What If American Airlines Had Implemented Alaska Air’s Capital Allocation Strategy?

ALK: Alaska Air logo
Alaska Air

After surviving bankruptcy proceedings in 2012, American Airlines (NASDAQ: AAL) is on the brink of bankruptcy yet again with a looming debt of $24 billion. Interestingly, American Airlines’ market capitalization of roughly $4 billion now is comparable to the $3.7-billion market cap of peer Alaska Air Group (NYSE: ALK), which is just 1/5th of American Airlines in terms of fleet size. (In 2019, ALK had a fleet size of 332 planes whereas AAL’s was 1,547). What did American Airlines do wrong in the last few years? And is there something it should have learned from Alaska Air?

The answer is a resounding ‘Yes!’ And as we detail in our interactive dashboard comparing American Airlines and Alaska Air, it’s all about capital allocation.

In 2016, Alaska Air acquired Virgin America and loaded itself with $2 billion in fresh debt. While American Airlines focused on returning cash to shareholders over the years, Alaska Air directed its efforts towards reducing long-term debt from $2.6 billion in 2016 to $1.2 billion in 2019. Before comparing the debt and capital return numbers for the two companies, it would be important to keep in mind their relative size and fleet condition:

  • In 2019, American Airlines generated $45 billion in revenues and $3.8 billion in operating cash. On the other hand, Alaska Air reported $8.7 billion in revenues and generated $1.7 billion of operating cash.
  • Alaska Air’s operating margins are 5 percentage-points higher due to a younger fleet
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Since 2016, Alaska Air has generated $5.8 billion in operating cash and repaid $2.5 billion in debt

In comparison, American Airlines has generated $18.6 billion of operating cash, from which it invested $16.8 billion towards fleet upgrades. Despite the massive capital, the company also chose to spend $9 billion on share repurchases and dividends. The company was short of cash, therefore, it took on additional debt and entered into sale-leaseback transactions to cover the shortfall.

Meanwhile, Alaska Air generated $5.9 billion of operating cash, repaid $2.5 billion of debt, invested $3.6 billion towards fleet expansion, and spent just $0.3 billion in share repurchases.

That said, Alaska Air utilized 50% of its operating cash to repay debt while American Airlines spent excessively on share repurchases despite spending 100% its operating cash on aircraft purchases. While increasing shareholder value is the primary goal of a company, if American would have implemented Alaska’s capital allocation strategy, its balance sheet would have been at least 50% lighter in 2019 in terms of outstanding debt.

Alaska Air clearly stands out as the better pick when compared with American Airlines. But which is a better bet between Alaska Air and Jet Blue? We attempt to answer whether Alaska Air Group Is Expensive Or Cheap vs. JetBlue Airways in a separate analysis. 


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