Alaska Air Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. The filing covers Alaska Airlines, Horizon Air and related businesses.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1,953 | $701 | $4,277 | $2,758 |
| Operating income (loss) | $258 | $(571) | $646 | $(1,180) |
| Net income (loss) | $194 | $(431) | $460 | $(877) |
| Diluted EPS | $1.53 | $(3.49) | $3.64 | $(7.12) |
| Adjusted net income (loss), non-GAAP | $187 | $(399) | $(287) | $(940) |
- Q3 adjusted pretax margin was 12%, and management reported the company’s first adjusted net income since the pandemic began. Adjusted results exclude Payroll Support Program (PSP) wage offsets, specified special items and fuel-hedge mark-to-market adjustments.
- Q3 revenue rose 179% year over year, but remained 18% below Q3 2019. Passenger revenue was $1.774 billion, up from $572 million in Q3 2020; demand recovery was strongest in July and August, then weakened amid the Delta variant.
- For the first nine months, operating cash flow was $901 million versus $116 million in 2020. It included $892 million of PSP grant proceeds recognized as wage offsets. Investing cash use was $943 million; financing cash use was $825 million, including $1.2 billion of debt repayments.
- At September 30, cash and marketable securities totaled $3.195 billion, compared with $3.346 billion at year-end 2020. Total debt was $2.650 billion, down from $3.495 billion. Debt-to-capitalization, including operating leases, improved to 51% from 61%.
- Adjusted net debt, including leases and net of cash and marketable securities, was $921 million. Trailing-twelve-month adjusted net debt/EBITDAR was negative 6.6x because EBITDAR remained negative; management cautions that the measure reflects pandemic-affected results.
- Q3 consolidated load factor was 80.3%, compared with 48.5% a year earlier and 85.8% in Q3 2019. Consolidated capacity (ASMs) was up 83% year over year but 18% below 2019. Q3 CASM excluding fuel and special items was 9.21 cents, down 34% year over year and up 9% from 2019.
Material changes and notable items
- The improvement from Q3 2020 reflected a $1.3 billion revenue increase and $453 million fewer impairment and restructuring charges. It was partly offset by the absence of a $398 million PSP wage offset recorded in Q3 2020, higher non-fuel costs and a $251 million increase in fuel expense.
- PSP funding received in 2021 included $892 million recorded as grant proceeds and $311 million as unsecured debt; $16 million was attributed to warrants. The company recognized $914 million of wage offsets in the first nine months, including employee retention credits, and said it did not expect additional wage offsets in 2021. PSP restrictions included limits on dividends and share repurchases through September 30, 2022.
- The company repaid $541 million of debt in Q3, including prepayment of its $425 million 364-day term loan. A $100 million voluntary contribution was made to the pilots’ defined-benefit plan; management estimated combined plan funded status at 94%.
- Economic fuel cost was $2.05 per gallon in Q3 versus $1.32 a year earlier, reflecting higher fuel prices and consumption. Q3 fuel-hedge settlements generated $21 million of gains; the nine-month GAAP fuel expense included a $68 million mark-to-market hedge benefit.
Outlook, risks and contingencies
- Management targeted a return to 2019 flying levels by no later than summer 2022. For Q4 2021, it expected capacity 13%–16% below Q4 2019 and load factors of 77%–80%. Regional capacity was expected to be constrained by anticipated Horizon pilot attrition.
- Management expected Q4 economic fuel cost of $2.25–$2.30 per gallon and operating cash flow between zero and a $100 million use, excluding federal income tax refunds or payments. It forecast approximately $250 million of 2021 capital expenditures.
- Recovery and forecasts remain sensitive to COVID-19 trends, variants, travel restrictions, demand and advance bookings. Management noted Delta-related booking weakness, rising fuel costs, labor shortages and wage pressure. It believed available liquidity and credit sources were sufficient for foreseeable operating and debt needs.
- A new risk factor concerns federal contractor COVID-19 vaccination requirements. The company warned that employee or vendor attrition could disrupt operations or affect government-contract revenue if qualified replacements are unavailable or compliance is not achieved.
- For a California wage-and-hour class action involving approximately 1,800 former Virgin America flight attendants, an appellate court reduced the prior judgment; the final amount was unresolved. The company estimated potential loss of $0–$22 million and accrued $22 million. It is pursuing further appeals.
- Aircraft and related commitments were substantial: the filing lists $3.694 billion of aircraft-related commitments and $1.641 billion of capacity-purchase-agreement commitments. Aircraft return costs are uncertain; management anticipated material costs and cash outflows beginning in 2022 as Airbus A320 aircraft exit the fleet by 2023.
Important facts for investors to verify
- Whether post-summer demand, bookings and capacity recovery met management’s Q4 expectations, including the impact of Delta and regional pilot availability.
- Underlying earnings and cash generation after PSP wage offsets cease, separating reported GAAP results from non-GAAP adjusted results.
- Fuel-price, hedge and labor-cost effects on margins, alongside the company’s ability to maintain service and staffing.
- Debt repayment, liquidity and covenant compliance, and the timing and funding of aircraft purchases and lease-return obligations.
- Developments in the flight-attendant litigation and the operational and financial effects of vaccination requirements.