Alaska Air Group absorbs $232M loss in first quarter
Alaska Air Group Inc. leaders reported a $232 million first quarter loss on May 5 as demand for air travel ostensibly remains at zero.
It marked the first quarterly loss for the Seattle-based parent company to Alaska Airlines and regional carrier Horizon Air in more than a decade, CEO Brad Tilden said.
Tilden called the result, which was driven by a 14 percent drop in passenger revenue for the quarter, “sobering” in an investor call but said there is “no doubt” that the second quarter will be much worse.
Executives chose not to forecast even near-term financial performance and business metrics given the very high uncertainty as to what lies ahead but stressed a goal of reaching breakeven cash flow by the end of the year while also admitting they do not yet know how they will get all the way there.
According to Tilden, the company had a cash burn rate of roughly $400 million per month at the start of April that has been brought down to about $260 million per month currently and the hope is to get it to $200 million per month in June to continue towards the breakeven goal.
The company has suspended its share repurchase and dividend programs.
Alaska Air Group stock closed May 5 trading at $28.97 per share. It had largely traded in the mid-$60s per share to start the year before a pandemic-induced drop started in late February.
Tilden commended airline employees’ focus on safety and caring for guests even as business has nearly ground to a halt.
“In the face of one of the greatest challenges in the history of aviation our people at Alaska and Horizon are doing extraordinary work to respond to these circumstances,” Tilden said.
All Alaska and Horizon passengers will be required to wear facemasks starting May 11.
He added that the airlines are requiring all flight attendants and customer-facing employees to wear face masks, are encouraging passengers to self-scan boarding passes, have slowed the boarding process to reduce crowding and suspended most in-flight services in attempts to limit the spread of coronavirus.
Alaska Airlines President Ben Minicucci noted the airline was one of the first major domestic carriers to feel the impact of the public response to the virus hit its business in late February as the Seattle area saw the first confirmed outbreak in the U.S. Ticket cancellations overtook new bookings on March 11 for the first time in Alaska’s history, Minicucci said, and as of May 5 the airline was mired in a stretch of 56 consecutive days of net negative bookings.
Alaska has waived all of its ticket cancellation and change fees through the end of the year.
He said passenger levels are starting to show “very modest” week-to-week improvement but demand is still down more than 90 percent from historical levels.
Capacity at Alaska Airlines was down approximately 80 percent in April and May and that trend is expected to continue at least into June.
Alaska Air Group received $992 million in federal CARES Act assistance from the federal government April 23. The aid breaks down to a $725 million payroll grant and a $267 million 10-year Treasury loan. It requires the company not institute mandatory furloughs or pay cuts through Sept. 30.
Tilden said the support covers approximately 70 percent of the company’s payroll through September.
The Treasury Department also took rights to buy 847,000 non-voting shares of common Air Group stock at the April 9 closing price $31.61 per share.
Overall, the $2.2 trillion CARES Act allocated $50 billion for grants and loans specifically to airlines.
Air Group Chief Financial Officer Shane Tackett said the company currently holds about $2.9 billion in cash and short-term investments that includes the CARES money; a $400 million draw on existing lines of credit; $425 million from a 364-day term loan and $50 million in secured financing acquired after the end of the first quarter.
Air Group started the year with about $1.5 billion in cash and marketable securities.
The $2.9 billion will last the company a little more than 11 months and Air Group has the ability to borrow against about $2 billion worth of aircraft it owns outright, Tackett said.
Alaska and Horizon also separately applied for $1.1 billion in CARES Act loans apart from the payroll funding.
“Banks and investors we’ve spoken to have indicated interest in lending against these assets with reasonable terms,” he said.
Alaska Air Group also has roughly $500 million in real estate as well as its loyalty program that could both be leveraged for further liquidity, Tackett said, adding that it all totals to between $7 billion and $8 billion of collateral that holds upwards of $4 billion worth of incremental liquidity potential.
He acknowledged that taking on the potential debt load is not ideal but may be needed to simply survive.
“Taken together, our hands-on liquidity, our access to additional financing and our aggressive goals to reach cash breakeven results will ensure that we bridge this downturn and are prepared to rebuild our success during a recovery,” Tackett said.
Air Group executives for years have stressed a desire to have an “investment-grade” balance sheet and have focused on paying down debt in the past.
The company’s debt-to-capitalization ratio stood at 48 percent at the end of the first quarter, compared to 41 percent to start 2020.
Tackett said Air Group’s airlines have cut discretionary spending by $50 million per month and deferred $600 million in capital spending, meaning the company’s total capital spend will be less than $175 million this year.
Additionally, more than 5,000 of Air Group’s 23,000 employees have taken 60 days of voluntary unpaid leave, according to Tackett. Executive pay has been cut and management hours have also been reduced by 10 percent as well, he said.
Alaska Airlines has also expects to permanently ground at least 12 mainline aircraft — likely Airbus aircraft acquired from its 2016 purchase of Virgin America — and is retraining 240 of its Airbus pilots to fly the Boeing 737 aircraft Alaska has traditionally flown.
“I believe that all 23,000 of our people understand that if we can achieve a breakeven cash burn rate our destiny is squarely back in our control, which means we are also in control of building towards a better future again,” Tackett said. “It’s an objective we have to get to.”
Elwood Brehmer can be reached at [email protected].