Take Advantage of the Recovery of This Sector

Robinson is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The airline industry has been rebounding from its lows of 2007 and 2008. Higher consumer sentiment readings have propelled stronger passenger traffic in most carriers. Revenues are strong and airlines are showing outstanding growth. Hence, investors should pick the airlines that have the highest probabilities of bringing capital appreciation for growth portfolios.

Dividends and Share Repurchases

Alaska Air Group (NYSE: ALK), Delta Air Lines (NYSE: DAL) and Southwest Airlines (NYSE: LUV) bring capital appreciation to their investors in the form of dividends. It is not usual for airlines to offer dividend payments. However, these companies are in the best positions to do it.

Alaska Air Group finished the last quarter with a 10% increase in cash from operations to $212 million, and its free cash flow increased from $85 million to $109 million. Furthermore, revenues rose by 10% to $1.1 billion.

Delta Air Lines finished the quarter with increasing cash from operations from $831 million to $1.0 billion. Further, its free cash flow ended at $357 million, from $424 million a year ago. The contraction reflects the dividend payment, which was instated in the previous quarter. Its revenues remained unchanged at $8.5 billion.

Southwest Airlines’ cash from operations declined from $1.2 billion to $983 million. Additionally, its free cash flow contracted from $1.1 billion to $450 million. However, the company spent an enormous amount of cash in its share repurchase program, and the shares outstanding declined from 772 million to 727 million.

Based on these metrics, these airlines should not have issues regarding the dividend payment. Alaska Air Group was the latest who joined the dividend-payment party. The company announced on Thursday the initiation of a dividend offer of $0.20 per share, to all shareholders of record as of August 6. Delta Air Lines announced a $0.06 dividend payment in its press release on May 8. Southwest Airlines has offered a dividend for more than 36 years. It was recently hiked from $0.01 to $0.04 in May.

What’s more is that these carriers are also bringing capital appreciation through strong share repurchase programs.

In September, Alaska Air Group announced its plan to repurchase $250 million worth of stock. Although the program does not have an expiration date, the company plans to complete it by December 31, 2014.

Delta Air Group, on the other hand, has authorized a $500 million share repurchase program, to be completed no later than June 30, 2016. Southwest Airlines has expanded its original $1 billion share repurchase program to $1.5 billion.

Overall, these companies will bring value to their investors in the form of dividend and share repurchase programs. Hence, they offer an excellent investment prospectus for any growth-oriented portfolio.

What are the tailwinds for these companies?

Delta Air Lines has inaugurated the Terminal 4 in the JFK International Airport in New York. Thus, its international presence may increase significantly. Long haul flights are important for carriers because they offer the best operational margins per seat. Further, the company is remodeling the Terminal 3 at JFK. With these terminals, the company will expand operations between JFK airport and international destinations. Finally, the company has acquired 49% of Virgin Atlantic Airways, which should expand its operations in the Atlantic region.

Southwest Airlines is a “regional” carrier with huge presence in the United States. The company offers low-price flight tickets, which is a plus. Hence, the passenger traffic should remain strong for this carrier. As proof, its revenue passenger miles for the month of June increased by 2.3% to 9.8 billion on a year-over-year basis. Its available seat miles, which means the seats available for purchase, increased by 1.7% to 11.5 billion, and its load factor increased 0.6% to 85%. These metrics are outstanding, at least.

Furthermore, the company has reached an agreement with Dish Network to provide free live TV access for customers using iPhone, iPad and iPod touch. This gesture is likely to bring several new customers who enjoy complementary treats.

Lastly, Alaska Air Group has a great relationship with its employees. Alaska Airlines pilots have ratified a five-year contract with the company. Also, Horizon Air, its subsidiary, has reached a tentative agreement on a proposed five-year contract with its flight attendants. I do not foresee any issue between the company’s employees and the employers in the near future. We must remember that the company awarded $88 million in February to its employees for having surpassed the company’s objectives.

Employees tend to perform better at their tasks, and provide better customer experiences when they work in appropriate conditions. Finally, the company is implementing an ambitious expansion plan that includes the inauguration of several routes including:

San Diego – Boise, Idaho. Scheduled to start on November 1.

San Diego – Mammoth Mountain Ski Area, California. Scheduled to start on December 19.

Seattle – Colorado Springs, Colorado. Scheduled to start on November 1.

Seattle – Omaha, Nebraska. Scheduled to start on November 7.

With these routes, the company increases its presence in San Diego and Seattle, one of its main hubs. Hence, the presence of the airline in the west is consolidating. This may bring higher revenues.

My two cents

These companies should bring capital appreciation in the form of dividends and share repurchase programs. Their free cash flow is stable enough to sustain these programs, and investors may expect future hikes. The companies are growing either by inaugurating new terminals or new routes. However, there is strong evidence that indicates that the companies are expanding successfully. Therefore, I recommend having these companies as a way to gain exposure to the airline industry.

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Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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