Analysis of the Economic Impact of the COVID-19 Pandemic on Alaska Airlines and Maximizing Bargaining Leverage in Upcoming Flight Attendant Contract Negotiations
A message from Aviation Economist Dan Akins of FlightPath Economics, LLC
(Compiled from the 2nd virtual roadshow transcript and lightly edited.)
Hi everybody. I have been in the industry for about 38 years. Kind of like (AFA Director of Collective Bargaining) Joe (Burns), I’m involved in a lot of different negotiations inside AFA and outside. I do mechanics, pilots, rampers (and) dispatchers. I’ve helped with the last Alaska AFA contract, and my role is essentially trying to keep track of each company and their place within the industry as well as the industry’s overall health.
Thanks for inviting me to this important decision-making process regarding your extension. As I mentioned in the introductions, I’ve been in the business for a long time, and negotiating sessions all have a context. The most important context for labor is to hit the timing well, meaning you have leverage when you’ve got profitable companies. We had about 10 years’ worth of profitable industry results that were punctuated by this unforeseen pandemic, and the context really is that the industry is different than it was during any pandemic, or crisis, or war, or after 9/11, in that it’s more consolidated–and Alaska’s obviously participated in that consolidation.
So, the industry is different, and this crisis is different, and one of the ways it’s different is that with a consolidated industry (there is) more control with fewer carriers. We also had PSP grants, of which Alaska has taken about 1.6 billion dollars. That’s never happened before. So, the odd thing about the worst crisis the airline business has ever faced is that no carrier has declared bankruptcy. No large carrier. So that’s different. But what is not different is we are still climbing out of the worst hole the industry has ever faced.
I want to talk to you about what that means regarding your vote for your TA and what it means likely for the future. My biggest concern is, you want to regain the foothold in leverage that you had in bargaining prior to the pandemic which was strong across the industry based on company results. So, I want to talk to you about generally what everybody knows about Covid-19: It was bad. How bad was it for the industry? How bad was it for Alaska? What are the prospects for the industry’s recovery and what are those prospects based on?
So about I think October, September last year, most of the industry analysts were saying that Covid impact on the airline business was worse than all the other impacts that have ever affected the airline business. Now what does that mean? The industry had 20 billion dollars in profits in 2019, and we swung to 35 billion in losses in 2020. That’s a 55-billion-dollar swing in a year. That has never occurred.
The way we stayed out of bankruptcy is government loans and PSP programs to support our payroll and our benefits. The impact back in September, October was foreseen to last as long as five to eight years. The most aggressive analysts (optimistic analysts) were saying maybe two or three. Now from Alaska’s perspective, it has hurt the company, it’s hurt its profits, it’s hurt employment potential, it shut its growth for the industry. Domestically last year at this time we only had about 10% of the normal ridership in April that we normally have across the industry. Right now, we’ve got about 60% so it’s a vast improvement and it’s on an upward trajectory.
The worst place to be as far as an airline position is to depend on business traffic or long-haul international revenue because those markets are dependent on international criteria (and) all kinds of restrictions on flights. The loss of international traffic last year at this time was almost 100% with 99.2 percent of all international traffic evaporated last year during April. Right now we’re about 25 percent back, (which is) 75 percent below where we should be.
So, the good news is for Alaska is that Alaska does not participate in long-haul wide-body international flights that are the worst affected. That helps the prospects for Alaska’s recovery. It also helps the prospects for carriers that are primarily domestic and primarily discretionary. That is vacation traffic that’s pent up and if any of you have flown on the “sun markets,” (such as) the Hawaii markets (and the) California markets, those airplanes are full, and the prices are high. That is sort of the ballast for the recovery at Alaska.
Know that people have retired. You know there was a temporary furlough (of) employment at Alaska and employment in the U.S. is about 60,000 fewer people employed today in passenger carriers than were here last year. That’s despite Covid early retirements, voluntary leaves, etc.
Right now, Alaska has reported its revenue (is) off by about 63 percent and as I mentioned Alaska did take the beneficial program known as PSP (or) Payroll Support (Program). There’s a third round (and) I’m not sure if Alaska signed up to take the third round, but essentially, we’ve gotten this huge benefit to save our jobs and save our payroll. Alaska’s cash is more than six times what it normally is in a regular year. In a regular year Alaska usually carries a couple hundred million dollars in cash on its balance sheet and that’s important because it’s a measure of liquidity that if something came up Alaska could handle it with what it has in the bank right now. Alaska has about $1.4 billion however Alaska has already taken on another $1.2 billion in debt.
The good news for Alaska is that the debt exposure and the ability to pay it off with cash is almost 100 percent so Alaska didn’t borrow money to buy airplanes or fixed facilities. Alaska borrowed money to generate cash and so Alaska even says in its (Form) 10k that they are largely prepared to pay down the increase in debt when the industry is stabilized. The industry hasn’t stabilized yet, (and) we’re still crawling out of this industry hole.
So, when you think about where we are in terms of leverage, Alaska reported the largest loss like every other carrier in 2021 from operating profits of $1.1 billion. (I know I’m throwing around a lot of numbers.) $1.1 billion in 2019 was the operating profit minus $1.7 billion was the operating loss in 2020. Now the first half of 2021 … is approaching break even on a cashflow basis. On a profitability basis after you pay for everything–after you pay for the debt service (on) the airplanes (and) all the non-operational costs that every airline has to bear–the front end of the year is going to be a loss (and) a pretty big one.
The back end of the year looks like a profit. On balance Alaska is likely to post a $600 million operating loss but that is mostly because we’re going to lose about that much in the first quarter and about half that much in the second quarter and then slowly rebuild according to expectations in the third and fourth quarter of this year. So, when we hit the amendable date of the current contract, we will have had two years of horrendous losses which again according to what Joe has said and from my background, bargaining from a position of strength means that you’re bargaining from profitability and that’s what we don’t have going into December.
However, the good news is according to Wall Street forecasts, 2022 looks highly profitable: about two-thirds as profitable as 2019. Then 2023 as much as anybody can hope looks like it’s even more profitable getting back to around a billion dollars in operating profit. So again, I think the fundamental choice you have is do we go in and expose ourselves to the negative side of the environment or wait a year, get a pay raise (and) keep ourselves positioned as the number two or three highest paid Flight Attendants at top of scale in the industry and wait until things get better so we can leverage that situation and look back at this period as a temporary problem that Alaska and the industry was able to conquer.
Alaska is very well positioned to become profitable as fast as just about anybody in the business, but it’s going to have to wait for about another year before we’re back to a position of strength where Alaska can build on its profits, and (then) we can leverage that at the bargaining table…. I think getting a TA with a one and a half percent in normal times might not seem that great, (but) in the most cataclysmic times that have ever occurred, I think it’s almost incredible to be able to do this.
