Will The Rally Continue In Alaska Air?

ALK: Alaska Air logo
Alaska Air

Alaska Airlines stock (NYSE: ALK) has observed a 25% jump since the beginning of the month on hopes of a successful vaccine by early next year. As the company observed only $637 million of operating cash outflow for the first nine months, the $3 billion drop in the stock’s market capitalization looks unwarranted given the positive results released by Pfizer and expectations of an early macroeconomic rebound. Thus, we believe that the stock has more room for growth and we compare Alaska Airlines’ stock performance during the current crisis with that during the 2008 recession.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 60% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
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In contrast, here’s how ALK and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Alaska Airlines vs S&P 500 Performance Over 2007-08 Financial Crisis

ALK stock declined from levels of around $6 in October 2007 (pre-crisis peak) to levels of around $5.50 in March 2009 (as the markets bottomed out). However, the stock gained significantly post-2008 crisis to levels of about $8.50 in early 2010 – rising by 58% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Alaska Airlines’ Fundamentals in Recent Years Look Stable

Alaska Airlines’ Revenues grew by 11% from $7.9 billion in 2017 to $8.8 billion in 2019, supported by capacity growth and ticket prices. However, the company’s margins deteriorated due to higher fuel expenses and administrative costs. Thus, the EPS decreased by 20% from $7.79 in 2017 to $6.24 in 2019. In Q3 2020, the company’s revenues fell by 71% (y-o-y) as the capacity (ASMs) dropped by 55% and the passenger load factor plummeted to 48.5%.

Does Alaska Airlines Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Alaska Airlines’ total debt increased from $2.5 billion in 2017 to $3.8 billion at the end of Q3 2020, while its total cash also surged from $1.6 billion to $3.7 billion over the same period. Considering a daily cash burn rate of $4 million, the company is in a good position to weather the crisis for more than a year.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Another round of payroll support for the airline industry, a sizable reduction in cash burn rate, and the launch of a successful vaccine are the key triggers for an upside in Alaska Airlines’ stock.

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