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Alaska Air Is Gearing Up for a Demand Recovery

By Adam Levine-Weinberg - Jan 27, 2021 at 10:07AM

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People aren't flying now, but the West Coast airline sees promising signs that air travel will rebound by the summer.

Last fall, COVID-19 case numbers surged in the U.S., undermining a nascent recovery in air travel demand. Many airlines -- including Alaska Air (ALK -1.41%) -- have reported that booking activity leveled off in November, following several months of steady improvement.

This setback drove a steep revenue decline for the Alaska Airlines parent and caused it to continue burning cash last quarter. Nevertheless, Alaska Airlines executives expect air travel demand to rebound in 2021. The airline is well positioned to cash in on that potential opportunity.

Mixed fourth-quarter results

Alaska Air's revenue fell 64% to $808 million last quarter, missing the average analyst estimate of $825 million. Furthermore, the company posted a sizable adjusted loss of $2.55 per share and burned an average of $3.7 million of cash per day.

That said, while cash burn didn't improve as much as management had initially anticipated, it did slow modestly on a sequential basis. Alaska's adjusted loss was also narrower than the analyst consensus of -$2.87 per share. Once again, management did an excellent job of navigating through tough business conditions.

An Alaska Airlines plane flying over clouds

Image source: Alaska Airlines.

Finally, shareholders got a welcome surprise near the end of the quarter, as Congress passed a new payroll support program for the airline industry. Alaska Air will receive $533 million from the government this quarter, including more than $400 million of grants. That's more than enough to offset the company's Q4 cash burn.

Demand is already starting to return

Right now, U.S. air travel demand -- as measured by current passenger volumes -- remains extremely weak. However, COVID-19 case counts have been retreating for the past two weeks after reaching record levels in early January. As the vaccine rollout accelerates in the months ahead, the pandemic should continue receding.

Many Americans are growing more optimistic about the pandemic's future course due to these factors. They may not be traveling now, but many people are starting to book future travel. During Alaska Air's earnings call, executives noted that booking activity has been improving day by day for several weeks. The number of people booking tickets has outpaced the number actually flying by about 50%. If case counts continue declining over the next few months, that will likely unleash additional pent-up demand.

Based on the positive booking trends, Alaska Airlines plans to operate about 80% of its pre-pandemic capacity by the summer. Management has decided to ramp up capacity gradually between now and then to minimize the risk of operational snafus. That may cause it to burn a little more cash in the near term, but this decision could pay off splendidly if leisure travel demand surges this summer.

Alaska Air is ready for anything

Importantly, Alaska Air exited 2020 with a strong balance sheet. In fact, the company's adjusted net debt barely increased during the year. And as of Jan. 22, 2021, Alaska had $5.2 billion of liquidity: far more than it would need even if demand recovers much more slowly than management anticipates.

Alaska's excellent liquidity and rock-solid balance sheet are enabling it to seize near-term opportunities, such as the company's recent deals to expand its Boeing 737 MAX fleet. The company now plans to take delivery of 68 new 737 MAX 9s by the end of 2024, with most of those arriving over the next two years. Meanwhile, it has retired dozens of older and less efficient Airbus A319s and A320s, which it will return to lessors over the next few years.

Without a strong balance sheet, Alaska Air couldn't have afforded to undertake such a rapid fleet transition. (It expects to incur $1.3 billion to $1.4 billion of capital expenditures next year.) Instead, Alaska is now poised to unlock substantial cost savings by upgrading its fleet over the next few years. The airline also has options to expand its fleet further if demand warrants it.

Smart investors will look past the near-term weakness in Alaska Air's results. This airline has put itself in great position to capitalize on the coming recovery in U.S. air travel demand.

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