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Delta Air Lines Reduces Its Debt: Can It Lower It Even More?

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DAL reduces debt

At the start of 2017, Delta Air Lines (DAL) raised its debt by ~$2.0 billion in order to reduce its pension plan liability. Although that would reduce Delta’s future liability, it could also lead to an increase in its current interest expense and leverage ratio. Delta has been committed to reducing its debt in the past, and its strong cash flow generation has made this possible.

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Reducing debt

Delta’s debt declined from $9.2 billion in 1Q17 to $9.0 billion in the second quarter of 2017. In the third quarter, it reduced it further to $8.8 billion.

Delta Air Lines generated cash flow from operations of $3.0 billion in 3Q17 and free cash flow of $285.0 million. At the end of 3Q17, cash on its balance sheet was $2.4 billion.

Leverage declines

Due to a reduction in debt, Delta’s leverage ratio declined in the third quarter. Its net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio has fallen from 3.2x at the end of the first quarter to 2.6x at the end of 2Q17. However, it’s still higher than 1.9x at the end of 3Q16.

Other airlines haven’t yet reported their third-quarter earnings. At the end of the second quarter, Southwest Airlines (LUV) and JetBlue Airways (JBLU) had cash reserves that exceeded their debts. Alaska Air Group (ALK) had a leverage of 1.7x, Spirit Airlines (SAVE) had a leverage of 1.8x, and United Continental (UAL) had a leverage of 4.3x. American Airlines (AAL) had the highest leverage ratio of 14.8x.

Investment-grade rating

Due to Delta’s reduced pension liability of $6.8 billion and debt reduction, the S&P upgraded Delta two investment grades in September. It now has an investment grade rating from all three rating agencies. Southwest Airlines is the only other airline to enjoy that status.

You can gain exposure to Delta Air Lines by investing in the PowerShares Buyback Achievers ETF (PKW), which invests 1.7% in the airline.

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