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

Good afternoon, everybody, and welcome to the 13th Annual Global Transportation Conference. And it's being held this year in conjunction with the first Annual Mobility Conference. I'm Helane Becker, Managing Director at Cowen and senior airline analyst. And this afternoon, we are so fortunate to have Alaska Air's -- two of Alaska Air's senior management team with us. And I think, Emily, IR -- Director of IR, is also online. Ben Minicucci, President. I'm going to scrub titles, so I'm just -- I think Ben, you're President, right, of Alaska Air Group? And Shane, you're CFO. So I don't know if you want to give a brief update on what you're seeing in the market now. I know you guys filed an 8-K -- excuse me, an 8-K this morning. So maybe you want to talk to that for a few seconds and then we can go into Q&A.

Yes, absolutely. And Helane, thanks for hosting this. It's really, really great to be on. We wish we were [indiscernible] And next year, I hope you're planning to have people fly out to your conference.

I was planning on it this year, Shane. I got canceled at the last instant. But yes, I was planning on it until about a month ago.

Okay. Well, we're going to book our tickets early. It's [indiscernible] [ peak season ] now, so it's not a problem. Yes. It's been an interesting summer, to say the least. I think as you know and you heard from all the airlines sort of in Q2, we had that nice kind of bump at the end of June into July. And then it sort of took a big swing backwards in the middle and end of July, which was disappointing and frustrating and stressful. And that sort of carried into August. It was pretty -- it was stable but low demand through August. And I think incrementally, us and other airlines have sort of taken capacity plans down. But at the end of August, and it's continued a bit into September, here we've seen more robust forward bookings. And that's been a nice change of pace. And I think folks are wondering what is the cause of that. And we're not totally sure, just to be transparent. I think one is people just do want to get traveling. I think there is some pent-up demand, especially on the leisure side. You're seeing that, I think, across the country. We do know that as geographies open, we see people go there pretty much immediately. And so a lot of the recovery for us and for the rest of the industry is dependent upon the country being able to get open which is not news, I know, but it's -- the trends we see are very similar. We did have a buy one, get one offer in the market sort of middle to late August. And I only mention that because it performed better than we expected. It was only for travel through October, which are September to October are seasonally shoulder or even low-demand months. And so we weren't expecting it necessarily to drive a ton of stimulation, but it did outperform what we had thought was going to happen. And then we've seen it sustained on a relative basis, stronger bookings through the end of the month and even into September. And so that's been a nice change of pace. It's been good to see and gives us a little bit of hope for optimism. A lot of those bookings are close-in. We're seeing the booking curve really shift much tighter than normal, which makes some sense. I think people are a little reticent to plan too far out right now, just given the uncertainty. And it makes a little bit harder for all of us to predict what Q4 is going to look like. But if we're right and the hypothesis holds that there is some pent-up demand and people are just waiting for an opportunity to go to somewhere that's open, our hope is that we see another upward sort of sustained trajectory here through September and into October as we begin to book out the fourth quarter and certainly the holiday season. So I would say right now, we're incrementally more optimistic than we were a month ago, but we're -- I think we've -- we're cautious because we've seen it go back and forth a bit. In terms of Alaska, we're really focused, as you would expect, on the things we can control. We've tried to be very transparent and explicit about the planning assumptions we're using for the size of the company, both in the fourth quarter and then into next summer. And then we've been obviously very focused on talking about cost discipline and cost sort of removal and getting our cost structure ultimately back to a place that we know will work long-term for the company. And so those are the things we're really focused on and executing on. I would mention and I think it's important too, that there is a really important date coming up for the entire industry and certainly for many, many of our employees, October 1. These are the hardest things that airline management teams have to do to make decisions to downsize staff. So we're hopeful that we were able to mitigate most, if not all, of the involuntary -- potential involuntary furloughs or that the government may come through with an extension to PSP. But absent that, it's going to be a tough first part of October to just process those involuntary furloughs if they come to fruition. And we did downsize our management staff on a permanent basis about a month ago, which obviously was hard to do. So those aren't fun things, but we're trying to make the decisions that we know we have to for the longtime viability of the company. And I think we're doing a fair job on that. So I won't take any longer. I think let's just get into your questions, Helane and we can dive into the things you're interested in.

Okay. Well, I mean I think some of the things that you talked about, we're interested in, obviously. I mean one of the things that, I guess, we're concerned about as you think about recovery in 2 to 3, 4 years down the line is brain drain and not having enough middle management to fill the ranks of the company going forward. Obviously, the people who are left are getting quite a -- what's the right word, quite a study in crisis management and how to respond in situations like this. It's -- I think for all of us, it's the worst we've ever seen it in the industry. We've never had a situation where the whole country shuts down all at once and people are ordered to stay home. I mean it's kind of frightening that you think we could get to that level. And then recovery is hard because, to your point, Shane, people don't know what the rules are and whether you have to quarantine when you get to where you're going or quarantine when you get back. So it must make it difficult in the booking curve. So I think I asked you like 7 questions. So I'll just kind of break them out a little better. So one, are you concerned about brain drain from middle management and not only people leaving because of the furloughs, but people leaving because they have other opportunities in other industries, especially in Seattle? So that's the first question.

Yes, it's a great question, Helane. For those of us who've been in this industry for 25 years, we've seen a lot of crises over 25 years and we've hired a lot of people in the last 10 years. And the last 10 years have been, for the airline industry, have been fairly good and strong, especially for Alaska. So we've seen good times. And it's funny when we have meetings and webcasts with our leadership team and even our employees will say, "Look, for those of you who've never seen something like this, this is the worst we've seen it in our career, but we will get through this." And Alaska has a great culture. People love this company and what we're about. And we do live in Seattle. We have Amazon, we have Microsoft, we have Starbucks, we have Costco. We have a lot of great companies that are doing well in this pandemic. So I think we're aware of that. We're talking to our Board about it as the senior leadership team. We're going to do everything we can to keep our top talent, all the way down to the lower levels of the company. So it's something that's on our mind. We're working on it aggressively. We're working on it consciously and deliberately. And again, we just feel we've built a company that is not just about how much money you make, but it's a company that have seen good times and got through it and gotten out of it stronger. Every -- we [ maintained ] our history whether it's 9/11, whether it's the 2008 in crisis, Alaska has always emerged stronger and better. And that's why we keep calling the story for people like me and Shane that have been here a long time and saying, "Look, we'll get through this stuff. It's ugly. It's not -- it's tough to come to work, but trust me, Alaska when in -- well positioned. We're going to come out well positioned, and we will thrive once the smoke starts to clear."

Right. So let's talk about that. I think your balance sheet was pretty good entering the year, right? You had paid down a significant portion, I want to say 3/4 of the debt that you had taken on related to the Virgin America acquisition. So could you maybe talk about liquidity and how you're thinking about capital allocation coming out of this?

Yes, for sure. And I just especially like the point you made that the folks who are willing to go through this sort of cycle, they will learn more in a 10- to 20-month period than I think they might learn in 10 years in most career settings. So I do think there's opportunities for people who want to be here. But on the balance sheet stuff, we're sitting at about $3.6 billion. I think we did release an 8-K yesterday last night. And we had burn of about $80 million if you exclude a onetime kind of prepayment of Visa rebates that we normally get spread out over 4 quarters. So August was quite good from a cash burn perspective. And the liquidity position, I think, is really, really strong. I think we're predicting more cash burn into September. That's really predicated on a more August-like demand level that didn't really look at the last week or 2 of stronger relative bookings. And we just did that to be conservative with it. It's really hard to predict the revenue side right now. I think really good on executing the costs side of the business, we're essentially right on target, right on forecast. We are still going to raise some incremental liquidity in the next little bit, and I think our primary source of that would be the CARES loan. Happy to talk about why we would be interested in the CARES loan. The goal is not to raise money because we think we need it, the goal is to raise it just in case we do if something really goes bad here with the country and with the industry over the next few quarters. But as you know, Helane, it's -- you have asymmetrical risk with this stuff. If you don't borrow it now and you need it, nobody is going to be there to lend it to you. So for us, it's just, I think, smart to get sort of as much liquidity runway as we can if we can do it on the right terms. And our view of this is to stay away from equity. It's not something we're interested in right now. We've talked a lot about that. And I think as we sit here today, given our cash burn trajectory and how we're executing on costs and a little bit of optimism on a recovery over the next couple of quarters, it's really not on the table and it's something we're more confident about not wanting to tap than we were even a couple of months ago. And so if we get the sort of final loan terms done with U.S. Treasury, and they've been great to work with, I think we'll sit there and really not plan to do a lot more and really begin to focus on how we repair that balance sheet coming out of this. And so future capital allocation, I think we do have an appetite to take delivery of aircraft that we've ordered from Boeing. And we do have an appetite to incrementally get out of the A320s and into a better profit-producing aircraft. Our goal would be to focus on debt repayment first. And so I think you'll probably see us use more leased content than we have in the past to replace some of those Airbus aircraft since they are all already leases. And then the thing about the Boeing delivery stream is we've got over $0.5 billion of predelivery deposits already sitting at Boeing. And our expectation is to use those in full before we put new fresh capital out the door for incremental deliveries. And so as we sit here today, I think our aircraft CapEx next year is going to be very, very light, if not de minimis. And it would really become a question about the delivery stream out to 2022 and beyond. But as we did with the Virgin acquisition, we're going to get back to the 40%, 50% debt to cap. That's going to be a priority of ours. And we're going to have to balance that with the right fleet sort of transition plan in terms of getting out of the A320s and also the right regrowth planning to get back to pre-COVID levels, but a particular emphasis on debt repayment over the next couple of years.

Right. Got you. As you think about capital, you have a pretty strong loyalty program and a really loyal group of customers. Is that something that makes sense for you to consider using to raise additional liquidity?

Yes. Yes, it is. I think that would be the primary collateral we'll use with the government. It's not required, and we've got a structure with the government that allows us to use hard assets or the loyalty program, but it is the single largest untapped collateral that we've got. And it will give us a sufficient amount of incremental liquidity that we would not anticipate needing any more after that. I think we've only -- we've got about $1 billion -- $1.1 billion of non-loyalty program assets that we can use to go raise money against, and maybe you get $500 million or $600 million out of that. That's less than I think our target is. And so right now, we are anticipating we would use the loyalty program if, again, we get the right terms with the U.S. Treasury done for that.

Got you. And then the other thing is -- one of the things that is, I guess, booking curve. It's so short now because people don't know how to plan, right? Like I would love to come to Bainbridge Island but -- because a mutual friend of ours owns a...

Pegasus Coffee?

Yes, Pegasus Coffee, which by the way I get shipped to me. Not because I drink coffee. I don't, but my husband does. So we try to support our friends. So I would like to go to see that island because I hear it's beautiful, but I have to quarantine when I come back. And that's unappealing to me, so it makes it less attractive to go. So I have to weigh my chance to go. But when you think about the booking curve, if they said like next week, there's no more quarantine, I would probably be on one of the next flights out. So live booking window is very short. And are you seeing that from -- am I typical or atypical of your customers right now, number one? And number two, what's with Hawaii? I mean are you able to fly there now? Are you still waiting for quarantines to be lifted? Kind of trying to figure out what's going on with that market.

Yes. No, Helane, you're absolutely right. I think people are in your space in terms of how they're thinking about traveling. And for those who have quarantine restrictions, they're exactly in your head space. The booking curve is really short. We're seeing a weekend, we're seeing bookings really close in. So that's why September is looking different than what we thought so far at the start of the month. So we're hopeful that, that trend continues. And for Hawaii, it's -- the infection rate has gone up in Hawaii, and -- which is unfortunate. It's a big part of our network. And I think it opening up on October 1, we're a little -- we're not that confident we'll open up October 1, given what we're seeing today. But again, it's hard to predict. And I think this is all contingent on things that are developing like ramping the testing. We're hopeful that these sorts of tests come out, so we can actually start going back [indiscernible] our flights are very limited to Hawaii. We've taken capacity down. We put it back in and then we take it back out based on what's happening with infection rates. So it's -- the demand curve is very linked to the infection rates in terms of which states are open and which are not.

Got you. Just on something Shane said before on the CARES Act. So what's the size of the furlough that you're going to have to do on October 1? I didn't see that in the 8-K this morning.

Yes, Helane, we haven't publicly stated that.

That would explain...

We're going to [indiscernible] that information until we really have tight final numbers. Because obviously, our employees are very anxious to understand that as well. We sent WARN notices out to quite a large number of folks, 6,000 or 7,000 people. I think the number's going to be well below that. And we've been working really hard to mitigate those involuntaries through relief programs and early outs. And those are still getting finalized, and we're probably a week or so away from getting really tight with those numbers. So I might just save that until we're ready to share that internally with our folks too.