How "Shareholder Friendly" Should Airlines Be?http://www.fool.com/investing/general/2014/02/03/how-shareholder-friendly-should-airlines-be.aspx Alexander MacLennan
February 3, 2014
The term "shareholder friendly" has become synonymous with dividends and share buybacks. Investors generally like returns of capital, and oftentimes these initiatives do help to increase the value of shares. Airlines are starting to get into the business of being "shareholder friendly," so the question is: How far should airlines go in these initiatives?
Dividend bidding war
Following the reduction of billions of dollars in net debt, Delta Air Lines (NYSE: DAL) launched a plan to return $1 billion to shareholders through $500 million in dividends and $500 million in share buybacks. The yield on Delta's dividend was around four times that of Southwest's dividend, and shortly after, Southwest quadrupled its dividend.
Last July, Alaska Air Group (NYSE: ALK), parent company of Alaska Airlines, joined the dividend party by initiating a payout comparable with Southwest and Delta on a yield basis.
The right time for initiatives
But it would be unreasonable to assume that all airline risks have just disappeared and to adopt a "this time is different" approach to airlines. The airline industry has a number of factors that inject above-average levels of risk into the business. Factors including exposure to oil prices, cyclical effects, high capital costs, and vulnerability to world events such as a health pandemic or terrorist attack, mean airlines must still be prepared for a rainy day. Because of this, there's a need for a sensible balance between "shareholder friendly" initiatives and preserving the health of the airline.
I see Southwest, Delta, and Alaska as the most qualified airlines to launch such initiatives at this point. Southwest has a decades-long history of consistent profitability (something extremely difficult to achieve in this industry), Delta has committed to reducing costs and has undergone major debt reduction, and Alaska has been able to remain relatively stable in this rather turbulent industry.
United Continental has been in a situation of expecting big earnings growth for next year for a couple of years now. A turbulent merger has been much to blame, but there is a bright spot in that the final touches are being placed on the merger, and we will soon see just how well an integrated United Continental can operate.
Before United Continental begins paying a dividend, I'd like to see some of these big expected profits come to fruition. But if the airline can live up to expectations, a modest dividend on par with other major carriers should be considered reasonable.
American Airlines Group has an interesting situation, where a large pile of cash sits on its balance sheet as it prepares to integrate American Airlines with US Airways. As integration risks still loom here, coupl