We recently issued an updated report on Alaska Air Group, Inc. (ALK - Free Report) .
Like many other transportation companies, Alaska Air is hit by uncertainties related to the COVID-19 pandemic.
Alaska Air witnessed significant fall in air travel demand in the wake of the coronavirus outbreak. Consequently, the carrier incurred an adjusted pre-tax loss of $102 million in the first quarter due to a 14% decline in passenger revenues. The company anticipates second-quarter loss to be much wider. The airline reduced its April and May capacity by 78% and 79%, respectively. In June, capacity is expected to be 70-75% below the year-ago quarter’s levels. Despite modest week-over-week improvement in demand lately due to easing travel restrictions, demand is likely to remain significantly low for upcoming several months. Escalating operating expenses are worrisome due to low passenger revenues. Notably, operating expenses rose 6% year over year in the first quarter with costs on wages and benefits increasing 10%.
Moreover, Alaska Air received $992 million via the payroll support program under the CARES Act. While $725 million of the above amount will be through grants (it doesn’t have to be paid back), $267 million will be via loans. The company has applied for $1.1 billion in federal loan funding through a separate program under the CARES Act. This is likely to worsen its debt profile.
Nevertheless, declining fuel costs are a positive amid this global crisis. Notably, fuel prices declined 9.4% year over year in the first quarter. The savings on fuel costs should drive the bottom line.
In sync with consistent cost-reduction strategies, the company has reduced its monthly cash burn rate to $260 million in May from $400 million in April. By June it aims to lower the rate further to $200 million and hopes to reach breakeven by the year-end. Additionally, the carrier reduced discretionary and overhead spending by approximately $50 million per month.
Zacks Ranks & Key Picks
Alaska Air currently carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the Zacks Transportation sector are Air Lease Corporation (AL - Free Report) , Herc Holdings Inc. (HRI - Free Report) and Teekay Tankers Ltd. (TNK - Free Report) . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-term earnings (three to five years) growth rate for Air Lease, Herc Holdings and Teekay Tankers is estimated at 3.1%, 1.4% and 3%, respectively.
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