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Cash Flight

Big Airline Mergers Start Throwing Off Crazy Cash

It’s not hard to imagine U.S. airlines playing a certain George Gershwin ditty in their offices these days: Summertime, and the livin’ is easy. Financially, business has rarely been so good, and the three biggest U.S. airlines recently posted record quarterly profits in the second quarter.

“Never before in history has [United Airlines] and its peers been in such a favorable position,” wrote CRT Research analyst Michael Derchin in a note to clients, raising his target for United (UAL) shares by $5, to $54. That good fortune has, in turn, meant greater pressure on the companies to return some of the largesse to shareholders, with American Airlines (AAL) and United this week both announcing $1 billion share buybacks.

American, which left bankruptcy protection in December with more than $10 billion on its balance sheet, was particularly compelled to trim the money in its coffers. The cash pile isn’t generating much interest income, and most of American’s new aircraft purchases will be financed with inexpensive debt, not paid for in cash. The world’s largest airline also said it would commence paying a 10¢-per-share dividend next month—the first dividend in 34 years, dating to American’s former days as AMR Corp.

The repurchase program at United was more surprising, given the company’s recent struggles to match the revenue performance of its peers and the integration issues the airline still confronts as it tries to meld the former United and Continental operations. The $1 billion will be spent over three years, including $200 million in the current quarter.

“[A]s United continues to make progress in improving its financial performance, we expect the introduction of a dividend, similar to American, Alaska (ALK), Delta (DAL), and Southwest (LUV),” Raymond James (RJF) analyst Savanthi Syth wrote today in a client note, raising her target for the stock by $5, to $55. Syth also raised her target on American shares to $55.

Still, with the top four airlines now controlling more than 80 percent of U.S. market share, a cynic might note that there’s no reason such handsome profits should not appear amid a recovering economy. The real question will be how generous airline executives remain over time in sending the money to owners, vs. funding the myriad other issues around an airline that compete for investment.

Bachman is an associate editor for

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