Alaska Airlines Betting on Its Agility With Domestic Travelers for the Rebound

As some competitors warn of substantial furloughs, layoffs, aircraft retirements, route cuts and an overall aviation landscape that will look far different in 2021 than three months ago, Alaska Airlines executives sounded nearly chipper on Tuesday, arguing on an earnings call that they’re in better shaper than other U.S. carriers.

“We do believe Alaska is configured to be a bit more agile than the average airline,” CEO Brad Tilden said while discussing first quarter results. “I think we are going to be a little better to scale up and scale down, depending on demand.”

Alaska is betting on what has become conventional wisdom among U.S. aviation executives — that domestic demand will return faster than international, and that returning customers will seek the cheapest experience, not the most premium. It’s a major problem for big global airlines that a few months ago charged $6,000 for a flat-bed seat to Tokyo, but potentially favorable for Alaska, a short-haul carrier with non-fuel costs 20 percent lower than a major carrier’s, according to its calculations.

Alaska has some history on its side. After a typical downturn, domestic leisure passengers often return first, with customers trading down to low-cost-carriers, rather than giving up vacations. They may buy fewer ancillary products to save money, but they still fly. Meanwhile, businesses can be more cautious, reducing spending on travel until the economy markedly improves.

Of course, this is not just a recession. It is also a massive health crisis that has made many passengers scared to fly. Still, some of the same may rules apply.

Executives at many airlines suspect U.S. leisure travelers, many of whom have been stuck at home for two months, may want to resume traveling as soon as they can, even if health risks remain. However, they fear businesses could remain more cautious, both for financial and health reasons. No company wants to send a traveler on a trip and have employee contract a potentially life-threatening illness.

There’s also the matter of the health implications of long-haul flying. Many countries have closed their borders to outsiders, and those restrictions may not lift soon.

“We also like the fact that our business is more oriented toward leisure travelers, and our business is more oriented toward domestic travelers and narrow-body travelers,” Tilden said.

Numbers Still Not Good

For all the happy talk, Alaska is facing nearly similar challenges as other U.S. airlines, after losing $232 million in the first quarter.

The airline continues to see slightly more cancelations than daily bookings, and is burning cash at an alarming rate, spending about $260 million per month. At this rate, they said, they would run out of money in about 11 months.

Executives say they have a plan to reduce spending further. They told analysts they can reduce cash burn to about $200 million by next month, or about half of what it was in March. By year-end, they said, they suspect they can reach a break-even point through a mixture of more cuts and improved bookings.

For now, though, demand remains “essentially zero,” executives said, and if that keeps up, reaching zero cash burn would not be easy. But Tilden he argued it’s necessary, even if it might be “painful” to get there.

“If we can get to zero, if we can commit to a zero cash burn rate by December, we’re in control of our future in 2021 and beyond,” he said. “If there are opportunities that present themselves on the landscape, we can take advantage of those opportunities, we can mitigate the downside.”

Alaska will continue to raise money, and may take more than $1 billion in government loans. But Tilden said the airline can’t take on too much debt.

“We hope we don’t come out of this with … an enormous amount of debt on our balance sheet,” he said. It’s going to be a high number. We just don’t want it to be $6 billion or $7 billion of debt on our balance sheet. That would be a difficult thing for us to manage.”

Smaller Airline

Alaska may eventually go on the offensive, but it’s already a smaller airline than before the crisis.

The airline has retired 10 Airbus A319 jets and two A320s it inherited from Virgin America, leaving it with 225 jets. More than 150 airplanes are now in short-term storage, the airline said, as Alaska is flying 80 percent capacity less than it expected.

With the airline shrinking, Alaska might be expected to furlough pilots, many of whom may not be needed during the recovery period. United Airlines has already warned pilots that several thousand may temporarily lose their jobs, beginning in October.

Alaska is going in a different direction. It will use this down period to train 240 Airbus pilots to fly Boeing 737s, the airplane that accounts for the bulk of Alaska’s fleet. If the airline grows in the future to take advantage of improving demand, executive said, it will probably add 737s, rather than Airbus airplanes.

“We have very limited flying and a full payroll,” Tackett said of the decision to retrain pilots. “It’s not totally free, but it’s close to free trading at this point.”

What Might Recovery Look Like?

While Alaska executives argued they’re better positioned than competitors, they’re under no illusions they’ll see a V-shaped recovery.

“We’re certainly modeling a range of 2021 demand assumptions right now, all better than we see today, but certainly much lower than we saw in 2019,” Tackett said.