Alaska Air Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Comparisons are primarily with Q1 2021; management also provides selected Q1 2019 comparisons. Amounts are in U.S. dollars.
Financial and operating performance
- Revenue: $1.681 billion, up 111% year over year. Passenger revenue rose 129% to $1.511 billion. Revenue remained 10% below Q1 2019.
- Profitability: GAAP operating loss was $202 million and net loss was $143 million, or $1.14 per diluted share, versus a $131 million net loss, or $1.05 per share, in Q1 2021. Adjusted net loss, a non-GAAP measure, improved to $167 million ($1.33 per share) from $436 million ($3.51 per share).
- Costs and margins: Operating expenses were $1.883 billion, up 97%. Fuel expense increased 71% to $347 million. Non-fuel expenses excluding special items rose 28%; adjusted CASM excluding fuel and special items fell 3% to 10.61 cents. Load factor was 76.8%, versus 51.9% a year earlier.
- Cash flow: Operating activities provided $287 million, compared with $167 million in Q1 2021. Investing activities provided $39 million, including net sales of marketable securities, while capital expenditures were $288 million. Financing activities used $168 million, including $170 million of debt repayments.
- Liquidity: Cash and marketable securities totaled $2.890 billion at quarter-end, down from $3.116 billion at December 31, 2021. The company reported $628 million in cash and cash equivalents. It said available liquidity was sufficient for foreseeable operating and debt needs and reported compliance with its credit-facility cash covenant.
- Debt: Total debt was $2.370 billion, including $292 million current; long-term debt net of current maturities was $2.078 billion. Debt-to-capitalization including operating leases was 50%, within management’s stated 40%–50% target range. The effective weighted-average interest rate for the debt portfolio was 3.3%.
- Other metrics: Q1 capacity (ASMs) rose 32.6% year over year, but was 11% below Q1 2019. Adjusted net debt was $1.109 billion and adjusted net debt to trailing-twelve-month EBITDAR was 1.6x.
Material changes and notable items
- Demand was weak in January and February amid the Omicron surge and staffing disruption, then rebounded in March; monthly operating revenue exceeded March 2019 levels for the first time since the pandemic began.
- Management attributed much of the year-over-year adjusted loss improvement to recovering passenger revenue. GAAP comparisons are also affected by the $411 million Payroll Support Program wage offset recognized in Q1 2021, which did not recur in 2022.
- The company recorded $75 million of fleet-transition and related charges, including a $70 million impairment of owned Q400 aircraft. The A320 fleet passed recoverability testing, but useful lives were shortened to reflect accelerated retirement plans.
- Marketable securities declined in fair value by $57 million during the quarter, primarily due to interest-rate changes. Management said it did not consider the unrealized losses to reflect expected credit losses.
- Cash from operations increased year over year partly because air traffic liability rose by $480 million as advance bookings strengthened. A $184 million federal tax refund was received after quarter-end.
Outlook, management commentary, and risks
- For Q2, management planned capacity 6%–9% below Q2 2019 levels because pilot-training disruptions had contributed to staffing shortages. It expected Q2 revenue to be 5%–8% above Q2 2019.
- Management expected continued passenger, Mileage Plan, and cargo revenue growth during 2022, alongside higher non-fuel costs as capacity, departures, staffing, and wage rates increased. It expected Q2 economic fuel cost of $3.20–$3.25 per gallon and continued fuel-expense pressure; anticipated hedge benefits were expected to diminish in the second half.
- Planned 2022 capital expenditures were approximately $1.6–$1.7 billion, expected to be funded with operating cash flow and cash on hand.
- The company plans to accelerate retirement of its 30 operating A320s by early 2023 and exit the Q400 fleet by the end of 2023. It is evaluating removal of 10 A321neo aircraft by the end of 2023, subject to agreements. Fleet plans include substantial aircraft purchase and delivery commitments.
- Risk factors include uncertain travel demand and health developments, staffing and operational execution, volatile fuel prices and refining margins, higher operating costs, aircraft transition and return costs, and the possibility that market or regulatory developments could alter plans. Management cautioned that forward-looking statements are subject to significant uncertainty.
- Contingency: In a California wage-and-hour class action involving approximately 1,800 Virgin America flight attendants, the company estimated potential loss of $0–$22 million and accrued $22 million. The final judgment amount remained undetermined; the company was pursuing further appeals.
Important facts for investors to verify
- Whether demand, revenue, and capacity develop in line with the Q2 outlook, especially given the disclosed pilot staffing constraints.
- Whether fuel prices and hedge settlements track management’s estimates, including the expected reduction in hedge benefits later in 2022.
- The costs, timing, counterparties, and impairment implications of the accelerated fleet transition and aircraft return obligations.
- Progress on planned capital spending, aircraft deliveries, debt reduction, and maintenance of liquidity and credit-facility covenant compliance.
- The outcome and any change in the accrual for the flight-attendant litigation, and the financial effect of the revised Mileage Plan agreement and estimates.
- How reported GAAP results compare with adjusted results; adjusted measures exclude specified items and are not substitutes for GAAP results.