Alaska Air Group, Inc. (ALK) Earnings Call Transcript & Summary

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Excellent. Thanks, and welcome back, everybody. Jamie Baker and Mark Streeter here, keeping on schedule. I'm pleased that Alaska is joining us. I think the slide deck just dropped a couple of minutes ago. As a reminder, Mark and I will be handling the Q&A after the prepared remarks. If you have anything succinct that you'd specifically like us to ask, we'll certainly do our best. For some of the boilerplate disclosures, let me hand it over to Emily Halverson, and then the team will take it from there. Emily, are you on the line?

Yes. Thanks, Jamie. Hello, and welcome, everybody. Although we were prepared to be with you today in New York, we're glad to have the chance to speak with you about the events that the industry and the world are facing as well as some of -- some high-level discussion of our long-term plans. Before we go any further, I need to first mention that today's presentation will include forward-looking statements regarding future performance, which may differ materially from our actual results. Information on risk factors that may affect our business can be found in our SEC filings. We also refer to certain non-GAAP financial measures, such as adjusted earnings and unit costs, excluding fuel. Reconciliations of these non-GAAP measures can be found in our SEC filings as well. With that, our plan is to spend some time sharing with you some information about the current issues we're facing with coronavirus, how we're positioned to handle the financial impacts of this situation and to touch on our long-term strategy. Thanks, everyone, for listening today, and I'll hand it over to Ben.

Hi, everyone, and thanks, Emily. As Emily mentioned, while it was our original plan to focus primarily on our long-term vision and 2025 plan, we know COVID-19 and its economic impact to the industry is top of mind for everyone. In light of that, I will be sharing information related to what we are seeing in our business right now, what steps we are taking or considering in response and why we believe we are positioned well to endure the depression in demand we are now experiencing. I also plan to cover at a high level elements of our long-term vision and to also briefly discuss our recently announced expanded partnership with American Airlines and oneworld. With respect to the coronavirus, we are working on it from 3 critical perspectives: first, how we protect the safety of our employees; second, how we protect the safety of our customers; and third, how we manage the impact to our business. Let's begin with safety as that is our most important value and matters more than anything else. Beginning approximately 10 days ago, as the local case count in Seattle increased and the tragic deaths of multiple individuals in a local care facility became public, we moved to create a centralized team responsible for understanding the threat of the virus to our employees and guests and to implement any changes to our operations and policies necessary to protect them. This team is in regular communication with experts in infectious disease from the University of Washington who are directly involved in understanding and responding to the outbreak with local health officials, with political leaders and with leaders in frontline employees throughout our company. As part of our response, we have implemented enhanced cleaning procedures for our airplanes as well as our airport space and suspended elements of our in-flight service procedures to reduce the likelihood of spread of the virus. We have also added reminders to pre-trip communications with guests that they should not travel if they are sick or symptomatic with fever or respiratory illness. To assist in enhanced cleaning protocols, we have dispatched our own management team to the airport to augment the awesome fleet service teams that do a superb job cleaning our airplanes. This not only provides added resources for cleaning, it also acknowledges that if we are going to ask our frontline employees to continue to come and operate the airline so our guests can travel, that we, too, will be in the same environment they are. And having done that just yesterday, I can say it's just been a really good experience for all of us. We are also testing additional approaches to enhance the cleanliness and safety of our aircraft, and anything we find that will do that, we will invest in immediately. To date, the CDC has said that the risk to the general public remains low and Americans who are healthy can continue to go about their lives, including travel. And so long as that is the case, we intend to operate. Travel is a central part of our economy and lives. People have a need to be where they are going, and it's our job and commitment to be there for them. So I know many of you are focused on understanding the demand trends that are unfolding. Let me provide a few important data points regarding what we are currently seeing, and then I'll discuss our ability to manage through it. So regarding demand, we've recently seen a material reduction in bookings along with a spike in cancellations. March and April travel have been the most materially impacted, but later periods have declined as well. It is difficult to predict what will happen going forward. But what we can say is that since February 24, we have seen 265,000 fewer bookings than we did in 2019 for March departures and 270,000 more cancellations for the month. We carry approximately 4 million passengers per month, so these are material impacts. We tested a sale this past week and saw positive booking trends during the sales period. So there still appears to be demand for travel, which is good news. And for capacity, we have not announced broad capacity reductions and are not prepared to do so today on this webcast. Our growth rate is lower than most airlines in 2020 as it was in 2019. And our March and April flying is crude. We will be looking closely at any flights that are forecasted to operate at a cash loss, with a bias towards consolidating them with other flights at similar times and operating at low load factor. For me, we are considering reducing certain red-eye flying in a small number of potential market exits representing approximately 3% of capacity in addition to reviewing cash-loss flights. We are obviously reviewing our final planned level of capacity for May and beyond, and may, in the future, announce capacity changes as the situation warrants. In terms of Alaska's ability to endure the economic stress associated with this crisis, we believe we are well prepared to do so. The reason we manage the company conservatively is specifically to be able to withstand the unexpected. Trends in this industry can turn incredibly fast, and we are fortunate to have a strong cash position and a fortress balance sheet as well as low-cost and a business model that does not rely on high fares. Taken together, these facts position Alaska to endure this latest industry shock and prepare for an eventual return to strength. More specifically, let me share several important data points that demonstrate Alaska's financial resiliency. We have approximately $2 billion of total immediate liquidity, including cash on hand and standby lines of credit, representing just under 25% of trailing 12-month revenues. We have 133 unencumbered, high-quality aircraft with a value of approximately $2.5 billion that we can pledge to raise additional cash. Our operating costs are approximately 20% below network airlines, and we have a business model that does not rely on high fares. And we have very manageable capital commitments this year and can defer or suspend a number of uses of cash, such as aircraft, PDP payments, non-aircraft capital spend and share repurchases. While we have not yet made any official changes to our capital spending plans, we are currently reviewing these with a bias towards cash preservation near term. We are also identifying discretionary and other nonessential spending cuts, pushing expenses to the right wherever feasible and reviewing whether hiring freezes for certain groups make sense. Our strong financial positioning extends beyond liquidity and cash management. We have a history of delivering results that exceeds the industry. 2019 was a year of getting back to basics, and we delivered financial improvements that put us back near the top of the industry. And we used the strong cash flows generated by the business to bolster our balance sheet, returning Alaska to target debt-to-cap levels and a net debt-to-EBITDA ratio below 1. Many of you who've been following the industry long enough recall past downturns. We cannot predict how deep or how long this one will be. But for reference, during the worst quarter following 9/11, industry domestic revenues reduced by approximately 30%. And during the financial crisis, revenues reduced by approximately 20%. Alaska and our employees were certainly impacted by those downturns, but we also had relative balance sheet strength and other competitive advantages that allowed us to perform well during the recovery period after the downturns. It was during those periods where we expanded into transcon flying and Hawaii service, regions that now represent sizable shares of our overall revenue and profit pie. My intent today is to remind you that throughout our history, we've made the tough decisions necessary to maintain a low-cost, low-fare financial model and to have a strong balance sheet. This model positions us well to address the challenges we face today as it has in the past. As you know, we mentioned on our fourth quarter earnings call that we have been hard at work on developing a 5-year strategic plan. That plan was developed with a focus on defending and growing the competitive advantages we have developed over the past 20 years. Along with a conservatively managed balance sheet, it is these advantages that have seen Alaska through periods of business stress and uncertainty in the past and allowed us to thrive when conditions return to normal. And I want to discuss these for a few moments because along with our immediate financial position, they are relevant to both the short-term and long-term ability for Alaska to succeed and to be a good investment for our owners. First is that we have a business model that does not rely on high fares, which is made possible by having a lower cost than most of the carriers we compete directly with. Costs have proven time and again to be a durable competitive advantage in our industry. And although they are routinely under pressure, it is in uncertain times like these that reinforce our commitment to a model of high productivity and low overhead. In the current context, lower cost will allow us to have longer staying power in a depressed revenue environment. Second is the way we operate. This advantage is directly linked to our low-cost advantage. Not only do guests prefer on time, reliable and efficient operations, but we believe we've built an operations model that is resilient and that doesn't require us to make potentially costly trade-offs between operating well or operating with low cost. Third is the loyalty of our guests. In an industry where 70% or more passengers only fly a single time per year, being able to reliably fill over half our seats with Mileage Plan members is a core strength and advantage of ours, given they are our most valuable customers. Driven by having the most generous offering and rewards in the industry, our loyalty program generates more than $1 billion in annual cash flow from our bank partner. Loyalty members generate 4x more revenue than a nonmember and at lower cost given members book directly with us the majority of the time. Fourth, a long-standing hallmark of Alaska's advantage is our award-winning service. Our people's commitment to their work and making our guests experience great is evidenced by the numerous awards they win each year. It is not common to hear people say they love an airline. And we are fortunate that many of our guests routinely say that about Alaska, which we attribute to the dedicated service of our great frontline folks. Lastly is what we refer to as our one-team culture. We know that we perform best when everyone here is engaged, trying their best and wants to make this an excellent airline. So taken together, our conservative financial management, strong balance sheet, liquidity, lower cost model, operational excellence, enduring loyalty, award-winning service and an aligned and engaged culture give me and the rest of the leadership team at Alaska confidence in our ability to navigate the near-term turbulence and to win over the long term for employees and owners. Finally, I'd like to shift the conversation briefly to talk about the longer term and, in particular, our 5-year strategic plan. The genesis of creating this plan was to create a clear shift away from our integration years fully into the how-to-win in the future. The plan is intended to defend and expand the competitive advantages I just noted. Something I've long seen at Alaska has been when we put ideas on paper and commit to them, we tend to be really good at executing. So it was important that we were deliberate in creating a road map for the next several years that would focus all of us on improving the company and delivering strong results. At the highest level, the plan has 3 pillars: growth, namely getting back into a higher growth mode; people, continuing to invest in our culture; and our business model, including specific financial returns and capital allocation metrics. The plan is comprehensive and contains 43 separate strategic initiatives and is bound by a set of disciplined financial guardrails that are included in our owner's manual. I'm looking forward to share more about our plans in the future, but some of the key components of it at a very high level include: moving back into higher growth rates, we're targeting 4% to 6% compounded over a cycle; replacing our leased Airbus fleet with larger, more fuel-efficient and lower ownership cost aircraft; developing further our commercial muscle in the areas of merchandising and brand preference; and returning to a focus on customer-facing and operational innovation, something we have a history of delivering on. And another key element was building out a more competitive offering for our loyalty members globally. Over the years, Alaska has assembled a compelling portfolio of domestic and international partners that bring connectivity and value to our guests, but we have not had the seamless and easy experience that will now be possible with our recently announced expanded partnership with American Airlines and oneworld. This partnership, which will provide value to Alaska, American and we hope the entire oneworld family, makes Alaska now a very viable option when our guest plans call for international travel. It will provide global network utility to over 1,200 destinations, enable us to aggressively compete for corporate sales throughout the West, create a seamless travel experience by selling oneworld partner tickets on our website and provide elite benefits reciprocity and full accrual and redemption on American and oneworld carriers, as well as access to 650 worldwide lounges, access to priority boarding, premium seating and baggage benefits. This is truly a game changer for Alaska, and we are looking forward to unlocking the value of this as quickly as we can. So in closing, and to wrap this thing up, I'll just quickly summarize for you. First, safety is our #1 priority, always. As the COVID-19 situation evolves further, maintaining a close relationship with government and health officials will be a priority. Effective and timely communications with our employees will be paramount. While we have not made any material capacity changes to date, we're preparing to make changes if the situation warrants it. We believe our fortress balance sheet and financial model position us well to compete even in the toughest of circumstances. Our competitive advantage remain key to our continued success, and our strategic plan is designed to drive our business to many more years of success. So thank you. And with that, Jamie, back over to you for questions.

Okay. Thank you very much.

Just fielding a number of e-mails from clients during your presentation, more than a few raised eyebrows that there wasn't a capacity cut, just hinting at one, and thank you for that. Does that simply reflect the fact that you're starting from a higher margin base? Is it something about your passenger elasticity? It doesn't sound like it. Or is there any structural impediment that makes it more difficult for you than others to cut capacity in the short run, maybe something in your labor contracts? I'm asking on behalf of a client.

No, I'll start, Jamie, and then I'll get Shane to provide more color. I think maybe a few points to remember. I think, first, and I think you know that we've been operating from a lower growth base than our competitors, so that's -- I think that's really relevant. I think when we look at what we saw for bookings for January and February, our load factor in January was up 3 points. It was up almost 2 points in February. RASM, we had a great RASM performance in January, 5 points, 3.8 points in February. So -- and bookings for March and April were really strong before this thing hit, so we felt good about where we were. Again, for capacity cuts for March and April, we're going to go aggressively after those cash-negative flights, and we are going to bring May down by 3.2%. But it's something that we're watching closely, and we'll react accordingly as this thing evolves. Shane, anything on the structural side? Or...

Yes, I don't -- Jamie, there's nothing structural in the way. It's just really a matter of being smart about where we ultimately decide to go with the capacity. I think one thing that is cleared, just as we sit here today, we do expect to fly less than we have previously guided. We're just not going through the details of that right now.

Okay. Another question. Actually, this is kind of an interesting one. Any difference in demand trends to Hawaii? On one hand, there's speculation that warmer weather will help the virus burn out quickly. Doesn't this mean consumers will be flocking to the islands? I think that's kind of a good question.

That's a -- it is a great question. The -- I would say, generally speaking, we've seen very similar trends across all of our regions. There are a few that are a little different, but it's hard to say why they're different. I think we've seen it really pretty consistent everywhere. I will say we had a sale last week, and Ben mentioned this in the script. We did that just as much as any reason to understand if there was demand or if people were just sort of in a mode where they weren't interested in flying, no matter what. And we did see some really strong bookings based on the sale. I don't know if it was price points or more, just we were -- we had e-mails in front of them. So they were sort of thinking about travel and maybe the days prior, they were thinking about the news. And a lot of those bookings did go into Hawaii. That tapered off over the weekend once the sales sort of ran its course, but it was interesting to see there was a little spike in demand to Hawaii this past week.

Okay, very helpful. Can you talk about your ability to shed current aircraft? I know that Virgin restructured its aircraft leases at one point. And that added -- definitely helped on rate, but added a lot of duration. Not asking about the ability to defer orders because Mark's and my base assumption is the OEMs will always work with customers. Really about the ability to shed aircraft already in operation.

Yes, Jamie. So we have a number of Airbus leased aircraft that were due to return next year, just a couple in the near term. So we're obligated with this fleet for much of 2020. We haven't started to look into or discuss ideas of bringing any of that forward. But within the next 12 to 18 months, we certainly do have a number of aircraft that were already scheduled to return. So if this was a more prolonged downturn, I think we can manage the fleet down. And then we've got -- we do have some aircraft that are owned and older that we could look at their sort of maintenance expense. And if there was a reason to retire those earlier or fly them less hard, we absolutely can do that. We've got an older classic 900 fleet. We've got some 700s in the fleet that are older as well. So I think we have a lot of flexibility on a number of aircraft we own.

Okay. I know you guys are sitting in a conference room somewhere. Airline stocks have -- well, somewhere, I know exactly where you are. Airline stocks have gotten a boost during the call on -- just some headlines that the administration might be looking at some sort of airline assistance. I personally hope not. The ATSB loan program probably slowed the industry's restructuring by 3 to 5 years, and the majority of airlines that actually got loans then went out of business, suggesting the administration knows more about picking losers than winners. But that was a while ago. Apologies for the ramble. Thematically, would Alaska be willing to take a political position on potential government -- well, I was going to say meddling, but again, that's biased, government aid?

Jamie, that's probably something we can't talk in [ front of you ]. We're not going to comment here on the call. I think we'll see how that unfolds, and we'll discuss that with our leadership team and with the Board.

I would maybe just add. The one thing we, I think, are trying to do is get accurate information, funneling to -- there's a lot of different data points sort of coming out around what's happening with bookings, what's happening with cancellations. I think we are looking at trying to consolidate some of that and make sure that people do have a view into the total sort of situation of the industry. But that's separate from the political position there.

Got it. Let me hand the baton over to Mark Streeter on the credit side. I think he's got a question or 2 as well.

Yes. Just one really -- just wondering if you could talk a little bit about -- are there any opportunities here as you think about capacity and you think about if the virus lingers here, anything you can do in the fleet in terms of simplification, any discussions with Boeing as you consider -- you still have some of those Virgin aircraft, and so obviously, that Virgin fleet and you're working on the integrations done. But just sort of wondering as you're choosing long-term fleet types and so forth, just wondering if the whole virus situation potentially has any impact on some of those decisions that you need to make regarding fleet types going forward.

A little bit. We're trying not to have this crisis change our longer-term focus and our strategic plan. Like I mentioned, we put a lot of time in what we want to do over the next 5 years. It looks at fleets. It looks at hubs where we operate. It looks at alliances. It looks at stuff we're going to do on merchandising and innovation. So we don't want to knee-jerk and throw all that away and say, we're going to pursue a different strategy. But what I'll say is we're continually looking at how we get the most -- the right mix of airplanes in our fleet, given again, the virus, what's happened with the MAX. Now we have experience with the Airbus. We're getting a lot smarter about what the fleet needs to look like over the next few years. And look, and what you're saying in terms of efficiency and how we operate, that is always top of mind for us. We want to configure the airline where we can have high productivity, low cost, so we can give out low fares. So we're going to look at it, Mark. But just -- we're not going to knee-jerk on anything because of this.

Okay, great. I'm just looking at the footnote on your unencumbered asset value. You mentioned that it's mostly, I think, the 133 unencumbered aircraft or the $2.5 billion. Anything else, though, in terms of unencumbered assets? Or as we sort of roll out, we've been talking this morning about our sort of distressed playbook here where we think about who some of your partners are, maybe it's your credit card partner, for example. How do we think about -- is there anything beyond the $2.5 billion that you're listing here where you could squeeze some liquidity out if you needed to, and I know you're a long ways from that, but just sort of thinking down the road?

Yes, Mark, it's Shane. We have some non-aircraft assets that are not encumbered that we could potentially put into a facility. Most of that is sort of our real estate holdings and some other assets. We haven't -- we've just started thinking about do we even need to get more serious about a path like that. As you mentioned, I don't think we'll need to go down that path. We do have some slots that are valuable. But I do think those are like way far to the right, and we'd have to see this be a very prolonged sort of event before we need to dip into that sort of thing. I would just mention, I think the liquidity we have is quite good, $2 billion between cash and lines of credit. And if you do look, and Ben mentioned it, we have a very manageable cash outflow sort of capital commitment stream this year. We've got share repurchases that we've taken steps to suspend. We've got voluntary contributions to pension programs that we can decide to make or not later in the year. And if we can't afford to do those, we won't. Fuel is way down, as you all know. There are variable costs that will come out as we trim the schedule. So I think we feel good about our ability to endure the next bit of time here until things stabilize and we understand more about how long this might last.

Great. That's helpful. Back to Jamie.

Guys, a similar question of something we asked on the Spirit call. When we -- just kind of stepping back, and maybe this does require more personal opinions than RASM and CASM data that you might have in front of you. What's the end game for the industry here? I mean in the event of a regrettably protracted downturn, how do you think we look in a year or 2? Does this mean that capital for start-ups is probably deployed more prudently going forward, which could have some competitive advantage to those that make it through? Should we even be studying up on how downturns have spurred consolidation in the past? Or is now not the time to have that discussion? We've long felt at JPMorgan that going forward, the airlines are increasingly going to be differentiated in the States based on the real estate that they dominate. Is that still going to be a theme? Or are we all going to have to travel with doctor's notes? I mean just kind of pie in the sky, how do you think this ends up if we don't see a near-term V-shaped recovery?

Jamie, it's a great question. I think there could be a lot of opinions about how this thing -- what it does to our industry. I think the one thing I'll say, it's happening to all of us. It's not happening to one carrier. It's happening to all of us. I think what we've learned from 9/11, what we've learned from the housing crisis, what we've learned from different crises in our last 20 years, it's hard to predict what happens. You know something is going to happen and then you have to come out of it. And the only thing that we know that works is creating a company that is resilient. And honestly, it's not sexy, but it's a company that provides great service. It's a company that has low cost. It's a company that is prudent financially. It's those things that you talked about. And sometimes, when times are good, people don't want to hear about them, but it's those things that allow you to weather the shock and allow you to come back stronger. But it's like, like I mentioned, in 2008, after the financial crisis, opportunities opened up for us, and we got into Hawaii. And after 9/11 was transcon service. And so opportunities will open up as we get through this thing.

Okay. Well, listen, that's really helpful. We're asking ourselves very similar questions these days. That does it for the e-mail inquiries that we've gotten. Thank you for the presentation. Good luck with any client meetings that you guys are hosting today. Listeners will enjoy a break. We had another airline drop out now. So we will resume at 12:50 when I will be firesiding Scott Kirby. So to the Alaska team, thank you much -- very much for your participation.

Thanks, Jamie.

Thanks, Jamie.

Take care, everybody.