Since surviving the Great Recession, Delta Air Lines (NYSE:DAL) has made a herculean effort to improve its balance sheet to protect against any future industry downturns. Delta's management believes that a strong balance sheet will enable its stock to command a much higher earnings multiple.

Years of debt-reduction efforts are finally paying off for Delta. Last week, Moody's became the first credit rating agency to upgrade it to an investment-grade corporate credit rating. That's an important symbolic milestone that Delta's fellow legacy carriers American Airlines (NASDAQ:AAL) and United Continental (NYSE:UAL) are still far from reaching.

Delta reduces its debt
At the end of 2009, Delta was staggering under $17 billion of net debt. It also had an unfunded pension liability of nearly $12 billion. By the end of 2015, Delta had cut its net debt burden by more than $10 billion, to $6.7 billion, with further plans to reduce net debt to $4 billion by 2020.

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Delta has reduced its net debt by more than $10 billion since 2009. Image source: The Motley Fool.

The unfunded pension liability has actually increased in the past few years -- it currently totals $13.9 billion -- due to the impact of low interest rates. Delta plans to address this by contributing at least $1 billion annually to the pension plan through 2020. Assuming average investment returns, that would make the pension plan 80% funded by then (or 100% funded, if interest rates rise by 2 percentage points).

Just last month, retiring Delta Air Lines CEO Richard Anderson told investors on the company's Q4 earnings call that he thought Delta would get an investment-grade credit rating before the end of 2016. Thanks to the company's strong track record of balance sheet improvements, it only took a few more weeks.

United Continental and American Airlines have work to do
Two of Delta's smaller rivals, Southwest Airlines and Alaska Air, already have investment-grade credit ratings. However, its global competitors American Airlines and United Continental are still pretty far from investment-grade status.

American Airlines CEO Doug Parker has made it clear that he doesn't care about reaching an investment-grade credit rating, at least for the foreseeable future. American Airlines can already issue secured debt with an average interest rate around 4%. One big reason for chasing a high credit rating is to get lower interest rates, and Parker doesn't see much room to do better there.

Thus, American Airlines is financing its new aircraft purchases at these low rates, while spending most of its operating cash flow on massive share buybacks. As a result, its debt burden is rising. American Airlines had net debt of more than $20 billion at the end of 2015.

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American Airlines is taking on more debt to pay for new planes. Image source: American Airlines.

By contrast, United Continental is at least making an effort to improve its balance sheet. A few years ago, United set a goal of reducing its adjusted gross debt to $15 billion by 2017. It is closing in on that target, ending 2015 with $17 billion of adjusted gross debt. Including its cash and investments, United has about $12 billion of adjusted net debt.

United also has a very manageable unfunded pension liability of just $1.5 billion. Thus, if you include both net debt and pension liabilities, United Continental's balance sheet is actually in better shape than Delta's.

However, Delta is a far more profitable company. United expects to report an 8% to 10% pre-tax margin this quarter, while Delta has forecast a Q1 profit margin nearly twice as high. United's lower profitability means that it has a greater risk of running losses during an industry downturn. As a result, it probably needs to pay off a lot more debt to reach investment-grade status.

What's next for Delta?
Now that Delta has achieved its first investment-grade credit rating, the company may feel free to increase its share repurchase activity. Delta bought back $2.2 billion of stock in 2015, but American Airlines outpaced it with $3.6 billion of share buybacks.

In its report upgrading Delta to an investment-grade rating, Moody's said it expects the company to use a majority of its free cash flow for share buybacks. Delta could interpret this as "permission" to become more aggressive. (Credit rating agencies usually frown on big share buyback programs.)

Considering that Delta expects to routinely produce $4 billion to $5 billion of free cash flow in the coming years, this means that shareholders can expect even more generous capital returns going forward.

Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines, and long January 2017 $30 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.