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

Welcome back to the UBS Industrials and Transportation Conference. I'm Myles Walton. I'm the aerospace, defense and airlines analyst here at UBS. It's a pleasure for me to moderate the next fireside chat with the Chief Financial Officer of Alaska Airlines, Shane Tackett. Shane, welcome. I know that you have a disclosure statement that you will want to read as well as I think you have some opening comments that I'll let you cover. And then we'll get back straight into the Q&A. So Shane?

Yes. Myles, thank you, and good afternoon to everyone. Thanks for having us on today. I'll be -- I will try to be super brief with opening comments, and I don't think they'll probably be too surprising to anybody. In terms of disclosure, we -- I think it's important for us to note, we'll be talking about future events, and actual results will likely differ. And just to refer folks to our 10-Q for disclosure of risk factors for the company. With that said, we did also issue an 8-K this afternoon, I think after market close, with some updated information that I'd be happy to talk about a little bit more. But the first piece of that is just we have seen, and I think this is a trend that is now being seen throughout the industry, signs of demand recovery that are sustained. There's still a very depressed level in terms of overall demand from normal, but certainly, off the bottom from April and into May. And I think our April load factor, as we disclosed, was 15% on an 80% or almost 80% reduced schedule. And on a similar schedule reduction for May, load factors were about 40%. So it's been a nice, slow, steady return of a little bit of demand. As we've seen some of the restrictions, shelter-in-place, those sorts of things lift, you're certainly beginning to see a return to travel but again at much lower rates than normal. I think now we're sort of hopeful and really watching bookings more into the fall, into the fourth quarter as people can sort of look up from the quarantine sort of approach to life and be thinking again about getting out and going on vacation and going to see friends and family, those sorts of things. We're sort of very focused on how the typical fall and winter leisure travel period begins to book from this point forward. The other thing we mentioned in the 8-K was an update on our cash burn. We had shared a target of getting cash -- our cash burn down to $200 million a month by June. And as a reminder, we're pretty simple in how we're calculating that. It's really -- any cash that comes in the door that will turn into revenue minus any cash that goes out the door, period. So money we're raising or borrowing, we don't put into that number, but everything else essentially goes into the number. In May, we actually were well under our June target. We were at about $170 million out for the month, which is a really nice result. And it's a credit to the hard work of the folks back here to make sure we did get costs out of the system aggressively. And also, we've got a lot of folks who've taken temporary leaves with the company, which have helped that number as well. We think that number probably inches back up close to $200 million in June, which might create some question for folks, and we can get into that, Myles, if you're interested. But there's good reasons that it will go potentially back up a bit. And then the real sort of focus becomes getting to cash breakeven at the end of the year, which is the goal we've set forth and talked about on our earnings call in other venues and remains our focus from this point forward. Maybe just a couple of other quick things. On liquidity, we're in a really nice position, $2.8 billion of cash on hand right now, with a much lower burn rate. We're feeling good about where we sit today, but we are actively pursuing additional liquidity. We'll see if those ultimately are things that we move forward with and close on. But it's our expectation and intent to go after additional cash raise over the next month or 2, just to really solidify the position and make sure that we can weather whatever shape of the recovery this ends up being. So we're working on that, both on the loan program through the CARES Act and some other potential financing vehicles. The one note I would just make on that, and it's a note we're making sure that we are talking about internally at the company with all of our employees as well is we are borrowing this money, not because we want to spend it. We're borrowing it in case there's a second downturn, or in case there's some -- the spending that we need to do of our network or other opportunities we can take advantage of. But our goal is to stabilize the business, understand what the new normal of demand is going to be in the domestic industry, sort of size ourselves appropriately, and then get back to generating positive cash flow so we can start to pay down the debt that we have had to raise and that we did burn or will burn this year. And so it's not our goal to raise a lot of money and actually burn through it. We'd like to raise it and then repay it quickly and as quickly as we can. I think I would just sort of summarize more generally that -- and I think you've heard us speak to this before, we did come into the crisis, I think, in a relatively good position, certainly from an access to liquidity perspective, a lot of unencumbered aircraft. It's a credit to Brandon and Chris and the team that preceded me that we did pay down a big [indiscernible] on increasingly saw this [indiscernible]. [indiscernible] working on. I appreciate the opportunity to [indiscernible]. [indiscernible] over to you, Myles, for questions.

Great. Thanks, Shane. And those on the call [indiscernible].

[indiscernible] to later. We've got new realities that we're looking at and dealing with. And so it's a pretty fast moving environment right now. But I think May, the last time we talked about it, we wouldn't have anticipated. It would've been at $170 million. We would've thought it was north a bit of $200 million. A couple of reasons that it came in better, and then I'll give a couple of reasons why June will be just a little bit worse potentially. But in April, we actually had negative outflows...

Shane, could I ask you to just speak a little closer to the microphone. I think some on the line are having trouble.

Yes. Sure. Yes. I got it right next to me. All right. Let me know if I can be louder, too. So with respect to May, in April -- I'm just going to go back to April. Our net sort of ticket revenue or cash flows was negative. We had more refund activity, cash refund activity than new sales. And in May, it was positive. So that was a nice sign. It was modestly positive, but positive. The other thing in May that happened was we had already purchased a bunch of fuel to use in April before we had cut the schedule back. And so we were able to deplete that inventory in May and not make a lot of new fuel purchases for May, which we're through that now. And as we ramp the schedule back up, as we go forward to the summer, we'll be back into more normalized for the new level of capacity we're running fuel purchases. And then the last piece between May and June is just our debt service is lumpy. We have higher monthly debt service at the end of the quarters than we do in the middle of the quarters. And so May is a particularly low debt service month, June is higher. So there's a couple of reasons that you see a little bit of down -- up and down to this metric. But we're comfortable and confident in the $200 million estimate for June. And really, that's a way point, hopefully on the way down towards our 0 cash burn target for the end of the year.

Okay. Okay. That makes sense. And then maybe the other one. You talked about in the 8-K that the load factor of 40% in May, and obviously, you're probably not in a position to, let's say, forecast load factors for June. But any reason why you wouldn't be able to sustain that level looking forward, if not improve?

Yes. I think we're feeling like that is, absent another rebound or something or more closures, the gross volumes of passengers we're carrying is pretty consistent right now, and it moved from, I think, as low as 5,000 people a day, and it's sort of in the 20,000 person-a-day range. In terms of the load factor, I mean, the question is, as we add more capacity, if we're still only carrying 20,000, load factor could slide down a bit. We're going to add capacity with the assumption that we're going to also have incremental traffic. But right now, we're seeing very, very steady daily traffic. We're seeing a reduction in refund activity, a reduction in cancel activity. Modest new bookings, not anything to sort of get too excited about. But with some new bookings, a much lower refund and cancel experience and sort of a steady demand profile right now. I think we feel like this load factor has stabilized. And hopefully, it starts to step its way up slowly but surely through the rest of the summer.

Okay. Great. And maybe just a little color around that. You'd mentioned looking for the normality of bookings and future plannings to start to carve into the booking curve. Can you talk about how normal or abnormal it looks? Obviously, you're at a low level, but is the flow in booking more normal in terms of the booking curve itself?

Yes. And I -- this is a -- I mean this is one we'll want to chat with people more as we go forward as well. But just as a reference point, we might, for December when we're in -- June is a long way away from December, but people are starting to typically think about winter vacations. We might have like a 6% load factor for December as we sit in June, under a sort of normal environment with normal capacity. And then it builds pretty quickly between now and end of the summer. And we're a little below that load factor. We are still selling essentially a full schedule out into December. So remember, we're not -- we haven't made decisions about capacity out that far yet. So we're essentially using our normal booking schedule. So we're understandably a little behind, but it's a very small base. So we're not too concerned. The real question is, over the next 90 days, do people really start to solidify vacation -- winter vacation plans and book travel? Or is there a slower return to leisure? And I think the jury is still out. I don't have any data that I could extrapolate from one way or the other to say whether we're going to see sort of a normal -- maybe a reduced, but more normal demand profile shape here over the next 90 days for December flying. I just mentioned it because I think that's like a key sort of recovery data point for us is to understand how much demand there is for the Thanksgiving and Christmas holiday season.

Yes. No, that makes sense. And then from a demographic perspective, business versus leisure, are you seeing the usual leisure first and kind of cabin fever? And business kind of waiting it out? And then maybe a medium-term picture of where you're expecting that ice to break on the business side.

Yes. No, I think that's exactly right. We're a little less exposed to business. But our basic operating assumption is the vast majority of business travel is probably canceled through the summer, if not for the entirety of the year. A lot of local businesses here, large ones at least, aren't requiring or even thinking about having employees back to the office in normal sort of numbers or whatever they end up having to do for sort of protective and safety measures. But until October or November and -- essentially business conferences, all those sorts of things have been canceled as far as we can see for the rest of the year and even into the first part of next year. So I think business is going to be behind leisure. I think that's a pretty well-established point of view at this point. And the real question is what does 2021 look like from a business climate perspective. And it's going to, I think, be based in part on employees being comfortable flying, companies feeling like that travel is necessary, and then obviously, the economy is going to have something to say about that as well. So yes, business is kind of nonexistent right now from a large sort of corporate perspective. Very, very kind of low volume of business travelers out there. The leisure side, the states in areas that are in our sort of sweet spot of our network that have opened, we have seen much more demand, and we've been able to add additional frequencies to support that demand. And so that's been nice to see. And I think that might speak to this cabin fever idea. There's some pent-up demand, and there are people who are anxious and willing and they feel comfortable going and traveling. And we're starting to see that, especially in the states where restaurants are open or the things that people want to do on the other end are ready to receive customers.

And I guess the other piece that's less important now and there's not a lot of passengers, but over time, it will become more relevant is on the fare side. Some of the carriers in Europe are predetermined that there'll be a fare war that lasts for the next year, 1.5 years. What is your expectation of the competitive landscape for fares here in the U.S.?

Yes. I'll just be honest. It's -- I think we're -- we've got a lot of differing opinions about this right now. And I think one new variable in all of this is all of the airlines have a pretty significant buildup of credit that people have access to as well. So we're not just pricing under sort of normal circumstances where the vast majority is cash sales. There may be a disproportionate number for a period of time of credit sales. And I don't know how that will totally impact our pricing decisions. The market -- it's -- I ran RM for a while. It's a very competitive industry. And to the degree that there are seats out there that are empty, and there's a lot of them, I've never seen it -- that result in anything, but pretty low pricing. And so the biggest issue with an average fare perspective that we're probably up against is the lack of the close in business fare. Those are quite -- they're quite -- they're a big component of the overall yield picture for most airlines, even like us who don't have as much exposure as some of the other airlines do. So leisure fares are typically pretty low anyway, especially if you're booking pretty far out, unless you're in the busiest sort of spring break and Christmas vacation parts of the year. But -- so I don't -- it's hard to know, but I would sort of guess that a lot of the far out leisure fares or they're going to be quasi normal for a while unless there's a particular area that's really depressed in terms of demand and then people will try to stimulate. But the yield picture is probably going to be more influenced by the lack of the business fare until those return.

Okay. That makes sense. And you brought up the kind of the credit -- use of credits for probably the next year or so as a headwind for cash. Obviously, it's not -- the industry has found a way to not have it hit all at once, but it would be, I guess, more of an overhang to get through. Can you just remind us -- I think you have $500 million in credits. Is that what's sitting kind of in ATL at this point? And do you kind of normalize your ratio of credits and loyalty and cash in that ATL over a period of a year, over a period of 6 months? How do you think about that?

Yes. So yes, typically, our -- sort of, we call it e-wallet and the amount of value that's in e-wallet, on a normal sort of period, is $50 million, $60 million, $70 million, and it's $500 million to $600 million now. So it's 10x. I -- we are -- we don't have a good window into how people are going to think about using e-wallet versus cash. But my expectation is people will access the credits at a higher rate than they had before in terms of form of payment for tickets. I just think a lot of travel plans got canceled abruptly, and people are -- it's still fresh in their mind that they had those tickets and they don't any longer and they've got value for them. And as they think about replacing those trips, I just have an anticipation that there's going to be a relatively large share of tickets that we sell will come from credit. We don't have an estimate at this point. It's kind of hard to see right now because we're just seeing cancellations and refund activity come down to a normal level. So we don't really know how that's going to spend out. But, yes, I think our ticket sales are -- converting ticket sales to cash is going to take us a little bit of time to get back to the normal. A year is probably a good way to think about it, to be honest. It's just that the levels we have, it's a -- that's a lot, 50 million to 75 million a month and to ultimately convert to get back down to a more normal number.

Right. Right. Okay. And then, one of the things that is interesting is a lot of the airlines, yourself included, are almost in the great position of having to -- or having the ability to think about how you want to run an airline from almost scratch. And fleet simplification has been one that's on top of a lot of people's priorities, and it sounds like you're kind of making real time or have already made decisions about gravitating towards the MAX 737s with the permanent parking of some 320s. So are you over that hump of that decision? Is there any reason why you'd go back and rethink -- operate A320s over the next couple of years beyond this point?

Yes. So we're not -- we haven't made a decision to go single fleet or to maintain 2 fleets. But what we have decided to do is put ourselves in the position to make that decision easier on us. And the way we're thinking about it is if we need to have fewer aircraft flying next year, the aircraft we wouldn't be flying are Airbus aircraft. And so we've got, give or take, and I don't have the number in front of me, but 170 Boeing aircraft, and we would assume that we'll fly all of those. And then, we'll fly some portion of the Airbus fleet to get to our total operating fleet number at that point in time. And I think this is super consistent. It's actually a little less about single fleet, getting down to that level, it's just that our Airbus -- the A320s, for us, are not the best main line fleet assets that we have. The Boeings are. I think, the -- we're out of market from an ownership cost perspective. A lot of these are leased aircraft with more complicated maintenance return provisions and those sorts of things. And so it's the marginal aircraft for us right now. It makes sense to -- if we decide not to fly something, not to fly the A320s and the A319s. But the goal would be to ultimately get that Airbus fleet, if we decide to fly to market rates, market ownership rates, and then down to a number of them where we could see a path towards a single sort of Airbus fleet of A321s or we could see a path back to a single fleet. And that's really what we're at work doing now, just architecting the fleet plan to give us that optionality. And then as we sort of understand more about the aircraft market, because we assume that there's going to be surplus aircraft on the market, and our own cash position and ability to actually spend new capital dollars, that would, at that point inform whether or not we would want to do something to try to get into all A321s or into an all-Boeing fleet. And I'm guessing this decision is probably a couple of quarters away still as we sort of feel our way through the next couple of months here and better understand the aircraft market and also just better understand the shape of demand next year. If demand -- if the recovery is significant and demand settles in at a place that's closer to pre-COVID levels, we would continue to operate the Airbus fleet in the interim to be able to have the capacity we need. But if it's much lower than pre-COVID levels, that's the fleet that we would ultimately stop flying.

And just remind me, on the Airbus side, what percentage of those are leased versus owned?

51-ish are leased. No, 60...

Yes. Yes, it's mostly -- it's 61 leased and like 10 owned. It's mostly leased. Yes.

Okay. And the negotiations with your respective lessors, have they gotten towards a conclusion on any deferrals or...

The thing -- the nice thing -- yes, Myles, the nice thing is except for the A321s, and the A321s are a phenomenal aircraft and I think could be very, very profitable for us. The A320s really start to return, like they're meant to go back to the lessors in spades over the next 2 to 3 years. And so you've got just -- it's an unfortunate situation, but the reality is you've got a lot of aircraft that may not be flown in the future may end up going back to lessors, including the A320s in the next year or 2. And so I think there is a willingness and openness to talk about what those terms look like. Is there a way to get closer to market or get to market with an extension, that sort of thing? So I think we just have -- because they're due to go back in short order, and I think I'm assuming lessors want to continue to place content with airlines and with us, I think we're a good credit and a good partner. It feels like there's the right conditions to go in and have a really good, mutually beneficial discussion about terms and length of lease.

Makes a lot of sense. Maybe just transition away from fleet towards your network. If you pulled down the capacity and you kind of started over, what should we think about as your reinsertion plan, putting the pieces back together? And also from a competitive landscape, you had a healthy amount of competition enter the Northwest several years ago. I'm just curious if that retrenchment -- or they've obviously pulled that capacity down as well, but if you expect that to simply just come back from their perspective?

Yes. Yes. I mean I'll sort of keep to -- sort of what we're thinking about and I'm not sure about the plans of others. Yes, our historic core places of strength, really, Pacific Northwest, Seattle, state of Alaska. And we fully expect that those will continue to be the core of our network and really where we have strength and we'll defend all of those markets pretty aggressively. And that's what we've done in the past, and there's nothing that's going to change coming out of this. I do think -- it's Seattle, it's home to a lot of large companies, successful companies, companies that may be benefiting from some of what's going on today. And so we also feel like there's a chance that the recovery could be quicker here than maybe some other parts of the country, maybe not the quickest in the country, but amongst the quicker in the country. And so we feel fortunate that this is the area where our headquarters is and where our sort of historic base of strength is. We have a large footprint in California. As you know, we built that out subsequent to the merger. We're not going to fold up shop and go home from California at all. We've been in California for many years, even before the merger. But we'll make -- we'll be more focused, I think, on what we're trying to accomplish in California. I think we'll be very focused on the Pacific Northwest to California sort of connections in those markets, which we started to announce and implement late last year, things like Eastern Washington into California and some of the smaller cities in Oregon as well. And so those make sense to us. We're strong relatively on both ends, and it makes a lot of sense. It feels like right now, but it's really hard to say if it's just a by-product of shelter-in-place orders, but it does feel like the California to East Coast flying is the most depressed right now. And I think that's, I think -- across the board, I think that's what you would see in public data. And we'll see how that comes back. But we'll be watching to see if there's more life in those markets. Right now, they're pretty depressed.

And I actually did get one over the Q&A bank here, Shane, and it relates to your agreement with American Airlines on the reciprocal mileage. Obviously, it was just a couple of months ago, I guess. And kind of what -- how, I guess, a COVID world is one thing, but in a non-COVID world, maybe what were you looking for out of the agreement? What does it bring you? And why now?

Yes. No, are you speaking broadly to the partnership with American or just the reciprocal miles?

Question wasn't specific.

Okay. Yes, we'll hit the broad strokes. Yes. No, I -- one thing -- we have a long-standing kind of tradition here of basically the entire leadership team making outbound phone calls to our sort of top loyalty members or what we call MVP Golds and 75Ks, just to check in with them, say thank you, ask how things are going, ask them what we could be doing better to serve them. And they're always enthralled and you get a lot of good input. But I think we -- there was a -- and we sort of had the same instinct, but the loss of the Delta partnership and the potential loss of the American partnership, we had a lot of really loyal people who loved us, and I don't think they were going to change. But we don't have utility to everywhere those folks want to fly. And so I think there was real benefit potentially in us being able to recreate some of that utility, especially back into the East Coast and to the middle of the country on a connecting basis. And then it's important to us to be able to serve the world, but it's really expensive to try to go do that on your own. And there's a lot of people already well-established in the international markets. And obviously, things have been upended here. But prior to that, I think we felt like we had an incredible group of partners in our program. But we really did need to look hard at a domestic partnership that could extend our utility through the rest of the world. And in doing so, I think we become more attractive to business travel. Most people who travel business also travel for leisure. And so if you can get the business trips, you tend to have a chance to get the leisure trips. And we think that we've got a good brand and a good product. And it was a way of expanding our appeal and sort of driving more loyalty. And I think -- American would need to speak for themselves, but I think they viewed us as a very strong West Coast partner who can help build out a good structure they've already got internationally off the West Coast. And it just -- it started to make more and more sense. And we were excited that it came together. And obviously, wished we were now talking about this under different circumstances, but we view like -- we do view this as a very positive and important part of our go-forward strategy, and I think a win-win for both of the partners involved. And we're continuing down the path of getting ready to hopefully, ultimately doing oneworld as fast as we can.

Again, another one in chain, which is around 2021. And in particular, your cash burn, just thinking about it conceptually, I guess. Is the ATL or e-wallet unwind enough to be a headwind to '21 against your target of getting to breakeven cash flow by the end of the year?

Yes. I think it's a fair question. And it's a bit of an unknown. It's highly dependent on how much demand returns. And then I guess the worst case would be not very much demand returns and the demand that does come back, wants to use all credit and not pay with cash. And so that would be -- and you guys are smart, that would be mathematically hard to overcome. On the flip side, if there's a reasonable recovery of demand and an elevated but not exclusive use of credit for that demand, I think then we clearly have an ability to go and achieve the cash breakeven. And this is again, an obvious statement, but the cash breakeven is just a way point back to a healthy business. And we could have picked any point in time but everybody has got to go through this point at some point in time. And so I don't know if our date was aggressive or not aggressive, but we felt like, essentially, financing a year's worth of massive cash losses was enough. And that was what we were willing to budget for. And we don't want to budget for any more of it next year now. The market -- the revenue reality and demand reality and sort of competitive reality, we don't control all of those things. We'll have to operate within that environment. But we'll be aggressive about trying to get to this goal. But we just thought it was important to put a marker out there, focus ourselves on it, go after it hard. Because ultimately, as I said at the top, we really need to get back to positive cash flow, pay down this debt that we had to raise to just keep the company afloat and get back to what we do best, which is grow. So that's what we're after. And we would like that -- we're going to try to make that happen as fast as we can. I think -- we think that's better for everybody involved, our people, certainly our owners, our communities, the economy. And so that's what we're focused on, getting healthy and then getting back to growth.

Makes sense. And I only got a couple of minutes more, but I did want to ask on the government loan side and building further liquidity. It sounds like you want, basically, to overborrow because you don't know what the future holds. There was a question that came in, I'd echo it. What is it that worries you most about taking further of the government money?

I don't have a lot of concern, if the question is sort of getting to terms and conditions. There are some sort of nonstandard conditions that are a part of the government support package, including the loan package. But we're not overly concerned about those, and we think they're fair. And we -- obviously, we're a part of that sort of process of understanding the legislation as it developed, and we understand why those provisions are in there, and we fully accept them. The actual economic terms and conditions, I think, are quite reasonable, and they make a lot of sense. The loan is fully prepayable. It's at a very fair rate of interest. And for those reasons, it makes a lot of sense to access that form of borrowing. My -- honestly, my only concern ever with any of this stuff is, if you have a lot of cash on the balance sheet, do you take your foot off of the kind of restructure and gas pedal? Do you go slower? Do you sort of feel like, "Oh, I've got a safety net. I don't have to make as many of the tough decisions." And I'm confident our company won't sort of be distracted by the level that's on there, that we'll view that very much as a safety net and nothing more, and that will have sort of a very strong consensus around not wanting to go spend the money that we're raising to fund losses. And we've just got to get back to cash breakeven again. So -- I mean, if anything, I think if you're -- it's just simple psychology. If you're close to things being really tight financially, you just -- you have to act. If you're further away from it, is there a little bit of a slower pace to it? But I think we're off to a very good start. I think we've shown that through our ability to get cost out of the company perhaps as fast as anybody in the industry. And I think that, that's something this team is very, very disciplined about and very good at doing. So I don't worry about it too much, but that would be my key worry about over raising at this point.

Okay. Great. Well, that brings us to the end of the session, actually at the end of the first day here. So with that, thanks so much, Shane. Really appreciate it. Good conversation.

Awesome. Thank you so much, Myles. Looking forward to some of the one-on-ones tomorrow.

Take care. Bye-bye.