Alaska Air Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited condensed consolidated results. The company operates Alaska Airlines, Horizon Air and McGee Air Services. COVID-19 continued to materially depress travel demand and capacity.
Financial performance and liquidity
- Revenue: $797 million, down 51% from $1.636 billion in Q1 2020 and 58% from Q1 2019. Passenger revenue was $659 million, down 56% year over year.
- Profitability: GAAP operating loss was $161 million; net loss was $131 million, or $1.05 per diluted share. The prior-year net loss was $232 million, or $1.89 per share. Q1 2021 results included a $411 million Payroll Support Program (PSP) wage offset. Excluding PSP, special items and fuel-hedge mark-to-market adjustments, adjusted net loss was $436 million, or $3.51 per share, versus an adjusted net loss of $102 million, or $0.83 per share, in Q1 2020.
- Cash flow: Operating cash flow was $167 million, compared with $33 million in Q1 2020; it included approximately $400 million of PSP grant funding. Investing cash outflow was $543 million, including net purchases of marketable securities; financing cash inflow was $82 million.
- Cash and liquidity: Cash and marketable securities totaled $3.549 billion at March 31, 2021, up from $3.346 billion at year-end. Total current assets were $4.284 billion and current liabilities $4.762 billion. The company reported available credit facilities totaling $461 million and said it was compliant with the $500 million minimum unrestricted cash and marketable securities covenant.
- Debt: Total debt was $3.571 billion, versus $3.495 billion at December 31, 2020. Adjusted debt including operating leases was $5.125 billion; adjusted net debt was $1.576 billion. Debt-to-capitalization, including operating leases, was 62%.
- Operating indicators: Capacity (ASMs) fell 32.1% and traffic (RPMs) fell 49.4% year over year; load factor was 51.9%, down 17.7 percentage points. Adjusted CASM excluding fuel and special items rose 18.5% to 10.93 cents.
Material changes versus comparable periods
- Revenue decline reflected pandemic-related weakness in travel: passenger traffic fell 49.4% and yield fell 12.1% year over year. Management said demand and bookings began improving in March as vaccinations expanded and restrictions eased.
- The reported loss improved year over year partly because of PSP grant recognition and lower operating costs, while adjusted net loss worsened substantially. Fuel expense fell 47%; non-fuel expenses excluding special items fell 19%.
- At March 31, customer travel credits included in air traffic liability totaled $484 million, net of breakage. The company extended their expiration terms in April 2021.
Outlook, risks and unusual items
- For Q2 2021, management planned capacity approximately 20% below Q2 2019 and expected load factors of 70%–75%. It forecast operating cash flow of $450–$550 million, including CARES Act PSP funding.
- The company expected 2021 capital expenditures of $150–$200 million. It anticipated continued recovery, primarily led by leisure travel, while warning that plans were highly sensitive to health trends, vaccine rollout and government restrictions.
- Alaska and Horizon received approximately $539 million under PSP 2 in Q1, including $403 million recorded as grant proceeds; an additional $80 million was received April 29. The company expected approximately $584 million under PSP 3 in Q2. PSP conditions include restrictions on involuntary furloughs and pay reductions through September 30, 2021, executive compensation limits through April 1, 2023, and suspension of dividends and repurchases through September 30, 2022.
- Special charges included $18 million for retired leased-aircraft return costs and $11 million for workforce restructuring. The company had about 2,800 employees on voluntary leave at quarter-end and expected most remaining leave-liability payments in 2021.
- A flight-attendant wage-and-hour case had an estimated potential loss range of $0–$22 million; the company accrued $22 million after an appellate ruling reduced an earlier judgment. A separate pilot class action was in discovery. Management said routine other litigation was not material.
- The company reported no material change in its stated risk factors or market-risk disclosures. It cautioned that forward-looking statements are subject to significant uncertainty.
Key facts for investors to verify
- How much of reported operating cash flow and earnings improvement depended on PSP grants, and how results trend when those effects are excluded.
- Whether passenger demand, yields, load factors and capacity recover as management anticipated, and how quickly adjusted unit costs normalize.
- Actual receipt and accounting of remaining PSP funding, along with the associated loan, warrant and operating restrictions.
- Debt repayments, refinancing needs and compliance with liquidity covenants, including the company’s announced post-quarter notice to repay $363 million outstanding on two credit facilities.
- Final outcome and settlement exposure for the flight-attendant litigation, and changes in customer-credit redemptions and breakage assumptions.
- Aircraft delivery and capital-spending plans, including commitments for 51 Boeing 737-9 MAX aircraft and related funding requirements.