Rising air-travel demand has given U.S. airlines a big lift over the past few months. For some carriers, the outlook keeps improving. On Monday, Alaska Air (ALK 0.83%) raised its forecast for the second quarter, with better-than-expected cost trends complementing the benefit from improving demand.

Revenue recovery continues

In its investor update this week, Alaska Airlines said that its load factor -- the percentage of seats filled with paying passengers -- will likely end up between 74% and 76% this quarter, near the high end of its initial guidance range of 70% to 75%. That would still be well below the 86.2% load factor it recorded in the same period two years ago. Nevertheless, it's clear that business is quickly moving back toward normal. In the first quarter, Alaska logged a dreadful 51.9% load factor.

With traffic coming in ahead of expectations, Alaska Airlines expects its total revenue to decline 33% to 35%, compared to Q2 2019. Previously, it had projected a 32% to 37% revenue drop.

The relatively small improvement in Alaska's revenue forecast indicates that fares have remained well below 2019 levels this quarter. That could change quickly, though. Several airlines have reported that fares for new domestic leisure bookings surpassed pre-pandemic levels last month.

Beating expectations on costs

Alaska Airlines also told investors that unit costs will come in lower than anticipated for the second quarter. The company now expects that its adjusted non-fuel unit costs will increase 12% to 14%, compared to the second quarter of 2019, despite operating at 20% less capacity and incurring costs related to getting the airline up and running again. It previously expected adjusted non-fuel unit costs to rise 15% to 17%.

An Alaska Airlines jet flying over clouds.

Image source: Alaska Airlines.

Part of the improved cost profile relates to pass-through labor-cost savings associated with the federal government's airline payroll-support programs. However, Alaska also improved its labor productivity and renegotiated a key vendor contract, securing lower rates.

Alaska Airlines' better-than-expected non-fuel unit cost performance will more than offset the impact of rising fuel prices, enabling the low-fare airline to post a smaller quarterly loss than it would have otherwise.

Cash flow surges -- and that's what matters most

The most significant detail in Alaska Air's guidance update was that the company now expects to generate between $650 million and $750 million of cash flow from operations this quarter. That represents a $100 million increase from its previous outlook and a $200 million increase from its initial forecast for operating cash flow of $450 million to $550 million.

Strong booking trends appear to the primary driver of Alaska's improving cash-flow outlook. That bodes well for the company's third-quarter revenue performance.

Sure enough, Alaska Airlines reaffirmed its prediction that its pre-tax margin will turn positive next quarter. Strong consumer spending is also translating to higher cash flow from selling miles to Bank of America, which issues Alaska's co-branded credit cards.

To be fair, Alaska Airlines has also benefited from one-time payroll-support payments this quarter. Still, cash flow is cash flow. That extra income is enabling the company to start paying down the debt it took on last year. Earlier this month, Alaska Air repaid the $135 million it had previously borrowed under the CARES Act subsidized-loan program.

Alaska Airlines' growing momentum and the full economic reopening of key markets like California will allow the company to generate strong cash flow without further government support going forward. That makes Alaska Air stock an attractive bet on the post-pandemic air-travel recovery.