Alaska Air Group (NYSE:ALK) isn't the best-known airline nationally, but for years it has quietly been one of the industry's top performers, flying passengers up and down the west coast and blanketing the Pacific Northwest with flights.

The airline flew into some turbulence in 2016 when it won a bidding war to acquire Virgin America, but entered 2020 with the integration largely complete, and Alaska once again focused on its core historical markets.

The COVID-19 pandemic has changed everything for Alaska and the rest of the airline sector, causing travel demand to evaporate and starving the industry of revenue. Shares of Alaska have lost nearly 50% of their value year to date, and the airline has cut 80% of its planned capacity heading into June.

The shares are more affordable than they were just a few months ago, but the risks are much higher as well. Is Alaska Air stock a good value or a value trap?

A rough quarter, and the next one will be worse

Alaska lost $232 million in the first quarter of 2020 on revenue down 13% year over year. Those numbers don't speak to the full extent of the damage done by the pandemic, as the U.S. wasn't fully impacted by COVID-19 until near the end of the first quarter.

The airline has parked more than 160 aircraft and sliced its schedule, trying to adjust to demand that at its worst was down 90% year over year. When second-quarter numbers come out in late summer, they will reflect a full three months of pandemic weakness, with only a trickle of revenue coming through the door.

An Alaska Air jet in flight.

Image source: Alaska Air Group.

The focus is on cost-cutting. Alaska was burning through about $400 million in cash in late March but had that down to about $260 million by early May. The goal is to get to cash breakeven by year's end, which would give the airline substantial flexibility to weather even an extended downturn.

It's too early to know how long the depressed demand will last, but the airlines came out of the Memorial Day weekend talking about hopeful signs of a gradual recovery.

Alaska prior to the pandemic had been doing a good job trimming routes it inherited in the Virgin America deal that were not profitable. These routes mainly involved more costly cross-country flying to destinations where the company did not have a large number of loyal frequent flier customers.

When we do see a return to flying, domestic travel is likely to come back first. Alaska has a largely domestic-focused network that should do better than some of its larger peers, and a lower cost structure than legacy airlines, including Delta Air Lines, American Airlines Group, and United Airlines Holdings.

There's cash in the bank

Even if post-Memorial Day optimism fails to hold, Alaska has the balance sheet to survive. The company as of May 4 had $2.9 billion in cash and marketable securities, including funds received as part of the government's CARES Act stimulus plan. Alaska has $3.9 billion in debt, a total that includes aircraft lease obligations.

Alaska has suspended more than $500 million worth of planned capital spending, largely through delaying new aircraft deliveries and deferrals on pre-delivery payments. The airline has a number of planes, including jets it inherited in the Virgin America deal, set to come off lease in the years to come.

About half of Alaska's cost structure is variable, and that portion of expense is coming down in line with capacity. Alaska is prohibited as part of the CARES Act to do any layoffs or involuntary separations prior to Sept. 30, but if a recovery has not taken hold by then, it seems likely there will be job cuts in order to hit the goal of reaching breakeven.

"We have been historically and are today financially conservative," company chairman and CEO Brad Tilden said during Alaska's early May earnings call. According to Tilden:

Throughout history, our people have worked our way through challenge after challenge and we've gained new skills and capabilities as we've gone along and we've come away from these challenges better and stronger. We have every belief that will be the case this time and we are fully focused on this outcome.

With billions in the bank and cost flexibility, Alaska should be able to survive through 2020 even if travel remains at April lows. If we are seeing the very early stages of a modest recovery, every tick higher adds just a bit more revenue to the equation and strengthens the airline's cash cushion.

Is Alaska Air a buy?

It's worth saying that if a second wave of the pandemic hits, or airline customers do not return for some other reason, no carrier is safe. There isn't a company in this industry that can survive indefinitely without revenue. But assuming some sort of slow return to normalcy, even if it takes years to fully recover, Alaska should be alright.

Alaska isn't the safest bet in the industry, but the combination of its domestic focus, strong liquidity position, and positive cost-cutting trajectory gives it a much longer runway than some of its rivals.

The stock is cheap, trading at just 0.5 times trailing twelve months revenue. Granted, revenue is going to be muted in the quarters to come, but Alaska in good times traded at near two times sales. If you believe revenue will eventually recover, there is a lot of potential upside to this stock.

Given it is impossible to predict the progress of a pandemic, and all of the uncertainty that still surrounds the sector, I'd caution against investors being over-exposed to any airline or the sector. But for those with a longer time horizon, and plenty of patience, I think Alaska is one of the more attractive stocks in the U.S. airline business today.