* To return more than $1 bln to shareholders over 3 years
* Delta last paid a dividend in 2003
* Share buyback program $500 million
* Industry seen attracting more investors
* Shares reach year high, up 3 percent
By Karen Jacobs
May 8 (Reuters) - Delta Air Lines Inc plans to return $1 billion to shareholders over the next three years, starting with its first dividend in a decade and a $500 million share buyback program, the company said on Wednesday.
The initiatives are part of a five-year plan that seeks to generate as much as $5 billion in value for investors, the carrier said in a statement.
The move shows that airlines, which weathered a tough decade after the Sept. 11, 2001, attacks, have gained more solid financial footing and are now focusing on improving their investment potential.
"With the Delta announcement here, it's going to signal that the industry has indeed changed," said Chris Terry, an analyst with Hodges Capital Management in Dallas. "Profitability seems sustainable, and I think it's just going to open up the industry to more investors."
U.S. carriers have merged, stopped flying money-losing routes and created new revenue streams with baggage and food fees to restore profitability. Fare increases have also helped improve revenue and earnings in the last few years.
Among the major U.S. carriers, Southwest Airlines also pays a dividend and repurchases shares.
Terry said he expects other airlines to unveil plans to boost shareholder value as they reach return-on-capital goals. "The timing on that is probably the biggest question," he said.
Delta declared a quarterly dividend of 6 cents a share, to be paid Sept. 10 to shareholders of record Aug. 9. Its board also approved a share repurchase program of $500 million, due to be completed by June 30, 2016.
Shares of Delta touched a new year high, rising 3.3 percent to $18.67 in afternoon trading.
United Continental Holdings, the current industry leader, was down 0.3 percent to $33.28 and US Airways Group , which plans to acquire AMR's Corp American Airlines, rose about 3 percent to $17.48. Southwest was up 1 percent to $14.38.
Delta, which filed for bankruptcy in 2005 and acquired Northwest Airlines in 2008, has improved profits and reduced debt in recent years. It last paid a common stock dividend in 2003, and its last share buyback plan was in 2000.
To cut costs, Delta has been retiring fuel-guzzling planes and acquiring used aircraft, and it bought a Pennsylvania oil refinery last year.
The carrier, second largest behind United Continental, has upgraded food and wine offerings and sold seats with more legroom to boost revenue. Delta has also set up partnerships with non-U.S. airlines such as Britain's Virgin Atlantic to position itself to win new customers, and has expanded flights in lucrative markets such as New York.
The initiatives have strengthened a host of financial metrics at Delta since 2009. For example, net debt stood at $11.7 billion at the end of 2012, down from $17 billion three years earlier. Delta said it expects net debt to fall to $10 billion by the end of this year and added its financial plan would further reduce that to $7 billion.
The carrier said last year that it would outline a capital deployment strategy in the first half of 2013.
"We think this move highlights how Delta has somewhat reduced risk in the historical boom and bust airline industry, which we think is attracting increased investor interest," S&P Capital IQ equity analyst Jim Corridore said in a note to clients.
The plan outlined on Wednesday also calls for Delta to spend $2 billion to $2.5 billion a year on improvement for planes, technology and facilities over the next five years.
Delta also said it would contribute as much as $1 billion to its pension plans in the next five years, on top of the required minimum annual contribution of $650 million to $700 million.