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Delta Is Reducing Leverage: What It Means for Investors

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Improving cash flows

The drop in fuel prices has helped to improve Delta’s profitability tremendously in 2015 and continues to do so in 2016. DAL generated $3.8 billion in free cash flow for both 2015 and 2016.

This leaves huge cash in hand for Delta Air Lines, which it has been using to restructure fleet, repay debt, repurchase stocks, and pay dividends.

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Reducing debt

Delta has been using a large chunk of its cash pile to pay off its debts. The company has an accelerated debt reduction program that has helped the company reduce its debt from $21.7 billion in 2009 to $6.2 billion at the end of 2016. This debt reduction is in line with the management’s target of reducing debt to $6 billion by the end of 2016. Delta Air Lines further plans to reduce debt to about $4 billion by the end of 2017.

Peer comparison

Despite the continuous debt reductions, declining EBITDA has taken a toll on DAL’s leverage ratio. DAL’s reduced net-debt-to-EBITDA ratio fell from 2.8x for 1Q16 to 1.9x at the end of 3Q16. For 4Q16, this has again increased to 2.8x.

At the end of 4Q16, United Continental (UAL) had a net-debt-to-EBITDA ratio of 3.1x, American Airlines (AAL) of 12.0x, Alaska Air (ALK) of -0.56x, JetBlue Airways (JBLU) of 0.52x, Southwest Airlines (LUV) of 0.03x, and Allegiant Travel of 3.2x.

Why pay attention to debt?

DAL’s strategy of reducing debt is becoming more important as industry fundamentals have improved tremendously. Reduced leverage and interest costs will put Delta in a better position to cope with an industry downturn, thus making Delta a less risky stock to invest in.

DAL forms 1.1% of the iShares U.S. Consumer Services ETF (IYC).

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