At this time last year, air travel demand was virtually non-existent. The TSA was routinely screening fewer than 100,000 passengers per day: down more than 96% compared to 2019.
While demand began to rebound last summer, the recovery has been very volatile. However, it looks like air travel demand is finally gaining more traction. Early this week, two of the largest U.S. airlines raised their first-quarter forecasts and said that core cash flow had turned positive in March. On Wednesday, West Coast-focused airline Alaska Air (ALK 2.80%) followed suit.
An inflection in March
Like other airlines, Alaska Airlines experienced a demand inflection last month. Rising vaccination rates and a sharp drop in COVID-19 case counts relative to the early January peak combined to unlock a meaningful amount of pent-up demand.
In mid-March, Alaska's management projected that the airline's Q1 load factor -- the percentage of seats filled with paying customers -- would come in between 45% and 50% on a 33% decrease in capacity compared to the first quarter of 2019. It also predicted that total revenue would be down 55% to 60% from the Q1 2019 figure.
However, rising demand enabled Alaska Airlines to boost its load factor to 62% in March, compared to 49% in February. That brought its load factor for the full quarter to 52%: ahead of its March guidance. (Surprisingly, total revenue still declined by 57.5%, near the midpoint of the March estimate.) On the bright side, despite carrying more passengers than expected, Alaska reduced its estimate for non-fuel unit cost growth by 2 percentage points.
Cash flow turns positive
While Alaska Airlines' first-quarter revenue won't be anything to write home about, the airline's cash flow surged last month.
As recently as late February, Alaska's guidance called for negative cash flow from operations totaling as much as $100 million for the first quarter. In its mid-March guidance update, the low-fare airline raised that forecast, projecting that it would generate between $50 million and $100 million of cash from operations. Now, the company estimates that it generated $150 million of cash from operations last quarter. (To be fair, that includes over $400 million of grants received from the federal government's airline payroll support program.)
A surge in bookings for travel later this spring and into the summer drove the sudden improvement in Alaska Airlines' cash flow last month. In fact, Alaska reported that it generated positive operating cash flow in the month of March even after backing out the payroll support grant funds it received.
Positive operating cash flow represents an important milestone on the road to recovery. And while American Airlines and United Airlines also reported that cash flow turned positive in March, Alaska's achievement is more impressive because -- unlike its larger rivals -- it is using a standard cash flow calculation rather than making lots of adjustments.
The worst is over
The surge in bookings that boosted Alaska Air's cash flow last month suggests that passenger volumes will improve sequentially over the next few quarters. This speaks to the success of the airline's recent moves to restructure its route network to capitalize on leisure travel demand, which is recovering much faster than business travel.
Indeed, consumers are reportedly sitting on $2 trillion of excess savings, and many are eager to start traveling again. That adds up to massive pent-up demand. Thus, as long as coronavirus vaccines continue to prove effective against new variants, the recent momentum in bookings is likely to continue.
That in turn should enable Alaska Air to continue generating positive operating cash flow in the months ahead. That's great news for shareholders, as it will allow the West Coast airline to start paying down debt while investing aggressively in initiatives to accelerate its earnings recovery.