Image source: American Airlines.
Delta Air Lines surprised many investors earlier this year when it announced a massive $5 billion share buyback program . Delta had entered the year with more than $1 billion remaining on a $2 billion share repurchase program announced a year earlier, and this move signaled an even more aggressive approach toward returning cash to shareholders.
However, while Delta Air Lines holds the record for the biggest single share buyback program in the airline industry, its close rival, American Airlines , has actually been more aggressive. It has executed a series of smaller buyback programs this year, and looks set to continue doing so during Q4 and throughout 2016.
American Airlines outguns Delta
When Delta announced its $5 billion share repurchase program in May, American Airlines was working on a $2 billion share repurchase program that its board authorized in January. American bought back $190 million of stock in Q1 of this year and spent another $753 million on buybacks in Q2.
American Airlines Stock Performance, data by YCharts .
The stock started to recover in October, but it has since fallen back into a rut, mainly due to concerns about American's aggressive price-matching policy and potential demand destruction related to the Paris terrorist attacks. However, neither of these is likely to significantly damage the company's strong profitability, especially from a long-run perspective.
On the flip side, American Airlines completed a big integration task in October, combining the US Airways reservation system with its own. By avoiding major snafus there, it significantly reduced the likelihood of a profit meltdown. Additionally, jet fuel prices remain as low as they have been in years, which is a major earnings tailwind.
US Gulf Coast Kerosene-Type Jet Fuel Spot Price , data by YCharts .
With earnings remaining strong and the stock price remaining depressed, the rationale for heavy share buybacks is as sound as ever. American Airlines can dramatically reduce its share count by repurchasing its stock, thereby boosting earnings per share. It had about $8.3 billion in unrestricted cash as of the end of September (excluding cash trapped in Venezuela), so it has plenty of firepower for buybacks, too.
As a result, American Airlines' share repurchases will probably remain elevated for the time being. At a minimum, it is likely to complete the existing authorizations of $3.5 billion by the end of 2016, which would be an average of $700 million in share buybacks per quarter.
However, there's a good chance that the company will increase its buyback plans again in 2016. American's heavy capex spending of the past few years will start to moderate next year before moving significantly lower in 2018. That will free up more cash for capital returns.
Furthermore, the current management team has shown in dramatic fashion this year that it is willing to prioritize buybacks over debt reduction when the stock looks cheap and financing costs are low. Until either the stock price or interest rates rise significantly -- or both -- large share buybacks will be a routine occurrence at American Airlines.
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The article Will American Airlines Group, Inc. Continue Its Buyback Binge? originally appeared on Fool.com.
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 .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
