As earnings season has gotten underway, many U.S. airlines have reported improving revenue and earnings trends, paving the way for a return to profitability this summer. However, excluding the impact of payroll support grants, the biggest U.S. airlines still recorded sizable losses last quarter.
By contrast, Alaska Air (NYSE:ALK) is ahead of the curve. Thanks to its domestic-focused route network and cost containment efforts, the Alaska Airlines parent nearly broke even last quarter, putting it in position to post strong profits in the second half of the year.
Remarkable sequential improvement
In the first quarter, Alaska Air recorded a huge adjusted net loss of $436 million on just $797 million of revenue: significantly less than half of pre-pandemic levels. Fortunately, demand accelerated as the quarter progressed. That trend continued over the past few months.
As a result, Alaska's revenue nearly doubled sequentially, reaching $1.53 billion in the second quarter, down from $2.29 billion two years earlier. This helped the company limit its adjusted net loss to $38 million ($0.30 per share). The analyst consensus had called for a loss of $0.73 per share.
Including the benefit from government payroll support grants, Alaska Air reported a second-quarter profit of $397 million under generally accepted accounting principles (GAAP).
Importantly, the low-fare airline also generated $840 million of cash from operations last quarter. This dramatically exceeded the company's initial quarterly guidance for $450 million to $550 million of operating cash flow. Excluding the $489 million of government payroll support funds that Alaska received during the quarter, operating cash flow was still a solid $351 million.
Momentum continuing into the summer
During Alaska's earnings call on Thursday, management revealed that the company generated a strong 14% adjusted pre-tax margin in the month of June. That reflected a combination of normal seasonality, growing comfort regarding air travel among many consumers, and the official "reopening" of California on June 15.
This momentum has continued into the third quarter. Alaska Airlines expects unit revenue to rebound to around 2019 levels this quarter, with capacity and total revenue both down 17% to 20% compared to Q3 2019.
Lower capacity continues to put pressure on unit costs, with nonfuel unit costs on pace to rise 10% to 12% this quarter compared to the third quarter of 2019. However, while oil prices have rebounded rapidly in recent months, Alaska still anticipates paying less for jet fuel than it did two years ago. That should allow it to record an impressive double-digit adjusted pre-tax margin in Q3.
Looking ahead to the fourth quarter, Alaska Airlines expects to remain profitable, although its pre-tax margin will probably recede to the high single-digits. The spread of the Delta variant of COVID-19 poses some risk to this forecast, but so far, management hasn't observed any change in bookings. Moreover, Alaska is less vulnerable than airlines with a greater focus on business travel and long-haul international travel.
A solid pick for long-term investors
Alaska Air stock has recovered most of the way to where it stood prior to the pandemic. However, it remains more than 20% below the 52-week high it touched a few months ago.
Notably, Alaska Air didn't dilute shareholders to raise cash during the pandemic -- unlike most of its rivals. Furthermore, its strong cash flow this year has reduced its net debt and lease liabilities to less than $1 billion: better than pre-pandemic levels. As a result, the company's enterprise value has declined significantly more over the past year and a half than many of its peers.
Alaska's strong balance sheet puts it in great position for an expected surge in capital spending next year associated with its fleet renewal plan. Those fleet upgrades will in turn reduce non-fuel unit costs and drive a big improvement in fuel efficiency over the next few years. Meanwhile, the airline's moves to focus growth on its strongest markets (especially the Pacific Northwest) should boost unit revenue.
Thus, Alaska Air has a good chance to emerge from the pandemic even more profitable than it was in 2019. That gives this airline stock plenty of long-term upside for patient investors.