Free cash flow comparison
Among the airlines in our analysis, Delta Air Lines (DAL) generated the highest free cash flow (or FCF) of ~$3.8 billion in 4Q16. United Continental (UAL) followed with free cash flows of ~$2.3 billion, and Southwest Airlines (LUV) posted free cash flows of ~$2.1 billion.
Spirit Airlines (SAVE) was the only airline with negative FCF in 4Q16, reaching -$67.4 million. SAVE had negative free cash flows throughout 2015, but its FCF had turned positive in 1H16. Spirit Airlines’s free cash flows whipsawed because the airline is still in its growth phase, which requires significant investment in the business.
Free cash flow yield
Looking at absolute numbers can help us compare these airlines to one another. For this purpose, we’ll look at another ratio—free cash flow yield, which is calculated by dividing free cash flow by enterprise value.
In 4Q16, Delta Air Lines (DAL) had the highest FCF yield of 9.9%. JetBlue Airways (JBLU) had the second-highest FCF yield of 8.7%, and United Continental (UAL) had the third-highest FCF yield of 8.1%.
Southwest Airlines (LUV) followed with a free cash flow yield of 6.6% in 4Q16, and Alaska Air Group’s (ALK) FCF yield was 5.4% for the quarter. American Airlines (AAL) had a free cash flow yield of only 2.0%, and Spirit Airlines (SAVE) had a free cash flow yield of -1.8% in 4Q16.
Investors can gain exposure to airline stocks by investing in the PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which invests ~23% of its portfolio in airlines.
Next, we’ll see what analysts are recommending for these airlines.