratio has fallen during the quarter. The net-debt-to-EBITDA ratio has fallen to 2.4x at the end of 2Q17 as compared to 3.2x at the end of 1Q17.

Though peers are yet to report second quarter earnings, Delta’s leverage ratio is the lowest among the legacy carriers but is higher than regional carriers. At the end of 1Q17, American Airlines (AAL) had the highest leverage among airlines with a net-debt-to-EBITDA ratio of 14.8x, followed by United Continental (UAL) with a net-debt-to-EBITDA ratio of 9.3x. Alaska Air (ALK) had a ratio of 4.3x, Spirit Airlines (SAVE) of 1.8x, and JetBlue Airways (JBLU) of 1.4x. Southwest Airlines (LUV) was the only airline having more cash than debt on its balance sheet.

Goals

Despite the large increase in debt in the last quarter, Delta Air Lines has maintained its target of reducing net debt to $4 billion by 2020. Low debt helps reduce volatility and will also reduce the risk associated with investing in Delta Air Lines. Investors should keep an eye on Delta’s debt reduction in the future.

Investors can gain further exposure to Delta Air Lines stock by investing in the First Trust Nasdaq Transportation ETF (FTXR), which invests 4.3% of its portfolio in the airline. It also invests 8.4% in American Airlines (AAL), 7.6% in United Continental (UAL), 4.1% in JetBlue (JBLU), 2.7% in Southwest Airlines (LUV), and 1.7% in Alaska Air (ALK).

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