Like all of its peers, Alaska Air Group (ALK 2.39%) has been hit hard by the COVID-19 pandemic this year. Revenue fell by more than 80% in the second quarter, as passenger traffic nearly dried up in April and has only partially recovered since then.
That said, the Alaska Airlines parent entered 2020 in better position to cope with a crisis than most other U.S. airlines. Sure enough, Alaska Airlines' low costs, domestic focus, and fleet flexibility are helping it to minimize its cash burn. Meanwhile, the company is capitalizing on its strong balance sheet to build up a huge liquidity cushion.
Alaska Air raises additional aircraft-backed debt
On July 2, Alaska Airlines and regional subsidiary Horizon Air raised $1.17 billion of new debt backed by 61 aircraft. The collateral consists of 16 Boeing 737-900ERs and 19 Embraer E175s delivered between 2016 and 2019, as well as 26 older Boeing 737-800s delivered between 2007 and 2010.
Alaska raised $966 million of senior debt maturing in 2027, which will carry a 4.8% interest rate, along with $208 million of junior debt carrying an 8% interest rate and maturing in 2025. Strong demand for the debt offering allowed Alaska Air to raise more capital than it initially planned. The first iteration of the deal called for using only 43 aircraft as collateral, which would have limited the senior portion of the debt raise to $674 million.
As of June 19, Alaska Air had $2.7 billion of cash and investments on hand. Even factoring in cash burn since then, the company likely has between $3.7 billion and $3.8 billion of cash and investments today: up from $2.1 billion at the end of March.
More funding available if needed
Last week, the Treasury Department announced that Alaska Airlines was one of several airlines to agree to terms for a secured loan available under the CARES Act. The company previously disclosed that it would be eligible to borrow up to $1.1 billion through this program.
This does not mean that Alaska Air will definitely access this additional source of funding. It has until the end of September to decide if it wants to participate in the loan program (and to what extent).
The recent announcement merely indicates that Alaska has agreed with the government on the collateral that would secure any loan. Following the aircraft financing completed earlier this month, Alaska doesn't have enough unencumbered aircraft available to support $1.1 billion of secured debt. However, it had $600 million of unencumbered non-aircraft assets as of June 19, according to the company. Alaska Airlines also may have followed the lead of larger peers by offering its Mileage Plan loyalty program as collateral.
Slower cash burn lengthens Alaska Air's runway
In early May, Alaska Air's management estimated that the airline was burning about $260 million per month and aimed to reduce cash burn to $200 million by June and breakeven by year-end. Fortunately, the airline has significantly outperformed these estimates.
On June 2, management estimated that cash burn totaled $170 million in May but would increase to $200 million in June, because of timing factors. An investor update published on June 22 offered better news. The company says that monthly cash burn slowed from $400 million in March to $206 million in April and $165 million in May. Furthermore, management estimated that cash burn would improve further to $150 million in June, driven by cost cuts and sequential improvement in ticket sales.
With COVID-19 case numbers rising rapidly in many parts of the U.S. -- causing some cities and states to reverse reopening measures -- ticket sales may slow again in the near term. Nevertheless, the significant improvement in Alaska Air's cash burn between March and June is helping the carrier make the most of its existing liquidity.
Alaska Air is on track to end the third quarter with more than $3 billion of cash and investments on hand, even if it does not tap the $1.1 billion of government loans available. Given that Alaska will gain extra flexibility to reduce costs through layoffs or furloughs in October, this should be more than enough to see the airline through the current crisis, regardless of the pandemic's future course.