Back in May, Delta Air Lines (NYSE:DAL) implemented a dividend and share repurchase program, thereby becoming one of the few airlines to actively return cash to shareholders. At the time, the company planned to return $1 billion to shareholders by 2015, divided evenly between dividends and buybacks. However, continued earnings improvements will allow the company to put even more cash in investors' hands.
Delta has already returned $350 million to shareholders in the last six months. Furthermore, based on commentary from Delta's investor day on Wednesday, it looks like the company may be prepared to return another $2 billion over the next two years. This coming flood of cash will undoubtedly make Delta investors very happy.
The free cash flow leader
Delta's position as the free cash flow leader in the airline industry is the main factor enabling it to be so generous. In recent years, Delta Air Lines has become the most profitable of the major airlines. For the last 12 months, it has posted pre-tax income more than double that of Southwest Airlines (NYSE:LUV) and quadruple that of United Continental (NASDAQ:UAL).
At the same time, Delta has been more reticent about buying new aircraft than these competitors. This has allowed it to build a clear lead in free cash flow generation over Southwest and United (as well as other competitors).
Delta's strong free cash flow has allowed it to pay off debt, reduce its pension liability, and return cash to shareholders -- all at the same time.
More cash to come
Delta is currently forecasting that operating cash flow will average at least $5 billion over the next two years. This projection seems fairly conservative, given that Delta has generated about $4.6 billion in operating cash flow this year, and the company has several ongoing initiatives to keep costs down and improve unit revenue.
Of this $5 billion -- or more -- in annual operating cash flow, Delta plans to reinvest half in the business (approximately $2.5 billion per year). Most of this capital will go toward fleet modernization. In September, Delta took the first of 100 Boeing 737-900ER aircraft, and the company recently ordered 40 Airbus aircraft to be delivered between 2015 and 2017.
However, this leaves at least $5 billion in cumulative free cash flow over the next two years. In that time frame, Delta plans to reduce its net debt by $2.6 billion, to a $7 billion target. Delta also plans to contribute an additional $250 million per year to its pension plan to reduce its long-term liability.
With at least $5 billion of free cash flow coming over the next two years and just over $3 billion in planned debt reduction and discretionary pension funding, Delta could generate $2 billion or more in excess cash in that time frame. This provides a basis for a significant dividend hike or a larger share buyback program.
Foolish bottom line
Delta's industry-leading free cash flow generation started to pay off for shareholders in 2013. The company was able to join Southwest Airlines and a select few other airlines in returning cash to its investors. (By contrast, United Continental is still a couple of years away from returning any cash to shareholders.)
Moreover, Delta's continuing outperformance may allow it to significantly increase its dividend or its share buyback program next year. The company is on pace to generate at least $2.5 billion in annual free cash flow, which is more than enough to fund debt reduction, pension funding, and a healthy return of capital to shareholders in the next few years.
Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.