Delta Air Lines: Is Higher Debt a Concern?
Delta Air Lines’s debt trend
Delta Air Lines’ (DAL) debt has shown a declining trend since 2013. After four years, Delta Air Lines’ debt broke the trend. Delta Air Lines’ debt increased after falling for three consecutive years. Delta Air Lines’ debt fell from $11.33 billion in 2013 to $7.33 billion at the end of 2016. The debt rose to $8.83 billion by the end of 2017 and fell marginally to $8.65 billion at the end of the first quarter.
The debt includes Delta Air Lines’ long-term debt and capital leases and current maturities of long-term debt and capital leases. Delta Air Lines’ debt mainly increased due to funding its pension liability. In the first quarter, Delta Air Lines made an additional $500 million towards its pension liability. As a result, Delta Air Lines’ unfunded pension liability was $6.3 billion at the end of the first quarter.
Impact on the DE ratio
Delta Air Lines’ higher debt means a higher interest expense and a higher DE (debt-to-equity) ratio. Delta Air Lines’ current DE ratio is 0.69x—well below the industry average of 0.83x. The increased debt trend isn’t a major concern at this point. Alaska Air Group (ALK), Southwest Airlines (LUV), and JetBlue Airways (JBLU) have DE ratios of 0.71x, 0.38x, and 0.24x, respectively.
Interest coverage ratio
Higher debt means higher interest expense. A company’s interest coverage ratio indicates how well it can service its debt. The ratio can be obtained by dividing the EBIT by interest expenses. The higher the multiple, the better it is for the company. At the end of the first quarter, Delta Air Lines’ interest coverage ratio was 8.5x—well above the industry average of 3.3x. The ratio indicates that Delta Air Lines could easily service its debt. Although the ratio has come down, Delta Air Lines can still efficiently service the debt.
Can Delta reduce its debt in the near term? Next, we’ll discuss Delta Air Lines’ free cash flows.
Investors can hold Delta Air Lines indirectly through the Invesco Dynamic Leisure and Entertainment ETF (PEJ). Delta Air Lines accounts for 4.8% of PEJ as of June 20.