American Joins United Returning Cash in Airline Rebound

American Airlines Group Inc. will pay its first dividend since 1980 and repurchase $1 billion in stock, matching a buyback by United Airlines’ parent as the once-struggling industry returns more cash to investors.

The 10-cents-a-share quarterly payout at American came as the 2013 merger with US Airways delivers financial benefits faster than the company expected. United Continental Holdings Inc. unveiled its plan today while returning to profit after recording the only first-quarter loss among its U.S. peers.

Stockholder rewards from American and United, the world’s two largest airlines, underscored the turnabout among U.S. carriers after bankruptcies, consolidation and nine years of losses through 2009 that totaled $58 billion. Chicago-based United left court protection in 2006, and American did so in December as it combined with US Airways.

“Both announcements are pretty positive for the group,” Joseph Denardi, a Stifel Nicolaus & Co. analyst in Baltimore, said today in a telephone interview. “It demonstrates how healthy the industry is becoming with their ability to return cash to shareholders.”

American and United announced their results today amid a grim week for the global industry. Malaysia Airlines Flight 17 crashed in eastern Ukraine after a suspected missile strike, killing all 298 people on board; 48 people died in a commuter-plane accident in Taiwan; and Air Algerie said today that a missing jet carrying 116 people probably went down in Mali.

Shares Slip

Airline shares retreated after rising early on optimism tied to the repurchase plans and record second-quarter profits. All 11 members of the Bloomberg U.S. Airlines Index fell, led by a 9.4 percent decline for Alaska Air Group Inc. Delta Air Lines Inc. tumbled 2.8 percent, while American dropped 2.7 percent and United, 2.4 percent.

“With all the negative airline and airspace-related headlines in recent days/weeks, I could see how investor sentiment on the airline industry might not be as rock-solid as it otherwise would be, given the positive developments highlighted in today’s earnings reports,” said Fred Lowrance, an Avondale Partners LLC analyst in Nashville, Tennessee.

U.S. airlines are profiting from a resurgent domestic economy and newfound discipline in limiting seating capacity, which preserves pricing power. Revenue from checked luggage, extra-legroom seats and other perks also is surging, reaching $12 billion at United, Delta, American and Southwest Airlines Co. in 2013, consultant IdeaWorksCompany said last week. United was the first to adopt a bag charge, in 2008.

Delta’s Cash

Delta, whose 2008 acquisition of Northwest Airlines marked the first tie-up among the biggest carriers, has led the way in handing back cash. The company resumed its dividend in September, then boosted the payout in May and announced a $2 billion stock buyback.

The two U.S. carriers capped earnings reports by the six biggest airlines, whose combined profit excluding some items was $3.97 billion. That beat analysts’ average estimate of $3.76 billion for the group, according to data compiled by Bloomberg.

Denardi had projected that American and United would issue dividends or buy back shares perhaps in early 2015. He rates both carriers as buy.

The American dividend will be paid on Aug. 18 to shareholders of record as of Aug. 2. The stock buyback will be completed no later than the end of 2015, American said.

American’s Goal

President Scott Kirby has said American should lead U.S. competitors in returns and other financial metrics in less than three years. American’s pre-merger parent, AMR Corp. racked up annual losses from 2008 through 2011, when it sought court protection.

American’s second-quarter profit excluding special items more than doubled to a record $1.46 billion, or $1.98 a share. That topped the $1.96 average of 16 analysts’ estimates compiled by Bloomberg.

“We’re at a time when most companies aren’t producing record profits,” Chief Executive Officer Doug Parker said in a Bloomberg Television interview today. “Here we are at American producing not just record profits but by far the best in the company’s history. The industry has been transformed through a lot of pain to a point where we can return cash to investors and we’re doing it.”

United’s Buybacks

United said it expects the buyback program to be completed within three years. The airline’s leadership team, including CEO Jeffery Smisek, has been under pressure to improve operations after the first-quarter loss, and the company posted a second-quarter profit.

Earnings excluding one-time items were $2.34 a share, United said. The average of analyst estimates compiled by Bloomberg was $2.19 a share.

“We are beginning to see the benefits of the changes we’re implementing to our network and revenue management processes,” Chief Revenue Officer Jim Compton said in a statement.

Southwest, JetBlue Airways Group Inc. and Alaska all reported record second-quarter profits today as they flew more passengers at higher average fares. Delta also posted a profit yesterday that beat analysts’ estimates.

Before it's here, it's on the Bloomberg Terminal.