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Alaska’s improved free cash flow benefits shareholders

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Alaska aims to increase returns to shareholders

Alaska Airlines is well-positioned to create incremental long-term value to its shareholders. The airline has a solid revenue and cost base, driving margins higher, as well as a strong financial position to support future growth. A sound liquidity position also enabled it to substantially increase returns to shareholders.

Alaska Airlines’s free cash flow as a percentage of revenue in the 12-month period ending September 2014 was 6.1%. During the same period, it was negative for the three legacy carriers combined: Delta Air Lines (DAL), American Airlines (AAL), and United Continental Holdings (UAL). Plus, free cash flow as a percentage of revenue was 3.1% for the three major low-cost carriers: JetBlue Airways (JBLU), Southwest Airlines (LUV), and Hawaiian Airlines (HA).

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Free cash flow up, leverage down

With a comparatively higher free cash flow available, Alaska Airlines reduced its leverage. The returns provided by the company to its shareholders in 2014 exceeded the cumulative capital returned from 2007 to 2012. The chart above shows the details on capital returned since 2007.

Alaska Airlines estimates its 2014 returns to shareholders in the form of dividends and share repurchases will be ~$415 million—exceeding the estimated $350 million. Alaska Airlines plans to exceed this amount in 2015. According to the airline’s management, after incurring ~$650 million in capital expenditure and $100 million debt obligations, more than $400 million will be available for distribution.

In the next article, we’ll compare Alaska’s key operating, financial, and valuation metrics against its peers to provide useful investment insight. Investors can either invest in the stock directly or through ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).

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