The COVID-19 pandemic has made 2020 a rough year for airlines. Alaska Air (NYSE:ALK) has been no exception. By late March, the company was burning cash at a pace of over $400 million per month. That's a huge amount of money for an airline its size: Over the past five years, Alaska's annual free cash flow has averaged less than $700 million.
Fortunately, the Alaska Airlines parent was able to control cash burn a little better last quarter. And just last week, the company gave investors good news about cash burn for the months of July and August. That keeps Alaska Air on track for a gradual march back to cash breakeven.
Rapid improvement during Q2
While Alaska Air was burning through cash at a worrisome pace at the beginning of the second quarter, this was largely due to the abrupt nature of the pandemic-induced demand downturn. On March 1, passenger throughput at Transportation Security Administration checkpoints was within 1% of 2019 levels. By April 1, throughput was down 94% year over year. It took time for Alaska and other airlines to slash their flight schedules to align with demand. A spate of refunds also contributed to high cash burn initially.
Cash burn improved rapidly once Alaska Airlines adjusted its schedules, cut discretionary spending, moved past the initial wave of flight cancellations and refunds, and experienced a modest recovery in ticket sales. Last month, the company disclosed that monthly cash burn moderated to $165 million in May and $120 million in June.
This pace of improvement during the second quarter was even faster than what management had been predicting. That said, Alaska Air executives did warn that cash burn was likely to tick up to around $200 million in July, due to the timing of various payments and a slowdown in bookings.
Another nice surprise
In an investor update last week, Alaska Air told investors that cash burn totaled approximately $175 million in July. While this marked a deterioration from its June performance, it was better than the company's forecast. Furthermore, while the pace of improvement in passenger traffic slowed during July, traffic and revenue did increase sequentially compared to June.
The outlook for August is mixed. Alaska Airlines has significantly increased its capacity this month relative to July. Traffic and revenue may come in a bit higher than July levels, but not by enough to justify the extra capacity Alaska has put in the market.
Crucially, though, management expects monthly cash burn to subside to less than $125 million. Ticket sales are improving again, as the rate of new COVID-19 cases has started to trail off. (The TSA has also reported a return to sequential growth in passenger numbers this month following a period of stagnation in July.)
While this level of cash burn is still unsustainable long term, Alaska Air had $3.8 billion of cash and investments on its balance sheet as of Aug. 13. That gives it the capacity to absorb monthly losses in the $100 million to $200 million range in the near term.
Alaska is on the right track
Ultimately, Alaska Air must achieve breakeven cash flow to decisively prove that it can outlast the pandemic. In recent months, management has stuck to a goal of reaching this milestone by the end of 2020.
During the company's Q2 earnings call, President Ben Minicucci tied this goal to a recovery in cash bookings to a range of "40% to 60% of normal" by year-end. A rebound of that magnitude appears to be within reach, depending on the status of the pandemic at that time.
If a coronavirus vaccine is approved or nears approval by December, a growing number of Americans will likely have the confidence to start booking travel for the spring and summer of 2021, making up for lost time. After all, airlines have experienced a surge in leisure bookings every time the pandemic has started to recede, hinting at pent-up demand. Conversely, a combination of vaccine setbacks and another wave of new cases could delay any improvement in booking trends.
There's no way to know what will happen with the pandemic. But between the company's strong balance sheet and continued cost-cutting efforts, Alaska Air is well-positioned to ride out the storm and then recover over the next few years.