Delta Sees S&P 500 in Reach as Credit Ratings Rise

Delta Air Lines Inc. executives said they are optimistic about inclusion in the Standard & Poor’s 500 Index, the benchmark gauge for U.S. equities, as they improve the carrier’s credit profile so it approaches investment grade.

“In terms of profitability, market cap and whatnot, we think we’ve met every criteria” for the S&P, President Ed Bastian said yesterday in an interview at Bloomberg’s headquarters in New York. “At some point in time hopefully that will be here. You don’t get to lobby.”

Investment bankers have told Delta the company is “on some short list” of possible index additions, Bastian said. Atlanta-based Delta is poised for its most profitable year ever, Chief Executive Officer Richard Anderson said.

Returning to the S&P 500, whose sole carrier is Southwest Airlines Co., probably would draw new investors and mark a milestone in Delta’s recovery since its removal in 2005 about a month before filing for bankruptcy. Delta’s market value was $15.6 billion yesterday, topping the $15.2 billion median of companies in the index, according to data compiled by Bloomberg.

S&P’s requirements include a market value of more than $4 billion, four consecutive quarters of profits and at least six months of trading after an initial public offering, according to the website of S&P Dow Jones Indices, a joint venture of McGraw-Hill Financial Inc. and CME Group Inc. Dave Guarino, a spokesman for S&P Dow Jones Indices, declined to comment on future index changes.

Dividend Resumes

After a decade-long break, Delta said May 8 it will restart a dividend, part of an effort to return $1 billion to investors that includes repurchasing shares.

Delta, which left Chapter 11 protection in 2007 and then bought Northwest Airlines Corp. in 2008, is also trying to get closer to investment grade as it pays down debt and catches up on pension obligations.

“I would say clearly it’s a five-year goal to be investment grade-like in terms of having credit metrics, ratios,” Bastian said.

S&P rates Delta as B+, or four steps below investment grade, after a May 10 boost from B marked the first upgrade since its April 2007 bankruptcy exit. Moody’s Investors Service’s rating is unchanged since 2007 at B2, or five steps below investment quality, data compiled by Bloomberg show.

Delta set a new target this month for lowering its adjusted net debt to $7 billion from a previous goal of $10 billion, which it projects meeting in 2013. Four years ago the world’s second-largest carrier had $17 billion in debt.

Bankruptcy Overhang

“We would expect to be qualified as investment grade by any metric, except we realize that having gone through a bankruptcy process, we may have to do more than that” during the next five years, Bastian said.

It may not be the best decision “to wipe out all your debt just to get an investment-grade character,” he said. “We’re not managing the business to that end. We’re going to manage it on a credit metric basis.”

Delta climbed 1.7 percent to $18.49 at the close of trading in New York. The shares have jumped 56 percent this year, beating a 16 percent advance for the S&P 500 and a gain of 44 percent for the Bloomberg U.S. Airlines Index.

Delta’s turnaround comes as U.S. airlines’ return to profitability after the first half of the last decade was punctuated by the bankruptcies of five major carriers starting with Trans World Airlines in 2001. Then Delta’s Northwest purchase spurred mergers thinning the industry’s ranks.

More Mergers

In 2010, United Airlines and Continental Airlines merged to form United Continental Holdings Inc., which surpassed Delta as the world’s largest carrier. American Airlines is poised to vault to No. 1 when parent AMR Corp. leaves bankruptcy and combines with US Airways Group Inc. later this year.

“Think of the instability of having American in bankruptcy,” Anderson said. “No one can argue that’s good for the industry or the people that work there or for customers.”

The American-US Airways tie-up will create “a really contestable, competitive market,” he said. “You’ll have strong players that can invest in their employees, invest in their planes, and we’ll compete on a global scale.”

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