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American, Southwest, Alaska Post Wind-Aided Profits — But Real Losses. Now Expecting Increased Business Travel

American, Southwest and Alaska airlines got by in the second quarter with a little help from their 535 friends in Congress, with each reporting Thursday that they earned small profits thanks to payroll support payments from the federal government that were aimed at preventing tens of thousands of layoffs during the pandemic.

But, just like their rivals Delta and United that previously reported their second quarter results, Southwest, Alaska and American all reported adjusted second quarters losses – albeit much smaller than in previous quarters – once that government support was backed out of the calculations.

Fort Worth-based American said it’s tiny first quarter profit of $19 million – the first profit after five-straight quarterly losses during the pandemic – was adjusted to a $1.1 billion second quarter loss after one-time accounting adjustments. The biggest such adjustment, by far, was for federal payroll support payments the carrier received at the behest of Congress. That loss was equal to $1.69 a share.

Dallas-based Southwest, meanwhile said its first quarter profit of $348 million similarly was adjusted to a $206 million loss. On that adjusted basis the company’s loss equaled 35 cents per share.

Alaska, which is based in Seattle, said it earned a technical profit of $397 million in the second quarter, but a loss of $38 million, or $30 cents per share, after adjusting for $489 million in federal payroll support payments and other one-time accounting items.

A rapid recovery of demand for leisure travel in the second quarter drove all three carriers’ dramatic increases in revenue. American’s revenue jumped to $7.48 billion in the second quarter. That’s up from just $1.6 billion in the second quarter last year, when the pandemic’s impact on airlines and travel demand was at its worst. It was also up from $4 billion in revenue in the first quarter. Still American’s revenue take in the second quarter was down almost 38% from the $12 billion in revenue it reported from the second quarter of 2019, before the pandemic.

Similarly, Southwest’s second quarter revenue of $4 billion was up four-fold from the $1 billion in revenue it had a year earlier, and was nearly double the $2.1 billion revenue it reported from the first quarter of this year. But that $4 billion in second quarter revenue was still 32% short of the $5.59 billion that Southwest brought in during the second quarter of 2019.

Alaska’s revenue in the second quarter rose more that three-fold to $1.5 billion from a mere $421 million in 2020’s second quarter. But the second quarter of 2019, before the pandemic, Alaska brought in nearly $2.3 billion in revenue, meaning that this year’s second quarter revenue remains down 35% from pre-pandemic levels.

Executives at all three carriers said they expect leisure travel demand to continue at or above its current levels through the rest of the summer. After Labor Day, which traditionally marks the end of the summer vacation season, American officials said they expect to see demand for higher-priced business fares to rise. During a call Thursday morning with analysts and reporters Chief Revenue Officer Vasu Raja said corporate offices are begin re-opening in large numbers in September, and that he expects that to result in significantly increased amounts of domestic business travel four to six weeks later – in late September and the first half of October – after those returning to their offices are able to set their new work priorities and schedule appointments with customers, vendors and others with whom they will want to visit face-to-face.

Southwest and Alaska officials said they too expect business travel demand – and revenues – to rise after the summer vacation season ends. But Southwest, in particular, cautiously avoided forecasting profits beyond the current – third – quarter. Both Alaska and American leaders said they do expect to be profitable in both the third and fourth quarters without the help of government money.

But Southwest leaders did note that they will complete on July 26 its project to begin selling tickets through the SABRE reservations system and the positive impact that will have on its previously-stated plans to increase its domestic business travel market share. Historically viewed as a low cost, low fare carrier, Southwest has become, in normal times, the largest U.S. airline in terms of domestic passengers carried. With its growth, especially in major cities, Southwest has begun shifting more attention to capturing a greater share of domestic business travelers, who typically pay higher fare prices. That’s why it will begin selling tickets through SABRE on Monday, and why it already is doing so with via the other big reservations systems, Amadeus and Travelport. Those systems facilitate more corporate travel bookings because companies can use those systems to better track and compare not only fare prices but also their spending totals vis-à-vis large volume discount agreements they negotiate with carriers. Previously Southwest’s absence from those various reservations systems made it difficult or impossible for it to compete for many corporations’ travel contracts.

Tom Nealon, Southwest’s President, said on a conference call with analysts and reporters that his airline’s seven largest corporate accounts – all of which are professional services companies that provide consulting, accounting and similar services – all have removed the limitations on employee travel that they’d imposed early on during the pandemic. That, he explained, gives Southwest’s leaders confidence that the recovery in business travel demand already is underway and very likely to increase significantly by year’s end.

“We were expecting business travel this year to be up to around 50%” of what it was prior to the pandemic “by the end of this year,” he said. “But right now it looks like we down 50% by the end of this quarter. It’s happening faster” than previously expected.

In Southwest’s earnings release, CEO Gary Kelly touted his airline’s balance sheet strength, which he said is “unmatched in the U.S. airline industry and a competitive differentiator.

“As of June 30, 2021, our total liquidity was $17.9 billion. Average core cash burn was approximately $1 million per day,” and “we achieved positive average core cash flow in June 2021;” adding about about $4 million a day to its cash reserves. “Based on our current booking trends and cost outlook, we are hopeful to be profitable, both on a GAAP and non-GAAP basis, again in third and fourth quarter 2021.” GAAP refers to Generally Accepted Accounting Practices.”

American officials in their conference call also noted that their carrier became cash flow positive in the second quarter and is now adding to its cash pile at a rate of about $1 million a day. The airline also announced that it paid back all $950 in debt backed by the carrier’s spare parts in a transaction today. That debt, taken out to ensure the carrier’s liquidity during the height of the pandemic-caused cratering of travel demand, was not due to be paid until 2023. By paying it off early American’s liquidity total fell from $21 billion at the end of the second quarter to just over $20 billion now.

Derek Kerr, American’s Chief Financial Officer, said that while the carrier will maintain that historically high level of liquidity for some undetermined months to come, he expects for it to shrink that balance to between $10 billion and $12 billion beginning sometime next year. To do that, he said, the airline will begin paying down its debt.

“The de-leveraging of American’s balance sheet has begun,” Kerr said.

Alaska’s chief commercial officer, Andrew Harrison, said his carrier’s operations had returned to about 80% of its pre-pandemic size by the end of the second quarter and that he now expects both the size of Alaska’s operation and demand, especially among business travelers, to rise more rapidly in the second half of the year. That, in part, he said will be the result of California’s decision not to remove until mid-June most of the restrictions that had kept many workers there from returning to their offices and that had sharply limited demand to travel to and from the state. Now that California is open, Harrison said, demand for Alaska’s flights in the intra-west region is booming, and that that’s on top of increased demand for Alaska’s raft of new flights to and from popular sunshine destinations in Florida, Texas and elsewhere.

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