Alaska Air Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company operates Alaska Airlines, Horizon Air and related businesses. Results were severely affected by the COVID-19 pandemic and the resulting collapse in air travel demand.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $701 million | $2.389 billion | $2.758 billion | $6.553 billion |
| Operating income (loss) | $(571) million | $422 million | $(1.180) billion | $811 million |
| Net income (loss) | $(431) million | $322 million | $(877) million | $588 million |
| Diluted EPS | $(3.49) | $2.60 | $(7.12) | $4.74 |
| Operating cash flow | Not separately provided | Not separately provided | $116 million | $1.381 billion |
Q3 adjusted net loss, excluding the payroll support wage offset, special items and fuel-hedge mark-to-market adjustments, was $399 million, or $3.23 per diluted share, versus adjusted net income of $326 million, or $2.63 per share, a year earlier. For the first nine months, adjusted net loss was $940 million, or $7.63 per share, versus adjusted net income of $617 million, or $4.97 per share.
Q3 passenger revenue fell 74%; total revenue fell 71%. System traffic declined 74.6% and capacity 55.1% year over year. Load factor was 48.5%, down from 85.8%; revenue per available seat mile (RASM) fell 34.8%. Consolidated cost per available seat mile excluding fuel and special items rose 66.1% to 14.00 cents, reflecting reduced capacity and the resulting fixed-cost pressure. Reported Q3 operating loss included a $322 million restructuring charge and $121 million of impairment and other charges; payroll support grant offsets reduced reported expenses by $398 million.
At September 30, cash and cash equivalents were $1.855 billion and marketable securities were $1.904 billion, or $3.759 billion combined. Total debt was $3.822 billion, up from $1.499 billion at December 31, 2019; shareholders’ equity was $3.454 billion, down from $4.331 billion. Current assets were $4.465 billion and current liabilities $4.207 billion. Net cash from financing was $2.286 billion for the first nine months, chiefly reflecting new borrowing; investing used $767 million. Cash, cash equivalents and restricted cash ended the period at $1.867 billion.
Material changes and business developments
- Revenue and traffic contracted sharply as pandemic-related restrictions, reduced business and leisure travel, and cancellations suppressed demand. Passenger counts improved from a daily low of about 5,000 to approximately 40,000 in September, but remained well below prior-year levels.
- The company raised substantial liquidity, including $1.2 billion through equipment trust certificates, $589 million of secured aircraft financing, $400 million drawn on existing credit facilities, and CARES Act funding. The company had drawn $135 million of a CARES Act secured loan facility by September 30; the available facility was increased to approximately $1.9 billion in October.
- CARES Act payroll support funding was approximately $1.1 billion. It included debt, warrants and grant proceeds; $760 million of grant wage offsets was recognized during the first nine months. Funding conditions restrict dividends and share repurchases, among other requirements.
- Q3 workforce actions included more than 600 permanent early-outs, over 3,300 voluntary or incentive leaves, approximately 400 involuntary furloughs effective October 1, and approximately 300 eliminated management positions. Management expects these reductions to produce about $130 million in annual savings.
- The company permanently removed 20 Airbus aircraft during the first nine months and had 64 mainline aircraft temporarily grounded at quarter-end. Q3 impairment charges included ten owned A320 aircraft identified for retirement; the filing reports $350 million of impairment and other charges for the first nine months.
Outlook, risks and contingencies
- Management expected Q4 2020 capacity to be about 40% below Q4 2019 and summer 2021 capacity to be approximately 80% of summer 2019. These are planning assumptions, not formal guidance, and were subject to change with demand. The company expected Q4 load factors of 45%–55%, partly reflecting middle-seat blocking through January 6, 2021.
- Management said recovery timing was uncertain, expected depressed demand into 2021, and described reaching zero cash burn as a key objective. The company expected to meet cash obligations and remain in compliance with debt covenants for the next 12 months, based on available liquidity and expected cash flows.
- Management expected Q4 economic fuel cost of $1.20–$1.25 per gallon based on market conditions. The company noted it was overhedged relative to its usual target through the remainder of 2020 because demand and capacity had fallen.
- At September 30, the company had $461 million of availability across three credit facilities and was compliant with their $500 million minimum unrestricted cash and marketable securities covenant. It warned that credit-card processors could require reserves if cash and securities fell below $500 million or specified credit-rating triggers occurred.
- Travel credits outstanding totaled $617 million at quarter-end, net of breakage; the company had issued approximately $850 million of credits and paid approximately $475 million in refunds since March. It could not estimate when these liabilities would be recognized as revenue.
- A court entered a roughly $78 million judgment in a flight-attendant wage-and-hour class action; the company is appealing and recorded no loss accrual. A separate pilot class action was certified in August 2020 and remained in discovery. The filing says other routine litigation is not expected to be material.
- Aircraft commitments, fixed debt and lease obligations remain substantial. The company was discussing aircraft delivery and lease timing with manufacturers and lessors; its fleet outlook could change materially. Further impairment charges were possible as fleet plans and demand expectations evolved.
Most important facts for investors to verify
- Whether passenger demand, bookings, traffic and load factors recover as management’s capacity assumptions anticipate.
- Cash burn, liquidity, debt maturities and covenant compliance, including the terms and collateral attached to additional CARES Act borrowing.
- How quickly ticket credits and air traffic liabilities convert to travel revenue or refunds, and the resulting cash impact.
- Whether workforce savings and other cost reductions offset higher unit costs at materially reduced capacity.
- Further fleet decisions, impairment exposure, aircraft delivery obligations, and outcomes of the pending litigation.