There's no doubt that 2020 has been an awful year for airlines and their shareholders. But a crisis like the coronavirus pandemic often has a way of separating the long-term winners from the losers in an industry.
Alaska Air Group (NYSE:ALK) increasingly looks like one of the biggest long-term winners among U.S. airlines. In fact, the West Coast airline is in great position to come back strong over the next few years, boosting its earnings beyond pre-pandemic levels.
Cash burn is under control
While all major U.S. airlines have made great strides in reducing their cash burn since March, Alaska Air has been arguably the most successful of them. In recent months, the carrier has routinely outperformed its cash burn projections.
This streak of outperformance continued last month. Alaska disclosed this week that it burned $117 million in September: well below the estimate of $150 million it provided a month ago. For the third quarter as a whole, daily cash burn averaged just over $4 million. This was down about 70% compared to March.
As of Oct. 9, Alaska Air had $3.6 billion of cash on hand, along with access to nearly $1.8 billion of additional low-cost loans from the federal government. That's enough cash to last more than three years based on the company's recent cash burn rate. Moreover, cash burn is likely to slow further in the months ahead due to gradual improvements in demand and cost-cutting initiatives, including an early retirement program and management reductions.
The right product in the right place
To some extent, Alaska's above-average performance over the past few months reflects less-stringent travel restrictions on the West Coast than in the Northeast, and a stronger air travel recovery in the West than in many other parts of the country. Alaska Airlines' route network is well suited to carrying leisure travelers from big West Coast metro areas to national parks, beaches, and mountains throughout the West.
Looking ahead into the holiday season and 2021, Alaska Airlines will continue to benefit from rebounding leisure travel demand, particularly as key vacation destinations like Hawaii reopen. The carrier's low cost structure should allow it to reach breakeven while still primarily carrying lower-fare leisure traffic.
Alaska Airlines could also see a faster recovery in business travel than its larger rivals, thanks to favorable geography. With its main hub in Seattle and significant operations in most major West Coast cities, Alaska has high exposure to the technology industry, which has survived the pandemic relatively unscathed. That could pave the way for a faster recovery in business travel relative to full-service airlines, which have historically carried a lot of traffic associated with sectors that are now struggling (such as energy).
A huge savings opportunity ahead
Finally, Alaska Airlines has a massive opportunity to improve its unit costs by returning to an all-Boeing fleet over the next five years or so. Alaska recently hinted at such a move, taking an impairment charge on 10 relatively new Airbus A320s that it owns. It is reportedly talking to Boeing about a substantial order for 737 MAX jets, which could come at a big discount given how desperate the aircraft company is for customers.
Back in 2017, Alaska estimated that standardizing its mainline fleet could reduce annual costs by $20 million to $25 million. Additionally, the 737 MAX 9 and 737 MAX 10 have dramatically lower unit costs than the A319s and A320s they would replace. Finally, Alaska Airlines pays high rent for its leased Airbus planes. As of the beginning of 2020, annual aircraft rent was set to plunge from $245 million in 2020 to $81 million by 2024 due to the expiration of most of those leases.
All in all, replacing Alaska's Airbus planes with new 737 MAX jets could save hundreds of millions of dollars annually by 2025. Adding that to the savings from streamlining management (among other things) and the company's above-average prospects for a revenue recovery, Alaska Airlines is on track for a strong rebound as the pandemic dissipates.