Delta Air Lines' (DAL 2.86%) long-term credit rating was cut to junk status on Tuesday due plummeting travel demand caused by the COVID-19 coronavirus pandemic.
S&P Global Ratings downgraded Delta to "BB" from "BBB-" on expectations that the airline's 2020 credit metrics will be "much weaker" than 2019. Delta is taking steps to try to offset the decline, including cutting flights, freezing hiring, and tapping liquidity sources, but S&P analyst Betsy R. Snyder in issuing the downgrade wrote she believes the actions will be "insufficient" to make up for the lost revenue.
"Currently, we expect passenger air traffic to begin to recover in late 2020. However, any further delays will prolong the weakness in the company's credit metrics," Synder wrote.
Image source: Delta Air Lines.
The airlines historically have been no stranger to junk status, which is why it was big news in 2017 when Delta joined Southwest Airlines as the only airline to enjoy investment-grade ratings from all three agencies.
The downgrade is noteworthy, but S&P is not telling investors anything they haven't already figured out on their own. Shares of Delta are down 55% year to date due to concerns about the ramifications of the pandemic, but up 18% at 3pm on Tuesday following the debt downgrade.
The "BB" rating is near the top end of S&P's 12 "junk" ratings and shouldn't be construed as a prediction of financial ruin. Delta's financial position has deteriorated significantly since the beginning of the year, and its future is far from certain, but I believe an investor able to ride through near-term turbulence could do well buying into the company today.
