While there has been a flurry of trading in airline stocks, US airlines still operate at a fraction of capacity. After the onslaught of COVID-19, leisure and business travel have been restricted by government edict and passenger reluctance. The 3 million passengers carried by US airlines in April 2020 marks a 96% decline from April 2019.
But one airline analyst Helane Becker of Cowen has an Outperform rating on is Alaska, the fifth-largest US carrier. “They’re a really well-managed company with a strong route network and a young fuel-efficient fleet.” Becker says Alaska has already paid back three-quarters of the $2 billion it borrowed to acquire Virgin America in 2016. (The top US airlines by domestic market share as of May 2020 were American, 17.5%, Delta, 17.5% Southwest, 16.7%, United, 14.8%, Alaska, 6.4% and JetBlue, 5.5%.)
Like the rest of the airline industry, Alaska faces tremendous challenges. “Between business, international and leisure—people are worried about traveling,” says Alaska Airlines President Ben Minicucci. “With all these negative demand drivers, we see 2021 down 20%.”
Still, travel numbers are picking up, says analyst Becker, and leisure-focused airlines like Alaska will benefit. “People are sick of being home. As things open up, like Las Vegas last week or Disney in July, people are going to travel, in August especially—the airline industry is going salvage half the summer.”
(Full disclosure: I own stock in Southwest Airlines, American Airlines and Jet Blue.)
Alaska unveiled a strategic plan in January 2020, which included adding new aircraft, adding routes and joining the oneworld alliance. “We had the wind at our back, first couple of months looked great,” says Minicucci, who announced the partnership with American Airlines in February 2020. With Alaska’s long history of conservative growth, “We thought, when the recession comes, we’ll be ready. But we didn’t plan for this [the coronavirus pandemic.] We went from 130,000 passengers a day to 5,000 in April.”
For passengers to feel comfortable flying again, Alaska has focused on creating “layers of safety.” In addition to social distancing at the airport, “When you check in, you let us know your health status, if you’ve been around people for the last 3 days with COVID-19,” Minicucci says. “We’re asking people to wear masks, and we do an immense amount of cleaning, including electrostatic spraying in the evening.” The HEPA filters on Alaska’s planes exchange air every three minutes, so the “air is hospital grade.” The airline also is keeping middle seats open until the end of July, when it will revisit that policy.
Minicucci says that demand is coming back slowly, with the airline now flying about 25,000 people a day. Alaska reported its load factor was 15% in April, but was up to 40% by May.
Analyst Savanthi Syth, Managing Director for Global Airlines at Raymond James, has just two of the top five US airlines listed as Strong Buys, Southwest (LUV) and Alaska (ALK). She says both have relatively strong balance sheets. And she believes both airlines are “much more leisure and domestic focused,” in an environment where domestic leisure travel will come back much faster than business travel. As hotel expert Katherine Doggrell, author of Checking Outsays“For business travelers especially, it is safety first. Companies are very wary about how they risk their staffs.”
“Alaska is even more leisure more focused than Southwest,” says Syth. “Alaska is 70% leisure, travel Southwest is 60% leisure, and American is about 50-50 business and leisure.” To Syth, with an airline hub structure, First Class seating, and regional service, Alaska is “really a hybrid model—a mix of low-cost carrier and network airline.” Minicucci says, “We call ourselves a ‘Bleisure’ airline—the business traveler flies us and then uses the Mileage Plan points to go to Hawaii.”
Financially speaking, “We have cash, a lot of liquidity, but we burned $400 million in April. We’re now down to burning $5 or $6 million a day,” Minicucci says. “It’s very volatile right now—we’re modeling 40 to 60% revenue for the fourth quarter. But we’ve made it an imperative to get that cash burn down to zero by December.”
A surprising bright spot for Alaska is it cargo operations, which add $130 million a year. It currently has three 737 freighters and the airline recently got approval from the FAA to use nine of its 737-900 aircraft to carry freight in the passenger compartment. “You name, we carry it, fish, animals, food, mail, oysters from Washington to people’s homes, lots of e-commerce, package and now personal protective equipment (PPE) to hospitals,” says Minicucci.
Like the other US airlines, Alaska received payroll support from the US Treasury under the CARES Act. The airline got $992 million for payroll support, of which 70% is a grant, the other 30% has to be paid back, backed by warrants from Alaska. Loans make up the second round of support for the airlines; Alaska is eligible for up to $1.1 billion. But the airline is well aware, as Minicucci put it, “Every dollar you borrow you have to pay back.”
Although the sudden downsizing of the industry has made labor relations tense , Becker says Alaska’ labor relations are “historically among the best, which was apparent when they were able to get a labor agreement in place with the Virgin employees.”
Alaska has 6,000 employees on voluntary leave, and has not announced furloughs or layoffs. The airline has parked about half its fleet of approximately 300 planes. Alaska plans to bring 20 back in July and more in August, but some smaller, less efficient Airbus A319s and A320s will be sold off.
An advantage of Alaska’s plan of partnering with international airlines, rather than build its own long-haul service to Asia and Europe, is that the airline didn’t have to buy (or dump) huge widebody jets. “The [financial] risk associated with the widebody is exponential,” says Syth. She also believes that the 737MAX aircraft Alaska still has on order givers the airline “leverage with Boeing to restructure the order book.”
Hawaii is a favored destination for Alaska travelers. Helane Becker says “Ten percent of Alaska’s business is Hawaii, ten percent is Alaska. “ But Hawaii’s two-week quarantine has been extended through July 31, which will cut into revenues. The state of Alaska has a two-week quarantine as well, although the rules were recently changed to allow travelers to get tested for COVID-19, instead of quarantining.
Even with such challenges, Minicucci says, “We’ll look for opportunities to grow. Alaska’s history has always been measured, growth. Revenues are constrained, demand is going to be tight, but low costs will help us grow.”