uploads/2017/01/Leverage.png

How Risky Is Alaska Air Group’s Leverage?

By

Updated

Debt reduction

Alaska Air Group (ALK) has been reducing its debt for the past five years. For 2016, it reduced its debt from $686.0 million to $626.0 million.

ALK has also paid down about $1.5 billion of its debt in the last five years. As a result, it has successfully lowered its net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio from about 2.2x in 2010 to -0.56x at the end of 3Q16.

At the end of 3Q16, net debt-to-EBITDA ratios for ALK’s peers were as follows:

  • United Continental Holdings (UAL): 1.0x
  • Delta Air Lines (DAL): 0.46x
  • American Airlines (AAL): 2.3x
  • Spirit Airlines (SAVE): 0.27x
  • JetBlue Airways (JBLU): 0.50x
  • Southwest Airlines (LUV): 0.03x

Alaska is one of the few US airlines to be positive on a net debt level. It thus enjoys an investment-grade rating. As a result, Alaska Air Group has a 36.0% cost advantage over legacy players.

Article continues below advertisement

Alaska Air’s debt to rise

Alaska Air Group has been able to maintain its debt position since it hasn’t borrowed any money for the past seven to eight months. However, that may change in 4Q16 since ALK borrowed $2.0 billion to fund the Virgin America acquisition.

To learn more, you can refer to Alaska Air Group-Virgin America Merger: Fifth-Largest US Airline and What Can We Expect from the Alaska Air–Virgin America Deal?

However, since the interest cost for this debt is close to 2.4%–2.5%, the net interest cost will be only ~$50.0 million. At the end of September 2016, Virgin America had ~$600.0 million in cash. EBITDA for the last 12 months was ~$194.0 million.

For 2017, Alaska Air Group has set strong cash flow expectations. The airline expects to generate about $1.4 billion in cash flow from operations. It expects to generate about $600.0 million worth of free cash flow in the upcoming year. That could help it continue on its debt reduction past.

The net impact on leverage ratios could be drastic. Alaska Air forms 1.6% of the holdings of the PowerShares DWA Momentum ETF (PDP).

Advertisement

More From Market Realist