U.S. Airlines: Initiating Coverage

Matt Woodruff, CFA - Head of Aerospace & Defense / Transports
Arda Tirnakli - Analyst, Aerospace & Defense / Transports

  • Four years post the Covid-19 pandemic, the US airline industry has been split into the haves and the have nots. The Haves include the majors – Delta, United and American. They figured the post-pandemic competitive landscape out and are running at or above pre-pandemic revenue levels and are earning solid operating margins. However, ultra-low-cost carriers (ULCCs) including Spirit and Frontier have struggled to earn positive operating margins, even during a period of extremely high demand over 2022-2023 as “revenge travel” took hold. A third group of airlines, including Southwest and JetBlue, were successful pre-pandemic but have struggled to achieve pre-pandemic profitability, just as ultra-low-cost carriers have.
  • We are reinstating our North American airline coverage starting with the Big Four: United Airlines, American Airlines, Delta Air Lines and Southwest Airlines.
  • Credit ratings have improved but aren’t fully back just yet. Post pandemic, Delta was downgraded to high yield at S&P and Fitch. We expect Delta will regain full investment grade ratings in 2024. American was downgraded two notches by the agencies post pandemic, and has since regained a notch to stand at B1/B+/B+ corporate ratings. American has some work to do on profitability to regain its former ratings. Southwest was downgraded a notch to stand at Baa1/BBB/BBB+. We believe profitability challenges will keep them there in the near term. United was downgraded two notches at S&P and Fitch, and have since regained a notch. Ratings stand at Ba2/BB-/BB-. We see further upgrades at S&P and Fitch as unlikely over the next year, but possible in the 2025-2026 timeframe.
  • The US airlines mostly remain in debt paydown mode today, seeking to reduce debt taken on during the Covid-19 pandemic over 2020-2021. We expect LUV will remain out of the bond market in 2024, while AAL, DAL, and UAL could see some opportunistic refinancing during the year.
  • Spreads/yields have come in significantly over the last year and we find pickings are generally slim at the moment for our four performing credits. 
  • Fuel and salaries are the two largest cost items for an airline. According to Airlines for America, in 2023, US airlines spent $67.8bn and $52bn on salaries and fuel, respectively, out of aggregate operating expenses of $212bn for the whole industry. This means that half of the running costs of an airline is the people and jet fuel.
  • Airlines in the US have different approaches to fuel strategies. While fuel hedging was a big practice in the past, it is rather uncommon now in the industry. In our coverage, United and American are fully unhedged, while Delta is unhedged but is operating its own refinery which provides a degree of control over fuel expenses. Southwest is the only airline in our coverage that is still using derivative contracts to hedge its fuel exposure; elsewhere in the US JetBlue also hedges fuel costs, but Alaska Airlines recently announced it would stop doing so.
  • The airline industry is very capital intensive as planes are very expensive. As a result, airlines often have a heavy load of debt on their balance sheets, which are both secured and unsecured. In the US, Enhanced Equipment Trust Certificates, or EETCs, is a common financing method for aircraft purchases, where an equipment certificate is collateralized by individual aircraft. In the post-covid environment, airlines also tapped into their loyalty programs, pledging the assets held in the loyalty subsidiaries in order to borrow.


After significant post pandemic debt paydown in excess of $10bn, we expect Delta to rise to investment grade in 2024. Unfortunately, DAL’s unsecured bonds are already appear to be nearly fully pricing this in, with the unsecured 2029 bonds trading +118 spread, just slightly wide of BBB- corporates broadly. Nevertheless, given a generally tight trading coverage we are comfortable with an Outperform view on the credit as it crosses over.

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