Alaska Air Group prepares for prolonged uncertainty
Alaska Air Group is joining airlines worldwide in its efforts to rework its business as the COVID-19 pandemic continues in place over much of the globe, and demand patterns are even more unpredictable than ever.
For now, the company appears to be sticking to its previous guidance that its capacity will fall approximately 50% year-on-year in 3Q2020. Whether Alaska's plans to be 35% smaller year-on-year in Oct-2020 will come about is yet to be revealed, or if it will need to refine its capacity plans in light of continued uncertainty in demand.
The company has rationally concluded that the key to unlocking the underlying desire by the general public to travel is cooperation through behaviours, such as mask wearing and improvements to deliver faster testing methods. The airline believes that type of collective social responsibility could be one element of driving an increase in demand.
- Alaska Air Group's capacity is expected to decrease by approximately 50% year-on-year in 3Q2020.
- The company aims to reach a break-even cash burn of zero by the end of 2020 and is working to determine optimal staffing levels.
- Alaska believes that collective social responsibility, including mask-wearing and faster testing methods, could help increase travel demand.
- The load factor for August is projected to be around 40% to 45% due to the weaker shoulder season in the US.
- The company expects a monthly cash burn of approximately USD 175 million in July and USD 125 million in August.
- Alaska has issued Worker Adjustment and Retraining Act (WARN) notices to around 4,200 employees and is working to mitigate involuntary furloughs through voluntary leaves of absence.
Summary
- Alaska's loads drop as the weaker shoulder season in the US approaches.
- The company continues its task of decreasing its cash burn, and is working to determine appropriate staffing levels.
- Alaska believes there is an underlying desire for travel among the populace, and it will take collective social responsibility to unlock those urges for travel.
Alaska's drop in load factor for Aug-2020 as the US shoulder season starts
Alaska recently stated that its available seat miles (ASMs) had fallen 63% year-on-year in Jul-2020, and the projected drop for Aug-2020 is 50%.
Previously, the company has estimated that its 3Q2020 capacity would decrease by 50% year-on-year, and the average drop for Jul-2020 and Aug-2020 is 56.5%. The company has not given guidance for Sep-2020, but it appears that its capacity projections for Sep-2020 and Oct-2020 have fallen during the past couple of weeks.
Alaska Airlines: weekly system seat change from 3-Aug-2020 to 17-Aug-2020
The company posted a load factor of 54% in Jul-2020, which was 2ppt better than Jul-2020's 52% load factor. Alaska expects its loads for Aug-2020 to slip to 40% to 45%.
Late August usually marks the slower shoulder season in the US, and with the spread of COVID-19 showing no signs of flattening out, September, which is usually a slow month, could be a particularly tough period.
Alaska works to determine optimal staffing levels
Alaska has a stated goal of reaching a break-even cash burn of zero by YE2020.
The company's monthly cash burn fell from USD400 million to USD120 million in Jun-2020. It has previously warned that monthly cash burn for Jul-2020 would be higher than Jun-2020, due to slowing ticket sales and the variable costs of incremental flying.
Alaska expects a monthly cash burn of USD175 million in Jul-2020, driven by the slowing of ticket sales and the timing of certain payroll cycles. The airline expects cash burn in Aug-2020 of approximately USD125 million.
Alaska's cash burn estimates include all operating cash receipts and disbursements, other operational cash including loyalty and cargo, plus investment earnings. That is offset by cash expenditures, including debt servicing, and excludes financing and payroll support funding.
As Alaska projects for capacity to fall 35% year-on-year in 4Q2020, the company is also planning for cash bookings to fall 40% to 60% year-on-year.
In late Jul-2020 Alaska explained that in order to reach break-even cash burn by YE2020 while operating 35% of the levels a year ago, it would have to cut its workforce, calculating that it would likely need 7,000 fewer employees in 4Q2020. Similarly to most airlines, Alaska is working to mitigate the need for involuntary furloughs through voluntary leaves of absence.
Alaska has now issued Worker Adjustment and Retraining Act (WARN) notices to approximately 4,200 employees. According to the Seattle Times, Alaska has said that it would continue to refine staff modelling over the next several weeks, and that it expects a final figure closer to 1-Oct-2020. US payroll support for airlines expires on 30-Sep-2020, and several airlines as well as unions are lobbying for an extension.
Alaska believes collective safety actions by society could help lift demand
Alaska has offered some insight into how it has reached its planning assumptions of a capacity reduction of 35% for YE2020.
Company president Ben Minicucci has remarked that traveller confidence and psychological safety are strongly connected. He noted that in Jun-2020 as US destinations moved to reopen and health concerns began to subside, "leisure demand returned quickly. This tells us that the desire to travel is just below the surface".
Of course, cases of COVID-19 in the US began to spike in Jun-2020 and have now reached a cumulative total of 5.5 million, growing from two million in early Jun-2020 to 5.5 million on 17-Aug-2020.
COVID-19: spread within United States of America
Mr Minicucci remarked that unlocking the underlying desire to travel that a large proportion of the public has "requires ongoing societal progress and cooperation through behaviours like mask wearing, better, faster and more reliable testing methods and improved treatments like a vaccine". He said that kind of cooperation is one factor that could lead to a continued recovery in leisure demand.
Alaska is also a strong advocate for "temperature screening and we are actively lobbying for screening to be implemented at airports by TSA [US Transportation Security Administration]", said Mr Minicucci.
The US lobbying and trade group Airlines For America, of which Alaska is a member, has been pushing for the TSA to start taking the temperatures of travellers at airports. At this point, the US ULCC Frontier Airlines is the only US airline requiring temperature checks systemwide for passengers, and company CEO Barry Biffle recently told USA Today that only a single passenger had been denied boarding due to a fever since temperature checks began in May-2020.
See related report: Frontier Airlines adjusts to uncertain realities spurred by COVID-19
Airlines will continue to push for widespread safety protocols as COVID-19 lingers on
Alaska and other airlines will continue to weather a level of uncertainty until a vaccine for COVID-19 is widely available.
The timeline for a vaccine remains unknown, and that makes the airline's conclusion a logical one - faster testing and a collective social effort towards the consistent practice of measures to block COVID-19's spread.
And some airlines will continue to push the government to take a role in that societal collective by taking the reins and implementing measures such as temperature checks. However diligent their efforts, there remains uncertainty as the industry makes its way through the pandemic.