Alaska Air Group improves financials as COVID-19 impacts continue
Alaska Air Group executives remain confident the airline company is one of the best positioned in the industry to rebound from the catastrophic toll of the pandemic despite losing $431 million in the third quarter and the acknowledgment the company will not break even this year.
The loss compares to a $322 million profit the Seattle-based parent company to Alaska Airlines and regional carrier Horizon Air turned a year ago when the industry was riding the wave of a strong U.S economy. Excluding payroll support program wage offsets, special items and fuel hedging adjustments the loss was $399 million, Air Group reported Oct. 22.
Company executives — as they often do — stressed Air Group’s strong underlying balance sheet that they feel will help them be nimble in restructuring their operations and recover quickly.
CEO Brad Tilden said the combined cash burn rate at Alaska and Horizon has been cut from $13 million per day during the worst of the pandemic down to $4 million per day currently. That has enabled Air Group to maintain the same debt level net of cash of about $1.7 billion that it had at the end of 2019, according to Tilden.
“This is an incredible achievement and one we believe few of our peers will replicate,” he said, adding Air Group’s treasury team added $4 billion worth of new liquidity to the company’s reserves when they had a goal of adding $2.5 billion.
Air Group’s debt-to-capitalization ratio stood at 59 percent at the end of the quarter, compared to 41 percent at the start of the year.
Chief Financial Officer Shane Tackett said the company took a $1.9 billion CARES Act loan from the Treasury Department because it came with an attractive interest rate and provided additional financial flexibility.
The loan, which Air Group has made relatively small draws from according to Tackett, gives the company roughly $5.5 billion in available liquidity — about four years’ worth — and he doesn’t expect to need any more.
“The next decision in front of us is whether to pay down or refinance our credit facility and 365-day term loans due in March and April of next year,” Tackett said.
The third quarter loss takes Air Group’s year-to-date loss up to $877 million, versus a $588 million profit it turned a year ago. The $431 million quarterly loss translated to a loss of $3.49 per share.
Alaska Air Group stock closed Oct. 22 trading at $40.60 per share, up slightly from a pre-earnings opening price of $39.15 per share.
Air Group generated $701 million in total revenue in the third quarter, which was down 71 percent from a year ago, but an improvement over the second quarter, Tilden noted. Alaska and Horizon similarly carried about 70 percent fewer passengers in the third quarter compared to 2019 on capacity that was down 55 percent.
Air Group executives also stressed that the company’s current — and many now former — employees have helped immensely in stabilizing its finances and operations through the industry collapse.
Nearly 7,000 Alaska and Horizon employees have taken short-term leave and another roughly 4,000 volunteered for long-term leave or early retirement packages, according to Tilden.
“Many of these people have been with Alaska for decades and are the folks that truly built Alaska,” he said. “They did nothing to cause this crisis and yet they’ve made a substantial personal sacrifice to contribute to our future and to save a job for someone else.”
Tackett added that the employees that took voluntary leave and furloughs helped limit the number of involuntary furloughs Air Group had to issue earlier this month to about 400. The company also cut 350 management positions, he said.
He estimated the temporary payroll savings to be about $350 million and said the annual savings from a smaller payroll should be more than $130 million per year.
“Our goal is to bring back our flying and our people as soon as demand allows us to,” Tackett said.
Air Group reported a workforce that averaged 16,027 full-time equivalent employees in the third quarter, which was down 28 percent from more than 22,200 employees a year ago.
Tackett said the airline industry as a whole likely needs additional help through Treasury’s payroll support program, or PSP, in-part because the recovery from the near-total spring shutdown has been slower than expected.
Air Group received $992 million in PSP funds in April and the company reported having utilized $760 million in payroll support wage offsets through the first three quarters of the year.
“Only continued PSP support can reliably help avoid balance destruction for the industry — balance sheets that will be needed to fuel future industry recovery and growth, which would, we believe, support the broader economic recovery and growth needed in our country,” Tackett said.
Negotiations on another large pandemic relief package between the House, Senate and White House have slowed prior to the Nov. 3 election.
The recovery to the all-important “breakeven” point for Air Group will continue to be slower than first hoped primarily because Alaska Airlines also announced it will continue blocking middle seats in its Boeing 737 and Airbus aircraft through Jan. 6.
Air Group leaders set a broad goal to reach zero cash burn by year’s end at the start of the pandemic but Tackett said blocking middle seats limits the load factor — how full each flight is — to just below what is needed for the company to reach cash breakeven.
Alaska and Horizon had a combined load factor of 48.5 percent for the quarter, while the airlines’ planes were typically about 85 percent full pre-pandemic.
Alaska Airlines President Ben Minicucci said surveys indicate passengers are much more likely to feel safe enough to fly again after making an initial trip and observing all of the precautions airlines are taking to protect customers. Minicucci also cited several scientific studies that generally conclude that a traveler is less likely to contract COVID-19 on a commercial flight than they are in other aspects of daily life.
“It’s safe to fly right now but we’ve got some work to do getting that information out there,” Minicucci said.
He added that bookings to Hawaii, which recently removed a mandatory 14-day quarantine period for travelers arriving with a negative COVID-19 test result, and other warm weather locations are steadily improving as people resume vacationing and look to work remotely from warmer climes.
Minicucci said while the near-term recovery has been slower than first expected, Air Group still expects to be flying at about 80 percent of 2019 capacity next summer, with a full recovery coming “well into 2022.”
Elwood Brehmer can be reached at [email protected].