Alaska Air Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing describes an unprecedented decline in air-travel demand associated with COVID-19. Unless noted, financial amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $421 | $2,288 | $2,057 | $4,164 |
| Operating income (loss) | $(288) | $364 | $(609) | $389 |
| Net income (loss) | $(214) | $262 | $(446) | $266 |
| Diluted EPS | $(1.73) | $2.11 | $(3.60) | $2.14 |
| Operating cash flow | Not provided separately | Not provided separately | $321 | $1,033 |
- Q2 passenger revenue fell 85% year over year to $309 million; total revenue fell 82%. For the first half, passenger revenue declined 53% and total revenue 51%.
- Q2 operating expenses were $709 million, including a $362 million CARES Act payroll-support wage offset and $69 million of impairment charges. Fuel expense fell 88% year over year to $59 million.
- Reported Q2 adjusted net loss, excluding specified grant, special-item and fuel-hedge effects, was $439 million, or $3.54 per diluted share. The six-month adjusted net loss was $541 million, or $4.37 per diluted share. These are non-GAAP measures.
- Six-month investing cash outflow was $124 million, including $168 million of property and equipment additions; financing cash inflow was $1.091 billion. Cash, cash equivalents and restricted cash ended the period at $1.520 billion.
- At June 30, cash and marketable securities totaled $2.803 billion, versus $1.521 billion at December 31, 2019. Total debt was $2.636 billion, up from $1.499 billion; shareholders’ equity was $3.861 billion, down 11%. Debt-to-capitalization including operating leases was 51%, up from 41%.
Material changes and business developments
- Q2 passenger counts started at about 5% of prior-year levels and peaked around 20%. Quarterly traffic fell 89%, capacity 75%, and load factor declined 47.8 percentage points to 38.4%.
- Management reported reducing monthly cash burn from about $400 million exiting March to $120 million in June. Cash and marketable securities were approximately $3.8 billion as of August 4, 2020.
- The company received approximately $1 billion under the CARES Act payroll support program. It recorded $723 million as deferred grant proceeds and recognized $362 million as a wage offset in Q2; $276 million was recorded as debt and warrants were issued to Treasury.
- During the first half, the company raised $589 million in secured financing and drew $400 million from credit facilities. After quarter end, it issued $1.2 billion of enhanced equipment trust certificates, secured by aircraft.
- As of June 30, 101 mainline aircraft were temporarily grounded; 12 Airbus aircraft had been permanently removed from the fleet. The company recorded $229 million of impairment and other charges for the first half, including Q2 additional costs related to the permanently parked Airbus aircraft.
Outlook, management commentary and risks
- Management planned capacity reductions of about 50% in Q3 and 35% in Q4, subject to demand. It described year-end cash break-even as a goal, with a planning assumption that cash bookings recover to 40%–60% of prior-year levels by December; management explicitly said these assumptions are not guidance.
- Management expected Q3 economic fuel cost of $1.35–$1.40 per gallon. Fuel positions left the company overhedged relative to its usual target of hedging up to 50% of expected consumption through the rest of 2020.
- Workforce programs had attracted about 4,000 volunteers, and management decided to eliminate approximately 300 non-union management positions. Related costs of $250–$300 million were expected to be recognized in Q3. WARN notices were sent to about 4,000 employees who could be affected if furloughs were needed.
- The company suspended share repurchases and dividends indefinitely; CARES Act terms prohibit repurchases and dividends until September 30, 2021, and impose payroll, executive-compensation and service obligations. Management said it expected to meet cash obligations and remain covenant-compliant for the next 12 months.
- COVID-19 demand uncertainty, potential renewed travel restrictions, continued cancellations and refunds, supplier disruption, fixed obligations and increased debt are material risks. The company had $509 million available under credit facilities at quarter end and was in compliance with their $500 million minimum unrestricted cash and marketable-securities covenant.
- A California wage-and-hour class action has a judgment of approximately $78 million against Virgin America and Alaska Airlines. The company is appealing and recorded no loss accrual; an adverse outcome could create a material liability.
- In July, Alaska received a formal invitation to join the oneworld alliance and was working toward entry as early as year-end 2020.
Investor verification points
- Track booking trends, capacity and cash burn against management’s explicitly non-guidance planning assumptions, and assess how long elevated liquidity can cover operating needs.
- Verify the terms, repayment schedule, collateral and restrictions attached to CARES Act support, secured borrowing, credit facilities and the post-quarter EETC issuance.
- Monitor further fleet, delivery and lease changes, and whether additional impairments or the expected Q3 workforce costs are recorded.
- Assess the size and timing of customer credit and refund obligations: the filing reports $363 million of refunds and $695 million of travel credits issued since the pandemic began, with $568 million of credits outstanding at June 30.
- Follow the appeal and potential exposure in the approximately $78 million flight-attendant judgment, for which no accrual was recorded.