Airlines Enhance Shareholder Returns and Boost Investor Confidence

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During the last few weeks, all major US airlines including American, United, Delta, Alaska, Southwest, and JetBlue posted remarkable first quarter results, amounting to a net income of over $3 billion on a consolidated basis. The outstanding performance in the seasonally weak first quarter was driven by the plummeting global crude oil prices and capacity restraint followed by the large airlines. Soon after the announcement of the first quarter results, the share price of all these airlines soared, reinforcing investor confidence in the airline industry that has historically suffered from heavy losses. After appreciating shareholder capital with extraordinary first quarter earnings, most of the US airlines are now offering higher dividends and share buyback programs to further strengthen investor belief in the performance of the sector.

Delta, which has been an industry leader in returning value to shareholders, recently announced its plans to return $6 billion to its shareholders via dividends and share buybacks. The third largest airline by traffic, Delta, authorized a $5 billion [1] stock repurchase program – more than twice its last year’s program – to be executed by 2017. During the first quarter of 2015, the airline repurchased 9.3 million shares, returning $425 million to its shareholders. In the second quarter, the airline plans to complete the buyback of $725 million that is still pending on its existing $2 billion repurchase program. At the current market prices, this will reduce Delta’s share counts by at least 5% annually, boosting its earnings per share going forward. Investors prefer to invest in companies that buy back their own shares, as it instills faith in the operational performance of a company.

Further to the delight of Delta’s shareholders, the Atlanta-based airline has increased its quarterly dividend by 50% from $0.09 per share in March to $0.135 per share [1] to be effective from the September quarter. Apart from maximizing shareholder wealth, Delta also targets to reduce its net debt level to $4 billion over the next three years to reduce the leverage on its balance sheet, realize interest cost savings, and improve the return on its invested capital. The expansion of Delta’s shareholder return program reflects the management’s confidence in the airline’s ability to sustain its strong financial performance.

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In parallel, Southwest also announced a share buyback program worth $1.5 billion [2], which is the largest repurchase program by the airline until now. The low-cost carrier recently completed its previous share buyback program of $1 billion by repurchasing approximately 28 million shares over the last one year. Moreover, the Dallas-based airline declared a 25% increase in the quarterly dividend to 7.5 cents per share from 6 cents per share. This is the 155th consecutive quarterly dividend declared by the airline, highlighting the airline’s consistency in returning value to its shareholders.

In addition, legacy carriers such as American and United are not far behind in their efforts to please their shareholders. American is currently completing its $2 billion share buyback program and has declared a dividend of 10 cents per share to be paid to the shareholders in May 2015. United had approved a $1 billion buyback program in July last year to be completed over three years, but the airline does have a history of paying dividends. However, as indicated by the management in the first quarter earnings call, the airline may consider paying dividends or undertake further share buybacks after the current buyback program is completed. Besides, the Seattle-based Alaska Air also repurchased 1.6 million shares for $102 million during the first quarter and paid a quarterly cash dividend of 20 cents in March, representing a 60% increase over the dividend declared in the first quarter of 2014.

As the airlines benefit from strong US travel demand and cheap jet fuel costs, they are not shying away from sharing their profits with their shareholders. Their intent is solely to remove the perceptions associated with the US airline industry in the past, and improve the impression of the industry for investors going forward. While the higher returns would be appreciated by investors, the sustainability of these returns may be questionable given the industry’s vulnerability to crude oil prices.

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Notes:
  1. Delta Announces Shareholder Return Program, 13th May 2015, www.delta.com [] []
  2. Southwest Returns Value to Shareholders, 13th May 2015, www.southwest.com []