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Strong balance sheet, fed bailout put Alaska Airlines on recovery path

Analysts see brighter future as cost containment kept 2020 loss of $1.3B in check

Alaska Airlines this week received its first Boeing 737 MAX jet. (Photo: Alaska Airlines)

Alaska Air Group (NYSE: ALK) executives are optimistic about the summer flying season once COVID-19 vaccinations become more widespread. During Tuesday’s earnings call they said the carrier is well positioned to capitalize on economic recovery because of a well-managed balance sheet, aggressive cost cutting and generous federal support.

The Seattle-based company reported a fourth-quarter adjusted net loss of $316 million or minus $2.55 per diluted share. For the year, Alaska Air lost $1.3 billion on an adjusted basis. Operating revenue was $808 million, or 64% below the comparable 2019 period. That total included $43 million for cargo, a 17% decrease year-over-year. 

Despite operating a 737-900 in a cargo-only configuration to increase cargo revenue while passenger traffic remains slow, as well as three 737-700 freighters, cargo revenue fell because of the limited number of passenger flights. For the full year, cargo revenue was $173 million, or 22% less than 2019.

“We are not out of the woods, but we are seeing signs of brighter days ahead,” said Alaska Air Group CEO Brad Tilden. “We’re positioned to come out of this crisis with our balance sheet unimpaired and our competitive advantages intact, and both of these set us up for a strong future and a long runway for growth.”

Despite a $5.2 billion drop in revenues (59%) because of COVID, Alaska Air’s total debt was essentially unchanged from 2019. It it was able to do that without issuing equity. Alaska has one of the best balance sheets in the industry. Only one other carrier, Delta Air Lines (NYSE: DAL), has similarly been able to avoid material dilution of its shares, said J.P. Morgan airline analyst Jamie Baker.

A strong business before the crisis and the speed with which the airline reduced cash expenditures have helped keep the company in good financial shape, but Tilden acknowledged that recovery would be much slower without direct payroll assistance from Congress. The group received $753 million through the CARES Act, which helped offset revenue losses and retain jobs. It is scheduled to get another $400 million grant this quarter after Congress in December passed a second rescue package.

Self-help measures included more than 10,000 employees taking elective voluntary leave, changing payment terms with suppliers and parking underutilized aircraft. And in 2019, Alaska paid off about $600 million of debt. 

Operating units Alaska Airlines and Horizon Air removed $2.4 billion in expenses and reduced capital spending, which will help the airline repay debt this year, assuming passenger travel recovers, CFO Shane Tackett said. 

“The fact that we were producing $1.5 billion or $1.6 billion in cash flow pre-pandemic gave us a lot of runway” to weather the crisis, he said. In other words, it only had to make up about $3.5 billion of the $5.2 billion in lost revenue to get back to neutral.

Alaska has $3.5 billion in liquid reserves and says it plans to carry an excess cash balance until there is sustained revenue recovery. The company will switch to quarterly, rather than monthly, guidance on cash burn because of the reduced liquidity risks moving forward, Tackett said. 

The capital account was significantly aided by a restructured order agreement with Boeing Co. (NYSE: BA) in December to receive a total of 68 737-9 MAX aircraft in the next four years, with options for an additional 52 planes — and Alaska has a history of exercising all aircraft options. The deal reduces payments to Boeing and keeps capital expenditures in the $150 million to $250 million range. 

The airline is scheduled to receive 13 planes this year, 30 in 2022, 13 in 2023 and 12 in 2024. In November, Alaska Airlines separately agreed to lease 13 MAX aircraft. The Boeing agreement features significant flexibility in the deferral rates for the majority of the orders and full substitution rights to other MAX models.

The 68 aircraft will largely replace Alaska’s Airbus fleet by mid-2023 and move the airline substantially toward a single, mainline fleet that officials say will be more efficient, profitable and environmentally friendly. The move returns Alaska to an all-Boeing fleet two years earlier than analysts expected.

Alaska Airlines accepted delivery of its first Boeing 737-9 MAX on Sunday, after waiting nearly two years for the Federal Aviation Administration to approve a Boeing software fix for the flight control system that was faulted in two deadly crashes and led to the grounding of the global fleet. The plane is scheduled to enter service March 1 after the plane goes through several rounds of flight testing and technicians and pilots receive more training to understand differences between the MAX and the airline’s existing 737 fleet. 

Passenger plateau and pop

The airline’s says its plan remains to limit cash outflows until bookings and boardings improve, but it is already gearing up for a big jump in summer capacity in anticipation.

Airline officers said passenger bookings and revenue peaked in October after hitting the pandemic bottom last spring when travel essentially evaporated and airlines closed down most flights. Earlier this month, Alaska Air said it expected to use up cash reserves at a higher rate in the first quarter after revenues and passenger volumes dipped since October as the fast-spreading COVID-19 virus curtailed passenger travel. 

Demand has plateaued as widespread travel restrictions designed to protect people from the coronavirus discourage bookings. 

According to travel data firm Cirium, January and February U.S. domestic capacity is expected to decline about 41.5% from pre-pandemic 2020 levels. Airlines are starting to adjust March capacity, which is now down 17.7% year-over-year versus down 2.7% last week. 

Strategies among airlines differ with American, Southwest, Allegiant and Spirit keeping capacity in the market longer and making adjustments closer to the travel date, while Delta, United, Alaska and JetBlue take a more aggressive approach by reducing capacity early to limit cash burn, according to Cowen equity analyst Helane Becker. Delta continues to sell 60% of its seats. Alaska started making 100% of its seats available, while Delta will hold off making middle seats available until the end of March.

Leisure travel for short flights is producing the lion’s share of Alaska’s passengers, with transcontinental traffic 85% below its 2019 level. Distance is a clear metric in performance during the COVID era, with long-haul international traffic across the industry also far slower than domestic. Alaska operates a limited international network with service to Mexico and Costa Rica, but recently launched a partnership with American Airlines (NASDQ: AAL) to connect to its international network.

Another major drag going forward is all-important corporate travel, which Alaska Air President Ben Minicucci said is expected to return to 50% of normal levels by the end of the year, based on surveys of corporate customers.

But the company is preparing for people to travel much more as the weather improves and COVID restrictions are relaxed, increasing seat capacity to about 80% of normal capacity by midyear. It estimates load factors of between 40% and 45% in the first quarter. 

Capacity growth will initially focus on the Pacific Northwest and Alaska and move down to California as restrictions are lifted there, Minicucci said.

“We have to see what happens with the vaccine rollout and with how people are feeling and relaxation of restrictions,” he said. With the Biden administration targeting 100 million to 150 million vaccinations in 100 days, “I think you might start seeing people venturing out for spring break. … I think we’re going to be on our toes and react appropriately.”

Alaska Airlines, which has recently attracted customers with discounts and is focused on filling planes to cover fixed costs, is playing it too safe with raising ticket prices for leisure travel, J.P. Morgan’s Baker complained in a research note. 

“Airlines are in an unprecedented position from which they can practically hold consumers hostage, [but] if a lack of pricing vigor is our biggest gripe after a conference call, that’s probably a pretty strong overall endorsement,” he said.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.


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Eric Kulisch

Eric is the Supply Chain and Air Cargo Editor at FreightWaves. An award-winning business journalist with extensive experience covering the logistics sector, Eric spent nearly two years as the Washington, D.C., correspondent for Automotive News, where he focused on regulatory and policy issues surrounding autonomous vehicles, mobility, fuel economy and safety. He has won two regional Gold Medals from the American Society of Business Publication Editors for government coverage and news analysis, and was voted best for feature writing and commentary in the Trade/Newsletter category by the D.C. Chapter of the Society of Professional Journalists. As associate editor at American Shipper Magazine for more than a decade, he wrote about trade, freight transportation and supply chains. Eric is based in Portland, Oregon. He can be reached for comments and tips at [email protected]