Alaska Air (NYSE:ALK) didn't manage to turn a profit last quarter. However, the West Coast airline generated positive cash flow and has started to benefit from a rising tide of bookings by leisure travelers. That has put it on a path back to profitability. In fact, the Alaska Airlines parent has a good chance of emerging from the pandemic as an even more profitable company than it was in 2019. Let's take a look.

Another quarterly loss

Alaska Air's revenue fell 51% year over year to $797 million in the first quarter. The company lost $131 million under generally accepted accounting principles (GAAP).

Excluding a $411 million pre-tax benefit from the federal government's airline payroll support program and other special items, Alaska logged an adjusted net loss of $436 million ($3.51 per share). This roughly matched the Wall Street consensus, which had called for a loss of $3.63 per share.

Like its peers in the airline industry, Alaska Air lost more money in Q1 than it did in Q4 2020. First, revenue declined slightly on a sequential basis. A spike in COVID-19 cases toward the end of 2020 and updated travel guidance from the CDC -- along with the industry's normal seasonality -- led to weak travel demand in January and February. Second, fuel prices have spiked in recent months. Third, airport-related costs increased significantly due to a change in lease terms at the company's main hub in Seattle.

A rendering of an Alaska Airlines plane flying over clouds

Image source: Alaska Airlines.

On the bright side, demand trends improved rapidly toward the end of the quarter, lifting earnings and cash flow. In fact, Alaska Air generated operating cash flow of $167 million last quarter: slightly ahead of its most recent guidance.

Demand is strengthening

The demand recovery that began about two months ago has continued into the second quarter. Alaska Airlines is on track to post better results for the month of April than it did in March. And so far, bookings for May are coming in ahead of the April pace.

Management observed that demand trends vary sharply by region. Most notably, bookings for flights to and from California remain severely depressed compared to the rest of the airline's routes.

Nearly half of Alaska's pre-pandemic revenue came from flights touching California. As a result, the slower recovery there has been a big headwind for the company's efforts to return to profitability. Fortunately, the state of California is targeting a full reopening by June 15. That could unlock a surge in demand for the summer travel season, putting Alaska Air back in the black.

An Alaska Airlines regional jet on the tarmac

Image source: Alaska Airlines.

A promising future

While Alaska Air hasn't returned to profitability yet, the company holds great promise for long-term investors. It has maintained a rock-solid balance sheet despite the pandemic, with just $1.6 billion of adjusted net debt as of March 31. Furthermore, it has a good chance to be more profitable by 2023 or 2024 than it was a couple of years ago.

First, Alaska Airlines officially joined the oneworld global airline alliance a few weeks ago. It has also formed a closer partnership with fellow oneworld carrier American Airlines. This will enable Alaska to sell tickets to virtually any destination around the world, which should help it win lucrative new corporate contracts as business travel recovers.

Second, Alaska Airlines will upgrade its fleet rapidly over the next few years. It recently began operating its first Boeing 737 MAX and is scheduled to receive 43 737 MAX 9s by the end of 2022, which would represent nearly 20% of its mainline fleet. (Another 25 737 MAX 9s are scheduled for delivery between 2023 and 2024.) These new planes will have significantly lower unit costs than the Airbus A319s and A320s they replace.

The net result should be higher unit revenue and lower unit costs once demand fully recovers -- a milestone that could occur as soon as 2023. Alaska Air stock has already recouped all of its pandemic-related losses, but this favorable outlook for future profitability could keep the shares moving higher in 2021 and beyond.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.