ALASKA AIR GROUP, INC. quarterly report, Q1 FY2020

Alaska Air Group, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. The filing was signed May 14, 2020. Results reflect strong demand in January and February followed by a sharp COVID-19-related deterioration in March.

Financial performance and liquidity

Metric	Q1 2020	Q1 2019
Operating revenue	$1.636 billion	$1.876 billion
Operating income (loss)	($321 million)	$25 million
Net income (loss)	($232 million); diluted EPS ($1.87)	$4 million; diluted EPS $0.03
Adjusted net income (loss), non-GAAP	($102 million); diluted EPS ($0.82)	$21 million; diluted EPS $0.17
Operating cash flow	$33 million	$468 million

• Revenue fell 13%, primarily as passenger revenue declined 14%. Traffic fell 14%, while capacity declined 1.3%; load factor dropped to 69.6% from 80.3%.
• Operating margin was approximately negative 19.6%, versus 1.3% a year earlier. The loss included $160 million of impairment and other charges; adjusted results also exclude merger costs and fuel-hedge mark-to-market adjustments.
• Total operating expenses rose 6% to $1.957 billion. Fuel expense fell 9% to $384 million; non-fuel expenses excluding special items were broadly flat at $1.410 billion. CASM excluding fuel and special items increased 1.8% to 9.22 cents.
• Cash and marketable securities were $2.125 billion at quarter-end, up from $1.521 billion at December 31, 2019. Cash and cash equivalents alone were $811 million. Q1 operating cash flow fell to $33 million, while financing provided $684 million, including $825 million of debt proceeds.
• Total debt was $2.262 billion, up from $1.499 billion at year-end; $1.059 billion was classified as current. Total shareholders’ equity was $4.015 billion, down from $4.331 billion. The company reported compliance with the $500 million minimum unrestricted cash and securities covenant on its credit facilities.
• Air traffic liability was $1.110 billion at quarter-end. The company reported $402 million of travel credits, net of breakage, and said the timing of their recognition as revenue could not be estimated.

Material changes and unusual items

• COVID-19 caused unprecedented cancellations and a steep demand decline beginning in March. Passenger revenue decreased $235 million year over year; cancellations and refunds also affected cash receipts and liquidity.
• The company recorded $160 million in impairment and other charges: $145 million for aircraft and related long-lived assets, $10 million for Dallas Love Field gate intangibles, and $5 million for a vendor receivable considered uncollectible. Management warned that further aircraft parking could lead to additional impairments.
• The company parked or planned to park substantial aircraft capacity, including 12 Airbus aircraft permanently. It reduced planned 2020 capital expenditures by nearly $600 million, suspended share repurchases and dividends, and took cost-saving measures including a hiring freeze and voluntary leaves.
• Q1 included $31 million of share repurchases and $45 million of dividends paid before the programs were suspended. The company reported that it suspended both indefinitely in March.

Outlook, management commentary and risks

• Management said the second-quarter financial impact was likely to be more severe than Q1 and could not predict when or how quickly demand would recover. April flown capacity was more than 80% below the prior year; May cuts were expected to exceed 80%, with similar reductions expected in June.
• Monthly cash burn was reported at approximately $400 million in March and $260 million in April. Management targeted $200 million by June and cash-burn break-even by year-end, contingent in part on demand recovery and further cost actions. These are targets, not guaranteed outcomes.
• After quarter-end, Alaska and Horizon received $992 million under the CARES Act Payroll Support Program: $267 million was a 10-year loan and the remainder was grant funding. The funding carries restrictions, including limits on involuntary furloughs and non-officer pay reductions through September 30, 2020, limits on certain executive compensation, and a prohibition on dividends and repurchases through September 30, 2021. Air service requirements also apply through March 1, 2022, subject to government exemptions.
• As of May 12, 2020, cash and marketable securities were approximately $2.8 billion, according to management. The company had also obtained $50 million of secured financing after quarter-end and applied for up to $1.1 billion of additional CARES Act loans; participation was still under evaluation.
• The company said it expected to meet cash obligations and comply with debt covenants for the next 12 months, based on available liquidity, anticipated access to liquidity and future operating cash flows. The pandemic’s duration and travel-demand recovery remained highly uncertain.
• Fuel hedges left the company overhedged relative to its target of hedging up to 50% of expected consumption through the rest of 2020, following capacity cuts. Estimated economic fuel cost for Q2 was $1.10–$1.15 per gallon, with consumption expected to be substantially lower year over year.
• Aircraft purchase, lease, capacity-purchase and other contractual commitments remained significant. The company renegotiated or deferred certain payments after quarter-end, including most remaining 2020 aircraft commitments. Its fleet plans and delivery timing were subject to change.
• A flight-attendant wage-and-hour class action had a judgment of approximately $78 million against Virgin America and Alaska Airlines. The company was appealing and recorded no loss accrual, stating it believed the judgment should be overturned. Adverse resolution could create a material payment obligation.

Key facts for investors to verify

• Whether demand, bookings, load factors and capacity recover in line with management’s cash-burn and year-end break-even targets.
• How long available liquidity lasts, including the use and terms of CARES Act support, additional borrowing, and compliance with minimum-cash and other debt covenants.
• Whether further aircraft parking, fleet-plan changes or asset impairment charges occur, and how deferred aircraft and vendor commitments affect future cash needs.
• How travel credits and the frequent-flyer liability are ultimately redeemed or recognized as revenue, and the associated cash-refund exposure.
• The outcome of the approximately $78 million class-action appeal and any resulting financial liability.