American, Delta, United - We Have Cash, We Want Higher Valuations
With $9.6 billion on hand at the end of the third quarter, American Airlines (AAL) - Get Report has more cash than it needs and it's looking for the best way to spend what it has.
"We have more cash than we need at this point in time," American Chief Financial Officer Derek Kerr said Monday at a Chicago investor conference. "As we complete integration milestones, we'll continue to lower (it)."
American's outlook is a sign of the airline industry's continuing transformation to investment worthy, which was a general theme of presentations Monday by the finance chief from the big three carriers.
The three are at different stages. Delta (DAL) - Get Report feels it is close to securing investment-grade debt ratings, American is completing a merger, and United (UAL) - Get Report wants to catch up to Delta and American.
In the third quarter, American had a pretax profit margin of 14.7%, Delta had a profit margin of 13.3%, and United had a profit margin of 10.5%, according to a slide presentation by Gerry Laderman, United's acting CFO.
"When we compare ourselves to our peers, there's a gap -- to me, it's an opportunity," Laderman said. "We still haven't been valued the way we think we ought to be valued."
Another United slide showed that as an industry, airlines have some catching up to do. As of Nov. 6, industrials in the S&P 500 had a price/earnings ratio of 17.1. Rails in the S&P 500 had a PE of 15.5. Other airlines had a PE of 8.4 while United had a PE of 6.2.
"I've worked in the airline industry for 30 years give or take and I've never been as excited about the industry {and United} as I am today," Laderman said.
Kerr said American has already paid off all debt with an interest rate higher than 6%. Through dividends and share repurchases, it has returned $2.7 billion to shareholders this year and directors recently authorized a new $2 billion share repurchase plan to be completed by the end of 2016. It will finance aircraft acquisitions, given high demand for debt secured by aircraft.
American will spend cash on product and employees. After that, "any cash that is left, we will return that to shareholders," Kerr said.
Meanwhile, Delta Chief Financial Officer Paul Jacobson said the carrier has paid down more than $10 billion in debt over the past two years while returning more than $3 billion to shareholders and paying out $1.6 billion to employees in profit-sharing.
Delta's progress was recognized during the third quarter as two ratings firms, Fitch and Standard & Poor's, upgraded its debt to just short of investment-grade. Fitch's September upgrade brought Delta debt to BB+.
"Airlines have always proven they can generate cash in the good times," Jacobson said. "They've never proven they can continue that in a down cycle." To be viewed more favorably by investors, airlines must "prove that we can do it in a recession," he said.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.