Airline Credit Rating Methodology

The Dual Relevance of Airline Creditworthiness

Airline credit ratings serve two distinct audiences. For airline bondholders and lenders, a rating expresses an opinion on default probability. For airport bond credit analysts, airline creditworthiness is an input into the airport's own credit assessment — affecting Moody's airport scorecard factors for carrier base quality and concentration, and influencing the airport's cost-recovery risk under residual and hybrid rate-setting methodologies.

As of early 2026, four U.S. airlines issue rated public debt. The current ratings reflect a post-pandemic recovery arc in which 35% of rated airlines globally held investment-grade ratings by mid-2024, up from 25% at the end of 2021, though still below the 41% level at the end of 2019 (IATA, August 2024).

Current U.S. Carrier Ratings

Delta is the only U.S. airline currently rated investment grade by all three agencies. Delta lost its Fitch and S&P investment-grade ratings in 2020 during the pandemic (Moody's maintained Baa3 throughout) and regained them in 2024. Moody's upgraded Delta to Baa2 from Baa3 in February 2026, citing "improving operations, free cash flow and debt reduction" and noting that Delta's business profile "is strong" (Moody's, February 20, 2026).

United Airlines achieved Fitch upgrades to BB+ (from BB) in December 2025, with Fitch citing "solid execution on strategic initiatives and debt reduction" and improving EBITDAR leverage of 3.5x in Q3 2025, down from 3.8x at year-end 2024. Fitch projects United's leverage will decline toward or below 3x over the next one to two years (Fitch Ratings, December 22, 2025).

Southwest Airlines was downgraded by Moody's to Baa2 from Baa1 in May 2025, reflecting Moody's forecast that Southwest's operating margin would improve only modestly to around 2% in 2025. Moody's cited softening domestic leisure demand and macroeconomic uncertainty as factors that would disproportionately affect Southwest relative to carriers with international networks and premium revenue streams. Both S&P and Fitch maintain negative outlooks on Southwest's ratings (S&P, July 2025; Fitch, April 2025).

S&P's Airline Rating Framework

S&P Global Ratings' published criteria for rating airlines — "Key Credit Factors: Criteria For Rating The Airline Industry" — divide the analysis into two segments: business risk and financial risk.

Business Risk Factors

S&P ranks its airline credit factors into three categories based on relevance to the rating outcome:

Category 1 (most relevant):

• Market position: route network, revenue potential of markets served, competitive position in those markets
• Revenue generation: capacity utilization (load factor) and pricing (yield per revenue passenger mile)
• Operating cost structure relative to competition and the airline's revenue model (CASM, adjusted for stage length)

Category 2 (lesser relevance, sometimes critical):

• Diversity of revenues by geography, passenger type, and nonpassenger services (cargo, loyalty program revenue)

Category 3 (shapes profile in conjunction with other factors):

• Age, technology, and suitability of aircraft fleet
• Labor relations
• Service standards and reputation

S&P states that the airline industry "usually involves greater credit risk than most other industries and sectors," and that the agency characterizes the business risk profiles of more than two-thirds of rated airlines as either "weak" or "vulnerable." Business risk scores range from Excellent to Vulnerable.

Financial Risk Analysis

S&P evaluates five financial risk categories — accounting characteristics, financial governance, cash flow adequacy, capital structure and leverage, and liquidity — and assigns an overall financial risk score ranging from Minimal to Highly Leveraged.

The key financial ratios S&P applies to airlines, adjusted for off-balance-sheet leases and retiree liabilities, include:

S&P notes that operating margins after depreciation for airlines are "typically in a range that we view as weak (in the single-digit percent range)" and that lease-adjusted debt often exceeds balance sheet debt for airlines. When S&P upgraded Delta to BBB- in December 2024, it cited expected FFO-to-debt of about 40% in 2025 and S&P-adjusted debt-to-EBITDA of approximately 2x (S&P Global Ratings, December 3, 2024).

How the Metrics Translate: Delta's 2024 Credit Profile

Delta's FY2024 financial data illustrates the quantitative foundation of a BBB-rated airline. As reported in Delta's Q4 2024 earnings release (January 9, 2025):

Delta's leverage target is 2x in 2025 and 1x over the long term. Delta's CFO Dan Janki stated: "With continued prioritization of the balance sheet, leverage improved to 2.6x and Delta returned to investment grade at all three credit rating agencies."

By contrast, Fitch's December 2025 report on United cited EBITDAR leverage of 3.5x, with a target of declining toward 3x — one full turn higher than Delta on the same metric at the same date. The leverage gap between the two carriers corresponds to the one-notch rating gap (Delta BBB- vs. United BB+).

Industry-Level Financial Benchmarks

IATA estimated the global airline industry's net debt-to-EBITDAR ratio at 3.8x as of 2024, an improvement over the 4.0x average from 2017–2019 but still reflecting pandemic-era borrowing. Among 13 U.S. airline companies, the average net debt-to-EBITDA ratio was 2.02x as of November 2025.

IATA noted that despite reduced nominal debt levels (close to 2019 figures), airlines continue to face elevated debt servicing costs due to the higher interest rate environment that began in 2022. Delta's weighted average interest rate of 4.3% — on $16.2 billion in debt and finance lease obligations — translates to approximately $700 million in annual interest expense, a cost that flows through the airline's operating economics and, under a residual rate-setting framework, is ultimately reflected in the cost base that airport rates and charges must recover.

How Airport Rating Agencies Incorporate Airline Credit Quality

Moody's "Publicly Managed Airports and Related Issuers" methodology (published February 2023) structures the airport rating scorecard around four factors: market position, service offering, rate-making framework, and financial strength.

Airline credit quality intersects with the airport scorecard in two specific areas:

Carrier base concentration. Moody's evaluates the primary carrier's share of total enplanements as a subfactor under "Service Offering." At LAX, Moody's noted in its March 2025 rating letter that "no single airline accounting for more than 20% of enplanements in fiscal 2024, bolsters credit quality." At Portland (ME), Moody's flagged that a "deteriorating competitive position coupled with loss of airline diversity" could lead to a downgrade. An airport where the dominant carrier holds a sub-investment-grade rating faces a different risk profile than one where the dominant carrier is investment grade — the carrier's ability to honor use agreement obligations, maintain capacity commitments, and absorb rate increases is directly tied to its financial condition.

Rate-making framework and cost recovery. Under a residual rate methodology, airlines absorb airport cost increases through adjusted rates, creating a credit linkage between airline financial health and the airport's rate covenant. Moody's evaluates whether the airport's rate agreement "allows charging airlines as necessary to achieve" a specified DSCR target. At LAX, the target is 1.40x on all senior and subordinate debt service and capital availability payments. At SFO, Moody's identified "high leverage and associated airline costs" as "the primary credit negative factor on the rating." The implicit question is whether the airline counterparties have the financial capacity to absorb the rates that the covenant requires.

Financial strength metrics. Moody's airport scorecard evaluates DSCR by net revenues, adjusted debt per O&D enplanement, and days of cash on hand. At SFO, Moody's projects adjusted debt per O&D enplanement increasing to approximately $635 in fiscal 2028 — and flags $700 as a downgrade threshold. At Portland (ME), Moody's cited a DSCR below 1.20x by net revenues as a potential downgrade trigger. These airport-level metrics are partially a function of airline traffic levels, which in turn depend on the financial health and strategic decisions of the carriers serving the airport.

The Rating Spread Across the Big Four

The gap between the highest-rated and lowest-rated U.S. carrier is six to seven notches: Delta at BBB-/Baa2 versus American at B+. This spread has concrete implications for airports:

• An airport whose dominant carrier is Delta faces a different credit dynamic than one whose dominant carrier is American. The former's counterparty has investment-grade access to capital markets at 4.3% weighted average interest rates; the latter borrows at higher rates, carries higher leverage, and has less free cash flow margin to absorb cost increases.
• Southwest's negative outlooks from two of three agencies signal a potential further downgrade, though it remains investment grade. An airport with high Southwest concentration — such as Dallas Love Field or Baltimore-Washington — would see its own credit profile affected by a Southwest downgrade, because the airport scorecard incorporates carrier-level credit quality.
• United's position one notch below investment grade creates a binary risk: an upgrade to BBB- would be the first since 2020 for that carrier; a recession-driven downgrade deeper into BB territory would widen the spread.

What Airport Financial Professionals May Wish to Evaluate

The airline credit rating framework interacts with airport finance at several points where DWU's clients operate:

Use agreement negotiation. Airline credit quality affects the enforceability and economic value of airline cost commitments. An airline rated B+ carries measurably different counterparty risk than one rated BBB-. Airport use agreements that rely on airline rate covenants to achieve specified DSCR levels are, in effect, leveraged to the financial condition of the signatory airlines.

Bond official statement disclosure. Airport official statements routinely disclose the credit ratings of the top carriers at the airport. A rating change — particularly a downgrade from investment grade to sub-investment grade — can affect bond pricing at issuance and secondary market trading.

Capital program timing. When airport capital programs require airline approval under MII clauses, the credit condition of the signatory airlines influences their willingness to approve rate increases. Airlines with strained balance sheets (as reflected in their credit ratings) may resist capital spending that increases per-enplanement costs. Southwest's operating margin of approximately 2% projected for 2025 leaves minimal room to absorb airport cost growth.

Air service development. The financial condition of target carriers affects the probability that an airline will commit to new service. An airline reducing leverage from 3.5x to 3.0x (United's current trajectory) is deploying free cash flow to debt reduction, not to speculative route launches.

The rating agencies' methodologies — S&P's category-weighted business and financial risk framework, Moody's scorecard approach for airports, and Fitch's EBITDAR-leverage-centric model — provide a structured, public, and auditable basis for these assessments.