American Airlines (NASDAQ:AAL) began 2015 with relatively modest plans for returning capital to shareholders. However, as the company's earnings and stock price performance began to diverge, American started to spend quite heavily on share buybacks.

By the end of the year, American Airlines had spent a whopping $3.6 billion to repurchase 85.1 million shares of stock. This reduced its share count by more than 11%.

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American Airlines spent $3.6 billion on share buybacks last year. Image source: American Airlines.

Based on management's commentary during American's recent earnings call, it seems likely that the company will continue to spend heavily on buybacks this year. In fact, American Airlines will probably repurchase even more stock in 2016 than it did in 2015.

Taking a different path
In the past year or so, Delta Air Lines (NYSE:DAL) CEO Richard Anderson and American Airlines CEO Doug Parker have staked out diametrically opposed positions on how to use their windfall profits.

At Delta, Anderson has held down capex to maximize free cash flow. Delta has used a lot of the resulting cash to pay down debt and make extra pension contributions.

Indeed, Anderson boasted on Delta's earnings call last month that the company had reduced its net debt by more than $10 billion since 2009. By 2020, Delta plans to cut its net debt to just $4 billion while ensuring that its pension plan is 80% funded based on current interest rates -- or 100% funded if interest rates rise by 2 percentage points.

Delta Air Lines hopes to achieve an investment-grade credit rating soon thanks to its efforts to repair its balance sheet. More broadly, management hopes that investors will reward Delta stock with a higher multiple to reflect its strong financial position.

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Delta is hoping to get an investment-grade credit rating this year. Image source: The Motley Fool.

By contrast, American Airlines has been spending heavily on new planes to reduce fuel and maintenance costs. This has pressured its free cash flow.

Nevertheless, American Airlines returned about 50% more cash to shareholders than Delta in 2015. That's because CEO Doug Parker is focused on holding down the company's cost of capital. As a result, while American is producing enough cash flow to pay cash for its aircraft purchases, it is instead financing them with cheap debt, freeing up cash for share buybacks.

Expect more of the same
American Airlines' steadily rising share buybacks didn't seem to impact its stock price last year. Management is taking the long view, though, and plans to continue prioritizing repurchases in 2016.

American Airlines ended Q4 with about $2.4 billion remaining on its share repurchase authorization. However, based on some targets that the company announced last week, it seems likely that it will spend significantly more than that.

First, American Airlines CFO Derek Kerr laid out a new $6.5 billion minimum liquidity target. American ended 2015 with about $8.7 billion of liquidity, so it could potentially return more than $2 billion to shareholders from its excess cash.

Second, the company's investor update projected that American will raise $4.5 billion in aircraft debt this year, including a recent $1.1 billion debt offering backed by planes purchased in 2014 and 2015. That would almost exactly offset its planned $4.5 billion in aircraft capital spending.

This means that all of American's operating cash flow will be available to pay for 1. non-aircraft capex, 2. scheduled debt payments, 3. dividends, and 4. share buybacks. Last year, operating cash flow totaled roughly $6.7 billion, and right now American Airlines is on pace for a similar performance in 2016.

American has estimated its non-aircraft capex at $1.2 billion for 2016. The company has $2.2 billion in debt maturing this year. And based on its current $0.10/share quarterly dividend payout, dividend payments would total less than $300 million this year. That would leave about $3 billion for buybacks, assuming operating cash flow remains flat year over year.

Thus, between its excess cash (about $2.2 billion) and the excess cash flow it will generate in 2016 (about $3 billion), American could potentially spend more than $5 billion on buybacks this year. It probably won't spend quite that much, but there is clearly room for American Airlines to increase its share repurchase activity beyond even last year's lofty $3.6 billion level.

Adam Levine-Weinberg is long January 2017 $40 calls on Delta Air Lines, and long January 2017 $30 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. 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.