What happened
Shares of Alaska Air Group (ALK -1.32%) traded down more than 13% on Monday after the airline announced it was cutting its schedule by another 10% and taking steps to preserve liquidity. Airline stocks have been hammered as the COVID-19 coronavirus outbreak has sent travel demand plunging, leading to questions about the viability of the global industry.
So what
In a securities filing Monday, Alaska Air said it will reduce April capacity by at least 10% and May capacity by 15% from original expectations and added that it intends to monitor and continue to reduce capacity as needed. The airline is pursuing additional borrowings of about $500 million and suspending at least $300 million in capital expenditures, largely through the deferral of predelivery aircraft payments.
Image source: Alaska Air Group.
The airlines have been racing to cut costs as outbreak fears and government border closings have caused travel demand to evaporate. Any hope that the disruption to travel will be short term has all but vanished, causing Alaska Air and other airlines to take more drastic steps.
"Based on information from health experts and government officials, this difficult situation appears likely to get worse before it gets better," the airline said in the filing.
Alaska is also suspending its share repurchases, freezing hiring, and offering unpaid leaves of absence to employees. CEO Brad Tilden and President Ben Minicucci have reduced their base salaries to zero.
Now what
Alaska said as of March 16, it has $1.9 billion in unrestricted cash and short-term investments available. That's a comforting stat for investors worried about a potential bankruptcy, but the cash is going to flow out the door quickly during this period, and it makes sense for the airline to prudently cut costs and secure new funding.
These are scary times to be an airline investor, and as Alaska notes, the issues seem likely to get worse before they get better. Until the outbreak seems contained and life begins to get back to normal, it is going to be hard for these shares to find a bottom. But Alaska is following the right playbook to fly out of the crisis intact and ready to grow.
