Alaska Air Group, the parent company of Alaska Airlines, on Tuesday reported its first quarterly loss in more than a decade and warned of significant cuts that will downsize the airline.
Alaska CEO Brad Tilden said the airline industry faces “one of the greatest challenges in the history of commercial aviation” as he announced a first-quarter net loss of $232 million.
With the coronavirus pandemic cutting passenger traffic by more than 90%, operating an airline has become a business with deep and mounting losses. The bigger U.S. airlines have also reported red ink for the first quarter: American Airlines lost $2.2 billion, United lost $1.7 billion, Delta lost $534 million and Southwest lost $94 million.
United plans to cut at least 3,400 management and administrative positions in October and has told pilots their ranks will be reduced by about 30%, according to internal memos obtained by Reuters. In another internal memo obtained by CNN, United Chief Operations Officer Greg Hart asked employees to “seriously consider” leaving the company voluntarily.
For Alaska to survive this industrywide crisis, CEO Tilden said, a priority is to reduce the rate at which the company is burning through cash.
Through Tuesday, Alaska has this year paid out $467 million more than the cash it brought in, said Chief Financial Officer Shane Tackett in a conference call with Wall Street analysts. Though the first two months generated positive cash flow, in March the company spent $400 million more than the cash it collected.
Since then, Alaska has cut out advance payments to Boeing, parked 80% of its jet fleet, reduced salaries of senior management and offered voluntary 60-day unpaid leave incentives that were accepted by more than 5,000 of its 23,000 employees. That reduced the cash burn in April to $260 million.
If the cash bleed were to continue at that rate, Tackett said that with $2.9 billion of cash on hand — including a $992 million grant from the U.S. government’s Coronavirus Aid, Relief and Economic Security (CARES) Act Payroll Support Program — the company’s cash would run out after just 11.2 months.
So the immediate goal is to reduce the cash outflow further to $200 million next month and to reach zero cash burn by year-end.
“We actually don’t know the exact path to get there. We don’t know exactly what revenue is going to be,” Tackett said, but added that the company must make whatever cuts are necessary to get to that point.
Alaska Airlines President Ben Minicucci said the prospect is for “a smaller industry and a potentially smaller company.”
Tackett said the size of the workforce reduction isn’t clear yet and that management will be talking with its labor unions about that over the next few months.
Asked what would happen if air travel demand stays as it is now through year-end, Tackett indicated that would mean bigger cuts to reach zero cash burn. “There’s no scenario under which we assume we cannot get to our target,” he said.
“It’s going to be painful,” warned CEO Tilden, adding that stanching the cash bleed is necessary for survival. “If we can achieve a break-even cash burn rate, our destiny is back squarely in our control,” he said.
The $992 million relief grant from the U.S. government will ensure employees are retained and paid through the end of September.
Tackett said that, in addition to the $2.9 billion in cash on hand, Alaska could access additional loans worth more than $4 billion if needed, including a separate $1.1 billion federal loan through the CARES Act. He said Alaska can use its aircraft, its real estate and its frequent flyer credit card program as collateral.
He said that Alaska will permanently retire from its fleet a dozen Airbus jets: ten A319s that were among its smallest and least profitable aircraft, and two leased A320s that had not been reconfigured from the Virgin America to the Alaska interior.
An additional seven unmodified A320s are parked and unlikely to return to scheduled service.
But that’s only the first step in the fleet reduction. “The rest of the parked aircraft are being stored and maintained so they can reenter service. We will make decisions about when and how many of them do return to service in the future,” Tackett said.
The retirement of the Airbus jets looks like good news for Boeing. Formerly an all-Boeing airline, Alaska has been operating a mixed fleet since it inherited the Airbus planes from its acquisition of 2016 Virgin America. It has been undecided on what to do in the future.
However, as analyst Michael Linenberg of Deutsche Bank put it on the conference call, the impact of the pandemic has meant that the fleet decision on whether to stick with a dual fleet or revert to all Boeing “is being made in real time” and in Boeing’s favor.
As a result of parking the Airbus planes, Alaska is going to use the current pilot downtime to retrain 240 of its Airbus pilots to fly the Boeing 737.
However, the company still has 10 larger Airbus A321s that it considers very efficient, so those may stay in the fleet long term.
Alaska president Minicucci said management intends to “restructure the company” for low-cost operation and that a dual Airbus/Boeing fleet is “a higher cost for us.”
But he added that “the Airbus 321 is a great airplane. We like it a lot.”
“We’re going to look at how we’re going to reconfigure this company for the best success,” he said. “As the months play out, we’ll get more clear on what our direction is.”
Just a month before the pandemic, Alaska was internally discussing buying 200 new jets for the decade ahead. Now that plan is likely dead.
Alaska has 32 Boeing 737 MAXs on order and it’s negotiating with the jetmaker to take the first few of those with no new money down, using instead the pre-delivery advance payments it’s already paid for many of those aircraft.
But as for that former plan for future fleet expansion, Alaska’s vice president of finance Christopher Berry said on the teleconference that the company has “eliminated” all capital spending on new aircraft for the immediate future.
Tilden said that while the immediate future looks bleak, “we plan to bridge what is essentially an economic closure across our country to a future where Alaska is stronger and better.”
To achieve that, he said the company has to rein in the mounting debt needed to cover the cash burn.
“That burden saddles the company,” he said. “We just don’t want it to be $6 billion, $7 billion of debt on our balance sheet. That would be a difficult thing for us to manage.”
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