Over the past five years, Hawaii-focused airline operator Hawaiian Holdings (NASDAQ:HA) has completed a heavy investment cycle and begun generating positive free cash flow. Up until now, it has used most of this cash to pay down debt.

However, Hawaiian Holdings has now achieved its long-term leverage (i.e., debt) target and has some excess cash. This will allow the company to start returning most of its free cash flow to shareholders, primarily through share repurchases. With the stock currently trading at just seven times earnings, buybacks could turbocharge Hawaiian's earnings-per-share growth.

Hawaiian Holdings' debt is under control

Between 2015 and 2017, Hawaiian Holdings spent nearly $500 million paying down debt, not counting convertible debt that it spent $186 million repurchasing. This left the company with $571 million of debt and capital lease obligations at the end of 2017. During the same period, it spent just $154 million on share buybacks.

By the end of 2017, Hawaiian's leverage ratio was 2.0, right in the middle of its target range of 1.5 to 2.5 times earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR).

The company's leverage ratio has crept up to 2.3 times EBITDAR in the first half of 2018, due to a recent debt issuance, combined with slightly lower earnings. Nevertheless, leverage is on track to start trending lower without any aggressive debt paydown plan.

A Hawaiian Airlines plane flying over the ocean, with mountains in the background

Hawaiian Holdings has paid down a lot of debt in recent years. Image source: Hawaiian Airlines.

First, the carrier is in the midst of removing several leased Boeing 767s from its fleet as part of its ongoing fleet transition. Therefore aircraft rent -- which accounts for more than half of Hawaiian Holdings' adjusted debt -- is set to decline significantly over the next year. Second, Hawaiian has more than $100 million of regularly scheduled debt payments between now and the end of 2019.

There's extra cash on the balance sheet

Additionally, Hawaiian Holdings currently has some excess cash. As of the end of June, it had $593 million of cash and investments on its balance sheet. That's significantly more than the $460 million it had at the beginning of 2018 and comfortably ahead of the company's target of keeping about $500 million of cash and investments on hand.

To be fair, Hawaiian -- like most airlines -- generates the bulk of its cash flow in the first half of the year, due to seasonal factors. However, the carrier completed nearly two-thirds of its annual capex in the first half of 2018, based on its forecast that capital spending will total $375 million to $425 million this year.

As a result, Hawaiian Holdings will probably generate enough cash from operations to pay for its capex in the back half of the year. That would give it at least $50 million of excess cash (above its $500 million target) that could be used for share repurchases during the second half of 2018: more than twice as much as the $23 million spent on buybacks in the first half.

Free cash flow should rise in 2019 and 2020

Looking ahead to 2019 and 2020, capex is set to decline. As of midyear, Hawaiian Holdings had capital spending commitments of $278 million for 2019 and $48 million for 2020.

Those figures don't include predelivery payments for Hawaiian's 787 Dreamliners, and they don't include things like technology purchases or airport improvements. However, those items are likely to be $100 million a year or less. Aircraft purchases account for the bulk of an airline's capex -- and that spending is included in Hawaiian's reported capital commitments.

Thus, as long as Hawaiian Holdings continues its run of strong performance, it will generate a lot of free cash flow between now and the end of 2020. Now that the Hawaiian Airlines parent has its debt under control, most of that cash should be available for stock buybacks.

Adam Levine-Weinberg owns shares of Hawaiian Holdings. The Motley Fool recommends Hawaiian Holdings. The Motley Fool has a disclosure policy.