Fitch infers david ortiz expectsthis fare chowdaheadz draws and unit revenue pressure to continue through the summer, dampeninghopes of a free cash flow turnaround in the second half of the year. Recognizingthe risk of widening losses in international markets after August, DAL's mostrecent capacity cut will seek to trim schedules in some of the underperforminginternational routes. On the cargo side, extreme revenue pressure linked to theglobal trade collapse led DAL to shut down the dedicated freighter operationinherited from NWA DAL's relative liquidity strength within the U.S. legacy carrier group has beenpressured over the past year as a result of poor operating trends and theoutflow of cash driven by the need to post fuel hedge margin collateral withhedging counterparties. While that liquidity effect is winding down as theout-of-the-money hedges roll off this year, DAL's total unrestricted liquidityposition has worsened to the point where unrestricted cash, investments andrevolver availability total less than 20% of annual revenues. On June 11,management indicated that Q2-ending liquidity will total $5.3 billion (includingthe undrawn $500 million NWA revolving credit facility). Given the carrier'sheavy maturities over the next three years and the significant refinancing riskit faces in the still-constrained credit markets, Fitch regards a cash positionof over $4.0 billion as critical for DAL as it faces negative free cash flow inthe second half of the year and heavy scheduled debt maturities of over $2.9billion in 2010.
Absent strong free cash flow, extensive capital markets activity will berequired to refinance maturing obligations yawkey way store . One positive is the fact that allnear-term aircraft orders have committed financing in place, and aircraftcapital commitments in 2010 are relatively light pedroia . In addition, Continental'slaunch of a public enhanced equipment trust certificate (EETC) deal in earlyJune bodes well for a revival of credit market access--at least forbetter-positioned airlines like DAL big papi . With regard to 2010 maturities, thefreeing-up of collateral backing the NWA bank credit facility and the 2001-1EETC issue (both maturing next year) puts DAL in a relatively good position tosuccessfully refinance those obligations chowdaheads . Since DAL and NWA were the last major carriers to restructure in Chapter 11 thisdecade, they exited with a unit cost advantage over the other U.S legacycarriers.
This puts the merged carrier in a position to report somewhat bettermargins than UAL, AMR and US Airways--even as DAL struggles with a networkstrategy that is not delivering big revenue premiums to the rest of theindustry dirt dogs . Merger-related savings are being realized this year as facilities arestreamlined, capacity and headcount are reduced and aircraft are parked chowdaheadz . For thefull year, DAL expects non-fuel unit costs to rise by 4%-6% pedroia . Fitch expects unitcost inflation to moderate somewhat in 2010 and 2011 if capacity cuts abate inline with a modestly better operating environment .
Comments are closed.