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Incoming Alaska Airlines CEO Ben Minicucci will take the helm in March in perhaps one of the strangest years in the century-long history of commercial aviation. After a brutal 2020, the airline is looking at this year as one of transition with a recovery in the offing in 2023, provided enough people in the U.S. get vaccinated, that is.
“I think I’m optimistic with the Biden administration,” Minicucci told analysts during the company’s fourth-quarter and full-year 2020 earnings call on Tuesday. “[President Joseph Biden] just announced 1.5 million vaccines per day … it could mean we have 100 million people in the country vaccinated.”
“I think we might start seeing people venturing out for spring break, so I think we’re going to be cautious … I think we’re going to be on our toes and react appropriately,” added Minicucci, who takes the helm officially in March.
For most airlines, spring break — beginning in early March and through April, when many schools and universities give students a week off —marks the first significant travel period of the year, ending the lull of January and February after the year-end holidays in December. Alaska executives noted that December was weaker than expected as bookings dropped off in late November in response to spikes in Covid-19 cases around the country and as states re-imposed travel restrictions.
But whether enough people in the U.S. will be vaccinated by then remains an open question, and airlines have been cautious in their predictions. Public health officials have said that at the current rate of vaccinations could result in herd immunity by Thanksgiving, in late November. The Biden administration has committed to increasing that pace, as Minicucci noted, but logistical challenges remain daunting, and vaccination rates and eligibility vary by state.
Adding to Alaska’s uncertainty is that its route network skews heavily toward the West Coast, which has some of the most severe travel restrictions in the country. Alaska expects demand at its San Francisco hub to be only 68 percent of 2019 levels in the first quarter. Similarly, its business-heavy transcontinental routes to the East Coast are expected to be down 80 percent in the first quarter.
Leisure, Leisure, Leisure
But where Alaska sees hope in what it calls “fun and sun” routes, to Hawaii, Mexican beach resorts, and destinations in the West that center around outdoor recreation. “You’re going to see a lot of focus on the Pacific Northwest and the state of Alaska,” Minicucci said. “We’re moving our airplanes around to go where the stronger demand is,” added chief commercial officer Andrew Harrison.
Like all other airlines, Alaska thinks leisure demand will lead the way to recovery. “We believe there is substantial pent-up demand for leisure travel,” Minicucci said. But translating that pent-up demand to actual bookings will depend on the vaccines and how comfortable people are traveling.
Business demand, however, is weak, at only 15 percent of 2019 levels. Where the airline is seeing some business-travel demand is among commercial fisherman and oil-industry workers heading to Alaska. And, echoing Delta Air Lines and United Airlines, Alaska is seeing more business travel among small- and medium-sized enterprises.
Larger business, like its fellow Seattle-based companies Microsoft and Amazon, are not sending employees back on the road yet. “[Corporate] travel managers have to decide on their duty-of-care and how much friction they’re going to put on people to travel,” before there is a more robust recovery in that sector, Harrison said. Alaska expects business travel to rebound to half of 2019 levels by the end of the year.
The carrier is unblocking middle seats in its economy cabin, but to encourage business travelers back to flight, will continue blocking middle seats in its premium cabin through May 31.
Alaska also is pinning hopes on its recently approved partnership with American Airlines and its joining the Oneworld alliance later this year. Both these moves will help it expand its corporate sales by giving customers more options for international travel.
The Right Aircraft
In the meantime, Alaska is retiring the Airbus A320 jets it inherited from its merger with Virgin America. The carrier recently announced a 68-aircraft order with Boeing for 737 Max aircraft, to be delivered between now and 2024. In addition, the carrier has options to buy another 52 more.
Pilots currently certified to fly the A320s will be trained to operate the new Boeing aircraft, but Alaska did not specify a timeline for when that training will be completed. The carrier has parked 40 of its A320s, but it will retain 10 of the larger A321s for the foreseeable future.
“This fleet order gives us the chance to get back to full pre-Covid capacity in 2022 if the demand is there, and the potential for growth beyond that,” chief financial officer Shane Tackett said. Capacity — the number of seats an airline flies — was down 59 percent year-over-year in the fourth quarter and is expected to be 70 percent of 2019 capacity this quarter.
Each 737-9 offers 28 more seats than the A320s being replaced and offer lower operating costs and greater fuel economy than the former Virgin America aircraft, he added.
And Now, the Numbers
The future may be hopeful, but the present is dire. Alaska Airlines hemorrhaged money in the fourth quarter of 2020 and for the full year. It lost $430 million in the last quarter and $1.3 billion for the year. Revenues were down 64 percent in the fourth quarter to $808 million, and down 59 percent for the full year, to $3.6 billion. Daily cash burn was $3.8 million in the fourth quarter, a number Alaska has managed to hold steady through much of the pandemic.
The reason it could keep its daily cash burn at about $4 million per day is that it took early and aggressive measures to cut costs, Tackett noted. More than 10,000 employees took some form of leave during the pandemic. More than 3,000 remain on leave. The carrier has taken a total of $533 million in payroll support from the federal government through the CARES Act last year and the extension in December. Alaska is availing itself of federal grants to support the airline industry, to the tune of $400 million this quarter. The company has until May to decide if it wants to take a loan — a separate CARES Act financial facility — from the federal government.