"Airlines" Didn't Waste All Their Cash Flow on Share Buybacks: American Airlines Did

Last Monday, Bloomberg reported that the top five U.S. airlines -- American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), United Airlines (NASDAQ: UAL), Southwest Airlines (NYSE: LUV), and Alaska Air -- spent a whopping 96% of their free cash flow (FCF) on share buybacks over the past decade. Numerous other media outlets picked up on this statistic, which became a rallying cry for people opposed to government financial support for the airline industry in the midst of the COVID-19 pandemic.

However, while this statistic is accurate, it's also a bit misleading. First, for people unfamiliar with financial terminology like free cash flow, it might appear that airlines were buying back stock hand over fist while neglecting to invest in their businesses. Second, the headline doesn't capture the fact that the high spending on buybacks relative to FCF was distorted by a single outlier: American Airlines.

Operating cash flow (OCF) is the amount of cash a business generates in a given period (i.e., a quarter or a year) before accounting for capital investments. One of the big decisions corporate leaders must make is how to allocate this cash flow. Some must be reinvested in the business in the form of capital expenditures, or capex. FCF is whatever is left after capex. This FCF can be used for several purposes: most notably, dividends, share buybacks, acquisitions, and balance sheet improvements. (For U.S. airlines, acquisitions are mostly off the table at this point because of antitrust concerns.)

Source Fool.com