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Delta’s Strong Cash Flows in 3Q15 Support Debt Reduction Strategy

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Oct. 27 2015, Updated 8:07 a.m. ET

Liquidity

Delta Air Lines (DAL) had $6 billion in unrestricted liquidity for the quarter ended September 30, 2015. Cash and cash equivalents consisted of $3.8 billion, and revolving credit facilities made up the remaining $2.2 billion.

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Cash flows

During 3Q15, Delta Air Lines generated $2.4 billion in cash from its operating activities and $1.4 billion of free cash flows. The company used the cash flow generated to invest in international airline companies, return capital to its investors and reduce its debt.

Debt reduction

In 2009, Delta Air Lines (DAL) decided to reduce its outstanding debt and operating leases. Since then, the company has reduced its debt by $9.4 billion. Its outstanding debt in the quarter ended September 30, 2015, was at $8.9 billion. This has decreased by over $1 billion since December 31, 2014, when it stood at $9.9 billion.

As part of its plan to reduce its outstanding debt, Delta repaid $320 million in 3Q15. As a result, the airline saw its net debt-plus-operating-leases-to-EBITDAR (earnings before interest, taxes, depreciation, amortization and rent/restructuring costs) ratio decrease to 0.68 by the end of the quarter from 1.0 for the quarter ended September 30, 2014.

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Capital expenditure during 3Q15

Delta spent $1 billion in its capital expenditure during 3Q15, of which $562 million was spent on property and equipment additions. Plus, it spent $500 million on investments in China Eastern Airlines (CEA) and GOL Linhas Aereas Inteligentes (GOL). Delta invested in buying a 3.5% stake in its global alliance partner, China Eastern Airlines, for $450 million and invested $50 million in a 6% stake in GOL.

Outlook

Delta Air Lines plans to continue to reduce its debt and derisk its balance sheet. The company plans to have a net debt of $4 billion by 2017. This would be supported by its long-term goal of achieving $7 billion–$8 billion of operating cash flows and $4 billion–$5 billion of free cash flows.

The lower financial leverage would mean a lower risk in future, which would also help reduce the stock’s volatility. The company’s focus is to achieve an investment-grade rating. Delta expects to spend about $1 billion in its capital expenditure during 4Q15, mostly on aircraft acquisitions, fleet modifications, and equipment.

Investors can gain exposure to airlines like Delta Air Lines (DAL), American Airlines (AAL), United Continental Holdings (UAL), and Southwest Airlines (LUV) through the iShares Transportation Average ETF (IYT). IYT holds ~38% in airline stocks and ~3% in Delta Air Lines. You can also invest in the SPDR S&P Transportation ETF (XTN).

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