TThere is no doubt that 2020 was a terrible year for airlines and their shareholders. But a crisis like the coronavirus pandemic often succeeds in separating long-term winners from losers in an industry.
Alaska Air Group (NYSE: ALK) it increasingly looks like one of the biggest long-term winners among US airlines. In fact, the West Coast airline is in a great position to recover in the coming years, increasing its earnings beyond pre-pandemic levels.
Money consumption is under control
While every major airline in the United States has made great strides in reducing money consumption since March, Alaska Air is arguably the most successful of them. In recent months, the operator has routinely exceeded its cash burn projections.
This streak of superior performance continued last month. Alaska revealed this week that it burned $ 117 million in September: well below the $ 150 million estimate provided a month ago. For the third quarter as a whole, daily cash consumption averaged just over $ 4 million. This dropped about 70% compared to March.
Image source: Alaska Airlines.
As of October 9, Alaska Air had $ 3.6 billion in cash on hand, along with access to nearly $ 1.8 billion in additional low-cost federal government loans. That’s enough cash to last more than three years, based on the company’s recent cash consumption rate. In addition, cash burn is likely to decline further in the coming months due to gradual improvements in demand and cost-cutting initiatives, including an early retirement program and administrative reductions.
The right product in the right place
To some extent, the above-average performance of Alaska in recent months reflects less stringent travel restrictions on the West Coast than in the Northeast, and a stronger recovery in air travel in the West than in many other parts of the country. Alaska Airlines’ route network is suitable for transporting leisure travelers from large metropolitan areas on the West Coast to national parks, beaches and mountains throughout the West.
Looking ahead to the holiday season and 2021, Alaska Airlines will continue to benefit from the recovery in demand for leisure travel, especially with the reopening of major vacation destinations like Hawaii. The operator’s low-cost structure should allow it to reach break-even point while still carrying mostly leisure traffic at lower rates.
Alaska Airlines may also see a faster recovery in business travel than its larger rivals, thanks to favorable geography. With its main center in Seattle and significant operations in most major West Coast cities, Alaska has high exposure to the technology industry, which has survived the relatively unscathed pandemic. This may pave the way for a faster recovery in business travel compared to full-service airlines, which historically carried a lot of traffic associated with sectors that now face difficulties (such as energy).
A great opportunity for savings ahead
Finally, Alaska Airlines has a great opportunity to improve its unit costs, returning toBoeing fleet over the next five years or more. Alaska recently suggested such a move, charging a commitment fee of 10 relatively new Airbus A320s owned by you. The company is reportedly talking to Boeing about a substantial order for 737 MAX jets, which could come with a huge discount, given how desperate the aircraft company is for customers.
In 2017, Alaska estimated that standardizing its core fleet could reduce annual costs by $ 20 million to $ 25 million. In addition, the 737 MAX 9 and 737 MAX 10 have much lower unit costs than the A319s and A320s they would replace. Finally, Alaska Airlines pays a high rent for its rented Airbus planes. In early 2020, annual aircraft rentals were set to drop from $ 245 million in 2020 to $ 81 million by 2024 due to the expiration of most of these leases.
Altogether, replacing Alaska’s Airbus planes with new 737 MAX jets could save hundreds of millions of dollars annually by 2025. Adding the economy with simplified management (among other things) and the company’s above average prospects for a revenue recovery, Alaska Airlines are on the way to a strong recovery as the pandemic dissipates.
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