This article discusses the new financial route taken by Southwest Airlines in June. Southwest managers announced increase in quarterly dividend and share buyback program to boost shareholder returns. Southwest also plan to purchase larger 737 Max jets from Boeing compared to previous purchase of smaller version. These larger jets will help southwest fulfill increase in demand and decrease operating expenses. These proposed changes will affect all three section of cash flow statement.

Southwest is the No. 4 U.S. airline by traffic that has generated 39 years of positive net income by providing superior services to customers. This achievement becomes more impressive when we consider that U.S. airlines industry had decade of bankruptcies and consolidation. Southwest announced to quadruple quarterly dividend and increase its share buyback authorization by 50%. Southwest plans to repurchase $1.5 billion shares under an accelerated repurchase program. These programs send a clear message to shareholder about strong financial health and cash position of the company. Share repurchase programs indicate that company believes market is undervaluing their security and they can take advantage of undervaluation. This program will also help them to increase their earnings per share. Similar strategy was followed in 2011 by Southwest as we have seen in the case study.

Southwest Airline also announced the purchase of first larger 737 Max, which will be delivered in 2017. This new purchase and delivery schedule will help southwest to trim $200 million a year from it’s aircraft capital commitments. Increase in demand for southwest services has been cited for the purchase of these new larger jets. These new large jets have higher passenger and cargo capacity per flight that would help them increase revenue and decrease cost. Purchase of new airlines sends strong future growth signals to shareholder.

Southwest and delta are the only two U.S. airlines that pay dividends and have share buyback program. Southwest strong consistent cash generation from its operating activity has enabled them to invest into new bigger jets and plan share buybacks to increase shareholder value.

Article Source: http://online.wsj.com/news/articles/SB10001424127887324767004578485132305205650