As summer turned to fall last year, Alaska Air Group’s struggle to cope with the COVID-19 air travel downturn seemed to have turned a corner — until November’s wave of new coronavirus infections and business restrictions hit.
Before that, both the numbers of passengers carried and Alaska’s forward ticket bookings “were at peaks for the pandemic period, and each month was improving from the last,” said Ben Minicucci, Alaska’s president.
Then, as state and local closures and travel warnings came into effect, “that trend stalled in the fourth quarter,” said Minicucci, who will become CEO on March 1.
Yet even as Minicucci discussed the faltering fourth quarter on a teleconference call after the company announced a $1.3 billion annual loss for 2020, he offered an optimistic case for a steadier recovery this year.
“While we had hoped the fourth-quarter results would be better, we are cautiously optimistic there will be a step change in demand once the vaccine has been broadly distributed,” he said. “We do expect health patterns to improve in the next two months and that restrictions will begin to relax.”
“We believe our customers are gearing up for travel in the spring and summer,” Minicucci said.
He said daily bookings this month are up 20% compared to December.
He said Alaska plans to increase the number of flights and reach approximately 80% of its 2019 aircraft capacity levels by this summer, with an initial focus on building up routes from the Pacific Northwest and Alaska.
For now, he said, passenger traffic remains stuck at just over one-third of normal levels, with transcontinental flights the worst performers and demand for more lucrative business travel at 15% of normal.
Financial results released Tuesday by Alaska Air, parent company of Alaska Airlines and Horizon Air, show total revenue down 64% and a loss of $430 million in the final quarter.
Excluding the impact of government stimulus funds to support airlines, during the quarter Alaska spent $342 million more than it took in. That’s burning through cash at an average rate of $3.7 million per day, down from $4.3 million per day in the previous quarter.
Alaska ended the year with $5.2 billion in liquidity, consisting of $3.3 billion in cash and the rest in available loans.
The fourth quarter results were worse than analyst forecasts, and Alaska shares closed down $1.07, or 2%, at $51.83.
Government grants help out
Brad Tilden, speaking on his final quarterly teleconference call before he steps down as Alaska Air CEO, praised the airline’s resilience in face of the “deep and prolonged disruption.”
He pointed out that even though revenue in 2020 was down $5.2 billion from the previous year, Alaska ended the year with adjusted net debt essentially unchanged from a year earlier at $1.7 billion.
That was achieved through aggressive cost-cutting. More than 10,600 employees took temporary leave in 2020, of whom 3,300 remained on leave last quarter.
And Alaska Airlines cut its fleet of 237 jets by taking 40 Airbus A320s permanently out of service.
Additional help came from the government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided Alaska a $753 million grant in 2020. The airline will get a further $400 million grant in the first three months of this year.
The CARES Act grant is part of an extension of payroll support that with additional loans totals $533 million. Alaska received $266 million of that amount on Jan. 15.
As a condition of the extension, the airline cannot lay off any more employees or cut pay or benefits through the end of March.
Alaska’s chief financial officer, Shane Tackett, said the airline must take back “a few folks, mostly on the management side,” who were let go in October.
Most of the furloughed frontline employees who work at airports and onboard planes are in the process of being recalled because of the planned capacity increase ahead.
Tilden said the company’s strong cash position will allow the airline to survive the pandemic, and because the airline has a mostly domestic, low-fare business, it will recover faster than larger competitors with more exposure to international markets that are likely to take longer to come back.
The $1.3 billion loss in 2020, or $10.59 per share, compares with a profit of $769 million, or $6.19 per share, the previous year.
The $430 million loss in the final quarter, or $3.47 per share, compares with a profit of $181 million, or $1.46 per share, in the final three months of 2019 — the last quarter unaffected by the pandemic.
For comparison, Alaska’s much larger rival, Delta Air Lines, announced earlier this month that last year it lost $12.4 billion, including $755 million in the fourth quarter.
Still planning for growth
As part of Alaska’s recovery plan, Tilden has committed to renewing Alaska’s fleet with the newly ungrounded Boeing 737 MAX, getting rid of its less efficient Airbus A320s.
Alaska has 68 MAXs on order and took delivery of the first one on Sunday. That airplane is due to begin passenger service March 1, and the airline will have 13 MAXs in its fleet by year end.
The total market value of those airplanes after standard industry discounts is about $630 million, according to market pricing data from aircraft valuation firm Avitas. However, CFO Tackett said on the teleconference call that the airline will have to lay out only $150 million to $250 million to take them because it had already paid Boeing advance delivery payments for those and other MAXs that will cover the difference.
That low level of capital spending in the year ahead “was one of the important features of the revised deal with Boeing,” he said.
On the same call, Nat Pieper, senior vice president of fleet, said Alaska is scheduled to take 30 more MAXs next year, 13 in 2023 and 12 in 2024, though with flexibility in the contracts to defer deliveries if the recovery takes longer than anticipated.
And if the recovery arrives as hoped, so that air travel is back to 2019 levels by 2023, he said Alaska has options to purchase a further 52 MAXs through 2026.