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US airline debt and balance sheets Part 2: Alaska, jetBlue and Southwest favourably leveraged

US airlines Alaska Air Group, jetBlue and Southwest are at different phases of their respective balance sheet fortification and debt management. Alaska and Southwest approach managing their debt with an eye towards maintaining the investment grade status each airline enjoys; Southwest’s status was further bolstered in 2015 with credit upgrades from both Fitch and Moody’s.

Lower fuel prices are allowing most airlines to enjoy healthy levels of free cash flow, and most of those companies believe a portion of those flows should be allotted to paying down debt, and issuing shareholder returns. JetBlue is continuing a trend of enlarging its base of unencumbered assets, which is also a focus for Alaska Air Group. Alaska believes its low leverage levels create a buffer against its competitors that are more leveraged. JetBlue, meanwhile, continues to drive down its leverage ratios significantly.

All of the work to bolster their balance sheets and achieve favourable leverage ratios results in Alaska, Southwest and jetBlue positioning themselves to brace for any weakness created by a cloud of macroeconomic uncertainty underlying demand that, for now, generally remains solid.

Alaska's debt ratios beat the S&P 500 average. A large focus remains unencumbered assets

Alaska Air Group has had one of the strongest balance sheets among US airlines for quite some time. Its adjusted debt to capitalisation ratios at YE2015 stood at 27% compared with the median ratio of S&P 500 companies of 45%.

At YE2015, Alaska stated 78 of its mainline aircraft were unencumbered, and its total number of unencumbered aircraft stood at 86. The CAPA Fleet Database shows that presently (18-Feb-2016) Alaska had 149 Boeing 737 narrowbodies in its fleet. The company’s wholly owned regional subsidiary Horizon operated 52 Bombardier Q400 turboprops. The company owns approximately 81% of its mainline fleet.

Alaska Airlines fleet summary as of 18-Feb-2016

Alaska generated USD760 million in free cash flow in 2015, and early estimates for 2016 indicate free cash flow of USD650 million. In 2015 Alaska used some of its cash flow to issue shareholder returns of USD602 million, and expects those levels to rise year over year in 2016.

Its long term on balance sheet debt at YE2015 was USD686 million. The airline opted not to access debt markets in 2015, but stated at YE2015 it might consider borrowing a small amount. In early 2016 the company said it was still contemplating borrowing USD100 million to USD200 million to manage its capital structure. Excluding a new order for regional jets, which Alaska estimates at USD90 million, the company projects capital expenditures for 2016 of approximately USD800 million. The company ended 2015 with USD1.3 billion in cash.

JetBlue makes strides in reducing its leverage. Opts to use cash for further reductions 

JetBlue has also been working to enlarge the number of unencumbered aircraft in its fleet. As of 30-Jun-2015, jetBlue estimated that it owned 143 aircraft in its operating fleet, and that 46 of those jets were unencumbered. At that time, the airline also has 34 unencumbered spare engines. At YE2015, the number of unencumbered aircraft at jetBlue had risen to 61.

See related report: US airline debt management Part 2: Southwest, JetBlue and Alaska enjoy favourable leverage

The company made USD390 million in debt payments during 2015, reducing net debt more than USD560 million. During 2016, jetBlue expects to make debt payments of USD454 million.

The increase in debt payments during 2016 is driven by the final maturity of a double enhanced equipment trust certificate (EETC) issued in 2004. JetBlue stated at the end of the final payment for that financing, an additional 50 aircraft will become unencumbered. As of 18-Feb-2016, JetBlue operated a total of 156 Airbus narrowbody jets and 60 Embraer 190 aircraft.

JetBlue Airways fleet summary as of 18-Feb-2016

JetBlue’s debt reduction has resulted in a steady decrease of its net debt to EBITDAR ratio, which fell to 1.1x at YE2015, far below the 4.1x ration it posted at YE2011. JetBlue ended 2015 with USD876 million in cash, which was 14% of its trailing 12M revenues.

JetBlue Airways year end net debt to EBITAR ratio: 2011 to 2015

2011 4.1x
2012 4.0x
2013 3.4x
2014 2.5x
2015 1.1x

During 2015 jetBlue spent USD227 million to repurchase 9.8 million shares. Company CFO Mark Powers in early 2016 explained that given the company’s debt maturity schedule for the year, “we plan to continue to focus cash deployment in balance sheet improvements this year”.  

There could be some possibility of enlarged shareholder rewards from jetBlue beyond 2016; but for now the airline’s focus remains on sustaining its favourable leverage ratios.

Southwest opts to reward shareholders at levels that exceed its free cash flow

Until Alaska and WestJet earned investment grade ratings in 2014, Southwest was the only North American airline deemed credit worthy. Delta in early 2016 earned investment grade status from ratings agency Fitch. In 4Q2015 Southwest’s investment grade status was further bolstered with an upgrade from Fitch that was preceded by an upgrade from Moody’s in Jul-2015.

Southwest’s leverage, including off balance sheet leases, was around the low to mid 30% range at the end of 2015, and its cash balances (including short term investments) were USD3.1 billion. The airline’s capital expenditures reached USD2 billion in 2015, and it estimates similar levels of spend during 2016, with USD1.3 billion to USD1.4 billion allotted to aircraft spend. Its average aircraft capital expenditures for 2016 and 2017 combined is estimated to be in a similar range to 2016 levels. Over the course of 2016, 2017 and 2018, Southwest is taking delivery of 33 new Boeing 737-800s as it opts to accelerate the retirement of its Classic 737 fleet comprised of 129 aircraft.

See related report: Negative labour sentiment overshadows Southwest’s positive outlook and favourable financials

Southwest repaid USD213 million in debt in 2015, and issued as USD500 million senior unsecured note with a rate of 2.65%. Its debt maturities grow to USD600 million in 2016.

The airline returned USD1.4 billion to its shareholders in 2015, which exceeded the USD1.1 billion in free cash flow Southwest generated during the year. The company did not engage in any share buybacks in 4Q2015; but highlighted that it returned more than 100% of its free cash flow to shareholders in 2015, and in early 2016 launched and accelerated a USD500 million share repurchase plan.

Alaska, jetBlue and Southwest work to strike the right balance for debt and shareholder value

Both Alaska and Southwest are using their investment grade status to maximise management of their balance sheet in order to sustain or grow their shareholder returns. As previously concluded by CAPA, jetBlue at 16 years old is younger than Alaska and Southwest, so its shareholder reward framework is different.

All three airlines are working to ensure that their balance sheets are fortified as general global economic uncertainty makes it tough to issue a reliable forecast for 2016. That is a trend that will continue for the foreseeable future as Alaska and jetBlue work to broaden their number of unencumbered assets and Southwest sets a precedent to return a large portion of its free cash flow to shareholders.

Ultimately, all airlines are focused on further balance sheet repair, both yo sustain shareholder rewards and, if they need to access capital markets, gain favourable rates to keep debt manageable.

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