Q1 2020 Earnings Call
Okay. So.
Exactly.
After the speaker's remarks, there would be essentially the answer session for animals.
If you wish ask question. Please press Star then one unusual to keep that.
If you like to withdraw your question personnel.
Thank you for dogs critical due to Alaska Air group's director Investor Relations.
Oh person.
Thank you Chris Good morning, and thank you for joining us for first quarter 2020 earnings call. This morning, Alaska Air Group reported a first quarter GAAP net loss of 232 million, excluding onetime costs and mark to market adjustments Air Group reported an adjusted net loss of 102 million onetime.
Costs incurred this quarter include approximately 160 million of asset impairment charges that were triggered as a result of the significant decline and demand for air travel and market conditions. These impairments included approximately 145 million of aircraft and aircraft related parts as well as approximately 15 million of financial and intangible asset.
On today's call, Brad Ben and Shane will be discussing the impact of cobot 19 on our business and sharing details about our response to the economic and health crises.
Several other members of our management team are also on the line to answer your questions during the Q and a portion of the call.
As a reminder, our comments today will include forward looking statements regarding future performance, which may differ materially from our actual results.
Information on risk factors that could affect our business, which were updated today can be found in our SEC filings.
On today's call, we will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel and as usual we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures and today's earnings release.
Now I'll turn the call over to Brad for his opening remarks.
Thanks, Emily and good morning, everybody. Thanks to all of you for joining us for first quarter call. This call comes at an unprecedented on for our industry.
Many people have lost loved ones were distance from their family and friends and others have lost confidence in the future because of concerns about the economy for their own financial situation.
People are justifiably fearful about the future.
In the base of one of the greatest challenges in the history of aviation.
Our people at Alaska, and Horizon are doing extraordinary work to respond to these circumstances.
Pilots.
Flight attendants customer service agents ramp service agents mechanics, and others continue to come to work and be their best.
Extremely difficult environment.
They're carrying for gas was kindness, well delivering safe and remarkable surface to those who are traveling.
All of US on the leadership team are grateful for their dedication.
[noise] also want to thank the very dedicated leaders at Alaska and horizon, including folks around this table, who are wholly focused on responding to these crises and preparing alaska to sustain itself and grow stronger in a highly uncertain future.
Their commitment and their loved for what they do and for this company give us all confidence at Alaska is going to come to this crisis stronger and better.
We would just going to use our earnings call to discuss our performance for the quarter to provide an update on our strategic efforts and does your guidance for the remainder of the year.
But that does not make sense today instead, we'll be sharing with you what we know at this juncture, how we're thinking about future scenarios given the macro uncertainty.
And how we plan to bridge, what is essentially an economic closure across our country do a future, where Alaska is stronger and better and fully prosperous.
As Emily mentioned, we incurred an adjusted pre tax loss of $102 million for the quarter.
This was the result of a 14% decline in passenger revenue driven by the near complete Lawson demand that we began to see in early March.
This is our first quarterly loss in over a decade and it is sobering to report.
There's no doubt that our second quarter loss will be much higher there's by very high uncertainty about the third and fourth quarters.
[noise] safety has always been our top priority. This crisis has caused us to review and improve our procedures.
We've been plump implemented several changes, including expanding and enhancing the cleaning up our aircraft, including the use of high grade registered disinfectants and electrons and electrostatic sanitizing spray.
We are requiring our flight attendants and see assays to use mass, we're limiting load factors and seed availability.
Modified boarding procedures to encourage self scanning a boarding passes into encouraged slower boarding to prevent crowding.
And we suspended or reduced most in flight services.
Additionally, beginning next week mass will be mandatory for I guess.
These changes can be difficult first for both guessing crews, but our teams have handled them with professionalism.
We anticipate further changes to our policies and procedures in the future and we will continue to be industry leaders with health and safety standards.
As we think about or industry air travel more broadly we're highly confident the people in the future want to physically connect with one another and see other places. We're also very confident they will value when airlines that offers them safety low fares and the type of personal hospitality you would see from a family member.
As you know we have taken and are continuing to date aggressive action to preserve our financial position.
Shane will detail all of this we've acted swiftly to build on our already strong fortress balance sheet and to make some very difficult decisions to manage our cash burn rate.
We've gone from a monthly burn rate of $400 million, one month ago to approximately $260 million today and our commitment is to get to $200 million by June and the breakeven by year end.
Just two weeks ago, we received $992 million in payroll support from the federal government.
The program was the result of decisive bipartisan action on the part of our federal leaders and we very much appreciate their efforts to provide direct support the airline employees.
The passage of this bill demonstrates one of the bright spots that exist during this crisis.
Opportunity for all sides to come together and work toward a common good.
We're thankful for the efforts of the President and his administration.
Congress secretaries manoogian and shall.
All in many others for their efforts and provided as vital support to help our industry and our economy, whether this downturn.
While our full attention is focused on the situation on hand, we've always operated with our eyes on the horizon and that focus continues today.
We have been historically and our today financially conservative we're proud to be the only pre deregulation did not have filed for bankruptcy.
Throughout history, our people have worked our way through challenge after challenge and we've gained new skills and capabilities as we've gone along and we've come away from these challenges better and stronger.
We have every belief that will be the case. This time and we are fully focused on this outcome.
With that I'll pass it to Ben.
Thanks, Brad and good morning, everyone.
I want to begin by sharing a few of the facts we know.
Our home based Seattle was among the first places in the country to be hit by the pandemic.
Washington.
[music].
Let me gatherings and close school.
Good morning was the first.
Mandates.
These communities and their leaders have shown recursion handling the situation.
While necessary these actions had a significant negative impact on our business.
As many of our largest hubs in these two states we began to see signs of the man deterioration in late February or.
March 11th we saw cancellations overwhelmed gross new bookings for the first time ever.
That's experienced 56 days of net negative bookings.
The largest waiver cancellations appears to be behind Us However, daily cancellations and do continue to modestly exceed gross new bookings.
We are attempting to gradual improvements in our daily passenger counts, which remain 90% below normal levels are showing very modest week over week improvement.
In March we reduced our capacity, 12% versus prior year, primarily through close and cancellations and consolidating frequencies. Soon after we cut April and may capacity by 80% and expect to come June flying Similarly, as well the top near term challenges, we face is to reduce our current.
Cash burn rate of 260 million to 200 million per month by Jim and to achieve our commitment for cash breakeven by year end.
To do this we will lean heavily into our competitive advantages because it is impossible to forecast the shape of the recovery with any certainty. We are planning potential courses of action from multiple recovery scenarios. There are several factors about our business model and our competitive advantage that I believe will benefit us any recovery.
Scenario.
First we have built our business to have structurally lower cost than our competitors.
Alaska has a history of managing a low overhead high productivity operation.
And this remains a guiding principle going forward.
CASM ex fuel is 20% lower the legacy airlines, which enables us to compete more effectively with low fares.
More than ever we see a future where low fares and low cost and matter and we have resolved to strengthen our cost advantage as much as possible.
As Brad mentioned, we've received payroll support program funds from the federal government.
These funds cover approximately 70% of original budget payroll through September thirtyth and allow us to keep employees on the payroll while the airline is operating at significantly reduced capacity.
This relief affords us more time to be thoughtful about restructuring decisions and how we will shed costs.
It also presents opportunities to redeploy management employees and crew, whose work has slowed due utilizer time with purpose where possible.
For example, many management employees have been redeployed to other divisions are the clean aircraft and on the crew side. We're taking advantage of this shortfall in demand to retrain Airbus pilots in bowling pilots to avoid both opportunity costs and economic cost she is going to share more detail on our cost saving opportunities that we're planning for.
Second we have strong comps and some of the best customer loyalty in the industry.
Even with passenger count significantly down the loyalty of our guess shines through.
We welcome words of appreciation and person and over social media from travelers have the need to travel, including medical personnel loved ones going to meet and care for family members and employees.
Some work requires them to travel for essentially reasons.
In fact, I guess recent communications and positive sentiment across social media was recognized last week, but the airline passenger experience Association has the best in the U.S. airline industry.
And third.
Our network orientation, and our fleet are well suited for the recovery ahead.
It is likely that recovery will first bias towards domestic travel are limited international exposure in our fleet of narrow body aircraft will be assets in this scenario as.
As you know we began a full fleet analysis last year.
Crisis, I made an imperative that we take a fresh look at our long term plans to ensure we select the best most efficient aircraft for our future state.
This will be another important aspect of our cost restructuring.
Finally, our employees our line of their commitment for the challenge ahead.
Alaska has experience being an underdog and we are battle tested today, we faced new challenges and the gravity of those challenges is understood.
People.
Each day of this crisis I'm struck by the dedication I see throughout the organization.
Bruce I've worked together with leadership and experts and evolve our guest facing health and safety policies.
Our call center employees have supported thousands of guests were challenging transactions and issues, our finance legal communications and government affairs teams have rallied from many long work weeks as we navigate changing business conditions.
As of employees across the company show their support through letter running to the best Treasury to help obtained industry support.
Well the prospect of a smaller industry and potentially smaller companies that's something we would have wanted.
We are realistic about the challenges ahead, we have more fight in us and we will do what it takes that make Alaska emerged stronger.
As always we're focused intently on controlling what we can control.
One of our control, but also important is understanding what will influence demand recovery time.
The name a few factors travel restrictions and stay at home orders that are likely to be lifted at different times.
Unemployment and broader economic trends and evolving public sentiment about whether to travel for what reasons, we'll all be considerations our roles to have robust plans for any scenario, we may encounter communicate honestly with our people about those plans.
Execute against us in excess of our ability.
We commit to doing that over the next several months.
Things become clearer.
Sure emerge from this crisis a stronger.
Okay.
That means getting to zero cash burn by December and setting up the conditions to control our destiny.
I'm going to pass over to Shane.
Thanks, Ben and good morning to everyone. Joining us my comments will focus on why we are confident Alaska will bridge. This period of no demand and continue forward is one of the industry strongest performers.
Appropriate place to start that discussion is cash on hand, and our remaining capacity to create additional liquidity should we need it.
We began 2020 with $1.5 billion in cash and marketable securities to which we added 400 million from existing lines of credit 425 million from a 364 day term loan and subsequent to the end of the quarter, we added an additional $50 million unsecured financing.
In April we received $992 million for payroll support the cares Act.
Together that totals $3.35 billion today, we have approximately $2.9 billion of cash and marketable securities on hand, meaning we burned about 467 million of cash from the beginning of the year.
Our cash burn rate is a critical figure that we are managing aggressively and today. It is about 260 million per month with demand at essentially zero. Our 2.9 billion at this rate of burn would sustain us for 11.2 months. However, we intend to increase how long are cash for last our commitment as Brad in bad have.
Both previously indicated and as I will reiterate now is to achieve 200 million cash burn by June and to reach cash breakeven by the end of year. We know this will require significant work in hard decisions on cost removal and restructuring.
While we are very focused on managing our cash Burns. We also have multiple channels, we can tap to add further liquidity to our current $2.9 billion, including.
More than $2 billion of high quality unencumbered aircraft banks and investors. We've spoken to have indicated interest in lending against these assets with reasonable terms, we have an additional 500 million of real estate and fought assets that we can borrow again, we have a very valuable loyalty program that can be tap for liquidity, we have available to us as much.
Just 1.12 a billion in cares acts loans.
And although in the category of having no current plans to tap we believe our equity would be a very high interest to investors as well.
This $7 billion to $8 billion of collateral and 1.1 billion of carriers Act loans, we believe represents well in excess of $4 billion of incremental liquidity potential.
Taken together, our on hand liquidity, our access to additional financing and our aggressive goals to reach cash breakeven results by the end of the year will ensure that we bridge. This downturn and are prepared to rebuild our success during a recovery.
The increased debt load that will result, as we navigate this crisis is obviously not our ideal long term set up.
While we are first and foremost focused on ensuring the survival of Alaska when the industry stabilizes, we will return our focus to repairing the balance sheet just as we did post Virgin acquisition.
To discuss cash reduction and preservation efforts I would share the following we've right sized our schedule commensurate with demand and have seen a very strong linear reduction in non wage variable costs, we have reduced discretionary and overhead spend by nearly $50 million per month, we have deferred nearly 600 million of capital expenditures for 2020, bringing our play.
And capex to under $175 million, which includes no additional aircraft capital spending we have suspended share repurchases and dividends, we have it reduced executive pay reduced management hours by 10% and have over 5000 employees, who have opted to take unpaid leaves for at least the next 60 days.
And we have also implemented extended payment terms and sought and in many cases achieve payment relief from suppliers.
I'd like to elaborate on a couple of these items first as mentioned we've dramatically cut capacity in Q2, and anticipate operating or reduce schedule for the balance of the year.
As a rule of thumb I view, our non wage variable costs to represent 50% of our cost structure.
Most of our operational contracts do not have minimums, and so scale almost perfectly although I acknowledge under the current climate. This has been extraordinarily difficult on our suppliers.
Wage costs, our largest cost pool and tend to be less variable our frontline workgroups all have minimums within their contract that ensure they receive a certain amount of pay.
We have adjusted down to those minimums, which reduces payroll by about 10% and in partnership with our Union leaders. We have also entered into other agreements that allow and incentivize employee employees to take leaf, which as mentioned represent over 5000 people currently.
With these efforts I expect payroll costs will be down 30% from planned for at least the next 60 days and we expect our cares act payroll support funds to cover the vast majority of our payroll through September.
To date, none of these changes are structural and the remained significant work to be done to achieve any longer term changes.
Wage costs.
Turning to aircraft given the temporary grounding of a significant portion of our fleet and our initial assumptions about demand over the next several quarters. We have determined that at least 12 mainline aircraft would be permanently parked, including 10, Athree nineteens that were among the smallest and least efficient aircraft. We have in two leased athree hundred twentys that had not yet.
Bid reconfigured to our new interior.
Rest of the parked aircraft are being stored and maintained so they can re enter service, we will make decisions about when and how many of them do returned to service in the future.
So we are working all the cost levers hard to drive towards our commitment of zero cash burned by the end of year.
And to clarify our cash burn rate does include the impact of refunds and cancellations and excludes the impact of cares Act payroll support funding and additional financing. It does factor in all of the self help I've just described.
Reaching our goal of 200 million cash burned by June and cash breakeven by the end of the year will require more work on our cost structure, but I believe we will get there are people attack tough goals like this with intensity and commitment.
And I believe that all 23000 of our people understand that if we can achieve breakeven cash burn rate our destiny us back squarely in our control, which means we are also in control of building towards a better future again and with that let's go to your questions.
Thank you.
I must remind everyone.
Question stowed one.
You have to withdraw your question that's how the attached.
This question.
Great and James.
Hey, good morning.
Just on the as kind of getting to cash for in fear of a breakeven by the end of the year I Wonder if you can elaborate a little bit more on that and you know is that how much of that you expect it comes from the revenue side.
You know and then on.
Depending I'm guessing all on the kind of demand recovery, what kind of physicians and how quickly could you scale to that.
Yes, hi, savvy a chain good morning.
The way I want to talk about the cash break even as its an objective that we have to get got too. So we look at the recovery is having the cross through zero, we've got to get there we've put a marker out in front of US eight months from today, we actually don't know the exact path to get there. We don't know exactly what revenues going to be but what were.
Thinking is regardless of the revenue environment, we've got to make the decisions necessary to take the actions to get to cash breakeven.
Obviously, we'll talk to you all a lot more as we get through some of that decision, making process and have better clarity about what Q4, it looks like but we're not relying on any particular revenue outcome to get there.
On the scale question I, just want to make sure I understand.
Are you thinking about if demand is better than we're thinking or I, just want to make sure I understand.
Yeah, and then clearly unless we have a V shaped recovery you have a lot of kind of difficult positions in front of view and just how quickly you scale the operation to send a near demand level is there.
Reality on like how how quickly you can scale that.
And guessing that some of the biggest fixed costs and how do you get it to kind of a new level of demand if we don't see any shaped recovery.
Yeah, Yeah, if you're talking about like sort of scaling down I mean I think.
I think we.
Don't know exactly how long that's going to take I think theres.
Part of our business like I mentioned, 50% of which is variable. It just moves with the operation we've been really happy see those costs almost perfectly linear with capacity.
There are 50% is payroll and a lot of just overhead and fixed costs the overhead and fixed cost that we can make decisions on those are tough, but we can act on that quickly I think it's really when you talk about the size of the company and how many people. We have that's something that takes more time that something that we've got to go talk with our labor leaders.
As about and sort of work through over the next several months, but the most important thing is we've got to know what size of the company. We're aiming for and we just don't know that as we sit here today.
That makes sense and if I may just clarifying question on the on the cost.
That's really helpful to have the kind of the cash burn.
Slide, but on the kind of the piano standpoint, and what do you expect cost to be in into Q generally.
Yeah, we I.
Like unit cost I don't think we're providing any guidance due I think just overall, yeah, yeah, I think savvy the.
The the 50% that's variable linear I think you can calculate very very closely just given our capacity.
And then we're not really quantifying the other side of the business or revenue at this point, if we do will be clear about that in the Medicaid or something that makes you guys you guys know that.
Alright, thank you thank savvy.
Your next question was for Mike Burton.
The other data.
Yeah, Hey, good morning, everyone. Just I guess two here on the payroll support program the 992.
I believe you called out that you could potentially get something for Magee I know that small, but every dollar matters and the 92 that you guide.
It seems like you got it in one installment I know other carriers are getting it in two or maybe more installments I'm curious why you're able to get all that and then I have a second question.
Thanks sure Mike the same they Shane.
Hi, the Treasury gave us the option of taking it in a couple of installments are all at once.
We looked at it closely we Didnt think there was a real difference theres no. It's not a different amount of money. There is no different in terms and so we decided to take it all at once I think a couple other carriers may have and some have taken it.
And installments, but there was just a choice given to us. So we took it all at once.
Good.
Oh, yes, sorry, Im Magee Mcgee's in process I believe on the payroll support grant there were well over 200 250 applications. The focus was sort of the largest carriers to begin with they're in that process. I think we expect to hear back from Treasury sometime this week.
I think there sort of qualified amount was around 40 million.
That would be if they got 100% of what they applied for nobody is getting 100%. So it's hard to know exactly what they'll get but but they are in line to still receive funding from the payroll support portion of the grant.
Okay, Great and just my second just reading between the lines.
Training Airbus pilots to fly Boeing Jets, and putting Airbus planes on the ground I guess, it's probably safe to assume that the fleet decision is being made in real time I guess the one issue is the Athree 21, Neos did you have any additional on order that were expected to come in or have you taken all the the newer.
Airbus is just thoughts on that and maybe any additional color you can talk about the fleet decision because again it looks like it's being made in real time. Thank you.
Mike I might start and go to bend that was a good three question one question.
Sorry.
Good morning, you know more Athree 20 ones on order, we've taken the 10 okay.
And so that that's the answer to that.
I would end Ben can talk more about our thinking about fleet and sort of what we're doing.
When I just want to conduct a couple of things. We are training 240 pilots off the Airbus onto the Boeing that is really a byproduct of the fact that we determine these 12 aircraft I'm going to fly again, and if we do decide to backfill that capacity at some point, we expect that that capacity would be backfill by boeing's that.
We have on order today and so it just it was prudent to do that we've got very limited flying we have full payroll we have pilots that.
We have the opportunity to get into the.
For the training school house without cost in this growth. So there is no opportunity cost him.
It's not totally free but it's close to free trading at this point. So it just made a lot of sense to marry that those two decisions up to par those 12 aircraft and train pilots over but then may have more to say on future fleet.
Good morning, Mike.
Ben.
Turning as you can imagine we're doing a lot of modeling with different you know I'm.
Structures and.
Just to give you a sense of what's guiding US is look we have zero cash burn rate goal that were.
We're aiming for and also we're going to restructure the company that well costs.
A dual fleet does have a higher cost for us. So that is a factor we're going to consider the.
The Airbus 321 is a great airplane, we like going a lot we're going to bring all these factors together, we're going to look forward to the future. We look how we're going to.
Reconfigure Ah this company for the best success, So a lot of things and play and as the months play out we'll get more clearer on what our direction.
Great. Thank you thanks, everyone.
The next question is Joseph Denardi Stifel. Your line is open.
Hey, good morning changes on the on the tax burden.
Im assuming that the 200 million by June assumes kind of a similar revenue environment, what you're seeing now what can you get that too by the ended the year.
This revenue environment continues just so we can.
Think about things apples to apples.
Yeah. Thanks, Joe It does.
Initially assumed.
You know demand is similar to what we're seeing right now.
Hi, I'm not going to hypothesize about exactly where we would be if there was literally zero demand at the end of the year.
We're very focused on getting the cash breakeven thats, what were sort of putting in motion that's where.
We are forcing ourselves to look at different scenarios and make make decisions and.
It's just there's the range of potential outcomes and Q4, so wide it doesn't make a lot of sense to hypothesize on where we'll we'll end up especially on the revenue side did you know, it's Brad I might jump in that that's the way we got to that is that's what we believe is required for us to be able to control our future. It's like all of these airlines we.
Got decent liquidity Shane detail, we've got good plans to raise liquidity, but that that gets us to a finite number and then you have a burn rate and.
At some point you do have to take control of your future. If you want to control your future and so that's our metallic is we've got it 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 and if there are opportunities that present themselves on the landscape. We can take advantage of an.
Cities, we can mitigate the downside so it's gonna be painful we believe is going to be painful, but there's just a lot of belief in the goodness of making a commitment like that and the good things that will come.
Another point it was going to you guys are asking good questions savvy and Mike as well, but we do believe alaska's configured to be a bit more agile than the average airline if you look at US right now our fleet is all it's basically on the Alaska side is all narrow bodies as Mike pointed out we're moving now 20 or 19 or 20 Airbus airplanes to Boeing So I think.
Going to be a little bit more.
Able to scale up or scale down depending on the demand that we see that some of our competitors I think we also like the fact that we are business is more oriented towards leisure travelers and our business is more oriented towards domestic travelers and narrow body travelers. So all of that so sort of in forms as we believe that.
We consider sort of sit here and say I, we don't know level blob, but we think that if we sort of defined the future that we need to have we think we can get there and we think if we get there will be in control less bad fewer bad things will happen to our people and we'll be in a better position to take advantage of opportunities that we see so that's something that's some more thinking around the goal.
That's very helpful. Brad.
Shane you mentioned 2 billion of unencumbered aircraft 500 million a real estate and then seven to 8 billion of collateral to does that imply that the loyalty program has got to 5 billion.
You know did that surprise you and what do you think being kind of the is it safe to assume that that would be the last line of liquidity that you look access. Thank you.
Yes, Thanks, Joe I think yeah, I think the math is probably fair because you sort of added up the only asset I Didnt put a price tag on so fair enough now I think it's that we've known it's a valuable program for a long time.
In terms of.
You know what our order of preference of raising money is I honestly, we're not in a position to share what that is right now we're still working on what's the best opportunities and options are for us.
There's a number of different vehicles, we could go down the path of tapping mileage plan is one of those and if it's on the table but.
Theres no certainty about which one will do at this point.
Thank you.
Thanks, Joe.
The next question is from June JP Morgan.
Hey, good morning, everybody can you just sort of comment as to how the negotiations with treasury are going when we might have some timing.
Around the loan outcome and also as a follow up to the previous question did you specifically list loyalty as Europe.
Asset on the loan application that you are willing to pledge.
Yeah, Hi, Hi, Jamie achieved again.
I would just I'd start by saying that the discussions with treasury and their advisors.
On the the very beginning on the payroll support graph through today have been.
Very very productive Super professional it's a great group of people back they're trying to do everything they can said.
Support the country support the economy give it away back in the future in there that's probably nobody working harder right now than that group of people back there.
On the loan side it has been in a bit of a low we didn't talk last week with treasuries advisors I think the varian intent on beginning to get more clarity on what these loan terms and conditions and collateral will look like in the coming weeks. So we anticipate.
A more active dialogue in the next five to 10 days.
Yes, we did list the loyalty program listed essentially.
Most of our asset base, which was sort of expected to be lifted just based on the way that they gave us the application those are all options of collateral regimen will shortly.
TBD on what we use.
Okay and then.
Following Mike's footsteps, so I'll try to do only a two part follow up question. So so on fleet and I apologize. If you mentioned this in responses question was breaking up a little on my end, but have you reached the walk away point in the Max contract and how should we be thinking about that as it relates to.
Future Capex and then second.
In the release you mentioned lease deferrals can you add any color on that is to the duration and when repayment is going to take place is you know I'm sure. It's in your your cash guide that you use that to a net cash savings for the year or did you just shift what lease payments from the second quarter to the fourth.
For example.
Jamie it's not paper.
Hey, let's start first with the Max question, So boeing's been a terrific partner of ours for years and years.
Our original order for the Max 32 airplanes, and Boeing has got a considerable amount of predelivery deposits on hand.
Of ours, we're working with them and sorting through what the rate scenario is good.
I think that's part of the fleet discussions and analysis that we're having internally to figure out what's the most efficient fleet for Alaska moving forward regarding the least deferral discussions we started those really in the second week of March and has had pretty good traction.
Very diverse lease base within Alaska and have been able to secure at least deferrals with all but two of our less orders and are.
Appreciative of the partnership with them.
Thank you Jamie as a 12 month process, so deferrals that we get.
Eventually within that 12 month window, we're going to repay those amounts with the exception of discussions with each of those less or should the revenue environment continue to be super challenging they understood from the beginning we may have to come back and have a second bite.
Okay. That's perfect. Thanks for the clarity take care.
Thanks, Jim.
Your next question it's Rob.
No.
And things very much operator in high everybody. Thank you very much for the time to here's one question for you.
I think horizon received money and so did skywest and they're both providers to you have you gone to them and asked them for their.
The payroll support program cash that kind of directly.
A tribute to your business.
Hey, Helane its Andrew.
Obviously horizons wholly owned subsidiary so.
That money comes to a group and I will tell you just go west has been a fantastic.
Along all of this Dave we've looked at our contract.
And they've helped us through this financially and.
We also they costs labor that they incur.
On to fly for us those.
Those care funds have been flowed through to us.
Contract.
In Helane. This is Chris this is Chris very I would say, we also having the same discussions with ground service providers and other contract.
Folks out at the airports, we have also receive those gears grant so we're having those conversations.
With all of our vendors that have received some form of federal support.
Right, because otherwise stayed kind of be double dipping.
And then my other question is do you do you.
You know are you changing your operations have been field to kind of focus back on sea Tac given how low demand is and the other part of that question.
Yes.
Siano was one of the first cities to experience.
The virus and I'm, just kind of wondering if as Seattle and the state of Washington in the state of Alaska has opened up a little bit have you noticed any recovery in bookings.
Helane Andrew again.
Just with respect to paint field, we've obviously materially reduced capacity just like everywhere else.
We run 175 airplanes out of their very low costs per se on where we just keep the bare minimum service there and that's where we're at right now we have a lot of folks really bumping around that area.
They enjoy the travel out of there so thats what were doing that.
As you heard on many out would be analyst calls.
Weve reached the bottom I mean, the bottom is the bottom, obviously, but I would say that although extremely modest.
We continue to see passages carried every day on out network growth, a little bit by little bit Diane and die out, but it won't be until days I material change in the.
Stay home orders that we expect to see any material shift in that so we still heavily reduced demand.
Diana do you want to talk about what's happening in our say the other important geography is in terms of where we think shelter in place orders are and so forth sure. He helane its staying in a brick Iraq lightly extended release at Alaska.
We have seen the curves out here flatten.
But like the rest of the United States, They havent necessarily gone down and our leadership out a lot of our west coast.
Hi States have worked together to have sort of this four phase approach that said, we haven't actually opened up significantly Washington State is still in phase one we've opened up construction.
As of today outdoor recreation and some other areas, but not significantly opened up in terms of the workplace or groups gathering and then in California Governor needs them, just announced that Friday, we will move into phase two of the four phase approach, which means that some barbershops retail open to sidewalk delivery. So many.
Factoring workplaces and again construction, but we have a way to go in terms of sort of truly opening up the economy.
Every state kind of going or taking their own approach, but the way that we think about it is both where what is the state of play in our hub and what's the status.
Respectively, and within the state of play sort of at the other end of that spoke.
Then just for Alaska, and Hawaii, Theres still some quarantine restrictions.
So we're watching each of those days closely.
And that's really awesome. Thank you very much for this detailed answers I appreciate it.
Thanks, a likely.
The next questions, We've got 30 day with Goldman Sachs.
Good morning, everyone. Thanks, so much for the time.
A couple of more on your Casper bigger I'm, sorry to belabor point, but so first on that.
Month of June.
What does your assumption on revenue are you assuming receive less refund improve from where we're turning today or you're assuming no no improvement there and then maybe just one more on that break even year on cash burn figure I wanted me trying understand that you know if demand was remain current level would you Bill would you be able to take out.
Just to get the.
Thank you break even or or you know I realize it.
Any more questions and answers on recovery, but just thinking if you had just wondering if you do have the tool kit that breakeven, even if the manpower to stay down here. Thanks.
Hi, Acadia chain.
Yeah on the on the June number I would just say, we're assuming that it looks very similar to April and may to be honest, so no no real recovery.
It would be great. If we sell for demand pickup and people start to book travel for later in the year, but we're not necessarily counting on that.
On the you know, what if sort of scenario I'm not going to.
Sort of go down that path very far except to say that there's no scenario under which we're assuming we can't get to our target and so it's up its incumbent on us to go after it as hard as we can and to get there.
And we're not going to take you know that that goal and commitment off of the table I'm.
Certainly not not as we're sitting here talking today and so.
Lots to be seen on.
Where that May end up in terms of Q4 revenue, but our job is to go work that thing. So we can control and get ourselves to cash breakeven for all the reasons as Brad said.
Okay. Great. Appreciate that thank you and then can you walk I'm sorry go ahead, sorry, no, which then thanks Oh.
One more sorry, so can you walk us through how you're thinking about additional liquidity read the so what type of demand recovery scenario are you, making contingency plan for in terms of those future potential liquidity ready the.
And I guess I'm, what I'm really trying to get a sense of is how many months liquidity are you comfortable having on balance sheet, assuming that we don't see an improvement from cover at current levels and end demand over the medium term. Thanks again.
Yeah, no. Thanks Katy.
Yeah, I think you know for us and I think others.
Gone before as I've said that Theres, a real asymmetrical risk with you know should you get more cash onto the balance sheet or should you not and so our bias as you know more liquidity is not going to be something we regret at the same time I think what we're trying to also be very clear about is we don't want to burn through that.
Cash in a perfect World, we know we're going to burn through a lot over the next several months, we know will burn through a lot in 2020, we would like to get to any equilibrium you know as we get into 2021.
And then hopefully demand stabilizes the industry stabilizes and we don't have to sort of burned through anything else that we can pile on the balance sheet, but our job number one is to make sure. We're here that we bridge this downturn and that we have an opportunity to take advantage of any potential opportunity on the other side.
Shane all that burn that's just that's if you raises a liquidity and get your burn under control you pay the liquidity often you're in good shape. If you don't manage your burn it just debt that that burden settled the company burdens the company for.
Okay. My own thing is I think we're going to be aggressive on the fundraising side I just think that's the that's the personnel in the profile of Alaska Air Group, but we hope that we don't come out of this would like.
I don't want.
A number but in an enormous amount of data on or about where it's going to be a high number. We just don't wanted to be $6 billion $7 billion of debt on our balance sheet that would be a difficult thing for us.
Managed with so thats why managing our burn rate us on board.
That makes a lot of sense. Thank you.
The next question it's okay.
Princeridge, let's open.
Hi, This is actually Mike Mondrian for Hunter.
So I saw bigger beginning operates in tag flights, which I assume is due to the deal team entering service requirements can you just talked a little bit about what that's doing pure operation and is that the tends to how your network might look.
Post cold it.
Yes, hi, Thanks This is Andrew.
We.
Really 'em, we only on us or exemptions for a couple of cities.
But the tagged flights and also what we call Lukas, where we sort of do a little bit of a circle.
These are a very efficient way.
To serve multiple markets when there is low demand and instead of flying you know two flights we can fly on one single aircraft the way the crews working right now.
We can easily.
Our crew times within those trips and and of course crews will stay over in the hotels, especially on the Transcons and then come back I think we launched about 11 markets. This month and we're going to be doing some more but I think you know in this time, we are going to be looking at how can we served as guests to give a maximum utility.
At the lowest cost and a win win for everybody and that's what we're going be looking at interest more based on our desire to take care of our customers than a.
Order from the federal government absolutely yes.
Got it didn't make sense.
And sort of a I guess a follow up to that.
How do you think about serving multiple airports in one metro area again in the post probably world space.
Balance with love field in DFW is it sort of work the complexity there.
Sort of sugar customers. Thank you.
Yes.
What I will say is we have spent an exorbitant amount of time as much time is changed me talking down on the financing in the business. We spent a lot of timing now network and where everything is and so we're also looking at many many scenarios on how to build and write down network backup the strength in the future and Thats, what we do.
And right now and we have nothing more to really add as it relates to that.
Got it thank you.
Thanks, Mike.
Your next question, it's the way the Pfennigwerth with Evercore ISI.
Okay.
Hey, thanks.
Shane I just wanted to say I hope you're enjoying the nice easy start to your new roles.
[laughter] appreciate it Duane.
I appreciate it.
For Twoq you, you've given us your monthly cash burn what is the amount of Capex and debt service.
Thats included in that.
And how much of the payroll support are you excluding from that you expect to take here in the Twoq.
I'll, let Chris just through the question on Capex, but just to be clear the way, we're talking about cash burn any money, we raise and we would put that the government grant money in loans in that bucket were just putting that into the cash and liquidity bucket. It's not part of our calculation our calculation is simply whatever revenue.
We were able to get in the door.
Yes, you know all of the cash that's going out of the door and so it's pretty pure from that perspective, we're not offsetting.
Any of the Cas expense with ramp money.
Yeah, and Duane this is Chris so from a debt service standpoint, it's about $60 million a quarter, so and it's a little bit lumpy throughout the quarter, but it's just putting your model 60 million per quarter for debt service on the Capex side is we mentioned earlier, we've eliminated all the aircraft Capex, what we have left is.
Pretty minimal and I don't have a number for you, but it's a relatively small number for a few projects that are still ongoing.
I just don't have that number in front of me right now, but it's it's pretty small.
Got it and then your comments about you know.
Having some concern about where that goes in and being able to to pay it down on the other side.
Really resonate because this is after all a bunch of equity analysts that are that are on the call here.
What are the long term implications for capital spending.
Given that goal and thanks for taking the questions.
Yes, Hi, Duane.
Again I, it's a great question, it's and I want to be I. Just mentioned you guys are asking often questions. We wish we had like more clarity in more answers we were sort of intent on.
Sharing whatever we know today and not really hypothesizing, so much and so that's in the category, where it's really too early to tell if we do our job right.
We we get the liquidity, we need we get down to the cash breakeven a goal we manage the business wells and then we were able to see.
A recovery at some point will be balanced in terms of managing growth opportunities and sort of getting back to baseline levels of capacity.
While we're also needing to go back and pay down debt I would just reflect on our last earnings call. When I think Brad said for the 2020 call in a row that we were very proud of our AR.
Couple of your pay down of the the Virgin debt that we had acquired and we're certainly focused on getting back into that range of debt to cap.
There is some flexibility on the fleet side, we do have a lot of.
PDP money on deposit with Boeing.
And we can take aircraft under some of that and so there's an opportunity for us to without new cash went out the door actually flex backup from whatever our new normal is out in the future if that makes sense and that's helpful.
Okay. Thank you.
Thanks.
The next question.
Errol Genovesi with vertical research your line is open.
Hi, guys. Good morning, good numbers.
I know, it's early for that but I wanted to ask but more about how this is going to affect your long long term planning process.
And I'm not sure proprietor benner, Shane but what we're going through now represent somewhat of a paradigm shift before now our downside scenario modeling efforts usually centered on a financial crisis like demand environment, So 20% peak to trough decline give or take and what we're seeing right now it's clearly much worse than that so two questions.
First.
Is I guess, one that would fall into the category.
One that you know what was the range of demand assumptions that have typically informed your long term planning prophecies before now in particular, what was the bare case assumption.
That you would sort of model around when youre trying to figure out how to size, the airplane and weather Golden era, where to buy an airplane or not.
And then secondly, and I guess, that's been kind of fall than I thought this category, but.
Regardless of the timing and cheaper recoveries 2020, now likely to represent.
Bare case that you'll model to going forward.
Yeah good.
Good question.
Daryl I think yeah, I think that we you know historically.
Had similar sort of downside models that you're talking about I think.
Inherent in a lot of our planning in decision making.
We wanted to have an ability to manage through.
Crises that were of the size, we had seen in the past give or take and to do so.
Comfortably as possible from a financial perspective to be able to whether those and.
Just to make sure we were here to participate in the recovery and.
Nobody obviously had modeled something like we're going through today and and so it is.
It is creating more question about how we think about downside cases in the future.
But again were about 60 days this or something into this and we're really now just pivoting our focus to managing.
The economics as we get into Q4 and into next year.
We just haven't had a chance to really think through what we think you know a new normal.
Pattern might look like and what downside cases might look like we're certainly modeling a range of 2021 demand assumptions right now.
All better than we see today, but but certainly much lower than we saw in 2019.
Okay.
Thanks for that.
And then.
All I continue to be surprised by how resilient. These have been across the year onset of reported so far.
Can you provide some color some color perhaps on how the.
Liability trended intra quarter and how much risk there has to do $1.1 billion balance in Q2.
Sure. They're all this is this is Chris.
Yes in detail a if you look at retail on our balance sheet. It's it's inclusive of normal what you would consider traditional HTL, which as you know tickets that are there for future travel and it also includes our voucher or credits or what we call E wallet on our side and that's where there is just a residual.
All value or some sort of credit in that we're holding onto as a liability that has no future date assigned to it. So what you saw in Q1 was really a especially March a significant shifts from that traditional HTL into credit or the vouchers and so you didn't see hcl.
Overall come down so as we look at that certainly is something that we're looking at we're trying to model right now how that rolls through and it really totally is dependent on when demand comes back we we cannot model that with any sort of precision, but what we do know is we continue to to see sort of.
Refunds and cancels is Andrew another's mentioned, and then others, you're seeing in the industry and the majority of those are going into this E. Waller this credit balance and so as we look to the rest of the year does demand starts to come back then that's when you'll see that start shifting back over into traditional etiologies people book their ticket cash inflows will lag.
Revenues from correct, that's exactly right, but we don't have a lot of precision on that model yet simply because we don't know when demand is going to start coming back.
Hi, Mike is easily sorry.
Sorry, I might just add political I think there's about 600 million of traditional Hcl right now in our number the refund cash refund to credit splits been 70% to credit or a little bit higher. So you can sort of in for.
The potential downside if we saw.
Refund activity continue to be what it was over the the first couple of months of the downturn here.
Well that's perfect that's exactly what I've gone Corp. Thank you very much.
It's Darryl.
There are no further questions at this time, we'll turn the call through tool for any closing remarks.
Thanks, very much for tuning in everybody. We look forward to talking with you at the end of the second quarter. Thanks Sara.
Thank you for blankets for today's conference call. This call will be available for future payback in Alaska Air Dot Com.
No that's correct.
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