Alaska Airlines’ chief financial officer revealed last week that the airline could owe as much as $600 million in travel credits. Issuing travel credits instead of cash may reduce an airline’s immediate revenue outflows, but it does create an ongoing liability. However, as the CFO noted, there are other advantages as well when it comes to issuing travel credits.
Alaska Airlines burns through cash, issues travel credits
Speaking at the UBS Global Industrials and Transportation Conference last Tuesday, Alaska Airlines’ chief financial officer Shane Tackett said America’s fifth-biggest airline was burning through $200 million per month. By the end of the year, Alaska wants to get that burn rate to zero.
In May, Alaska Airlines operated at 74% below normal capacity. Those flights that did operate were, on average, 40% full. There are signs the tide is turning.
“We’re just seeing cancellations and refund activity come down to a normal level,” said Mr Tackett at the UBS conference.
The airline was sitting on cash and short term investments of $2.8 billion as of June 1. But with a pessimistic short-term outlook, Alaska Airlines is keen to conserve cash. Like many airlines, it is issuing travel credits in preference to cash.
Predictable patterns of behavior may go out the window
Issuing travel credits means the airline isn’t spending cash. But it does create an on-going liability. Mr Tackett told the UBS conference that Alaska Airlines had issued up to $600 million in travel credits – that’s a tenfold increase on what the airline usually issues.
Usually, an airline is happy enough to sit on some travel credit liabilities. That’s because a lot of customers never redeem the credit, and the airline gets to keep the money.
But Mr Tackett isn’t so sure his customers will follow standard patterns of behavior;
“We don’t have a good window into how people are going to think about using e-wallet versus cash,” he said.
“But my expectation is people will access the credits at a higher rate than they had before in terms of form of payment for tickets.”
This is potentially bad news for Alaska Airlines; they expect more customers than usual to use their travel credits but can’t put a number on how many. That creates uncertainty. Mr Tackett doesn’t think customers will sit on their travel credits for long, either.
“It’s still fresh in their mind that they had those tickets and they don’t any longer, and they’ve got value for them.
“And as they think about replacing those trips, I just have an anticipation that there’s going to be a relatively large share of tickets that we sell for credit. We don’t have an estimate at this point.”
But there could be a bright side for Alaska Airlines
But there is a bright side for Alaska Airlines. People perceive the value of cash and travel credits differently. If you are paying with cold hard cash, you often hunt for best value fares. But if you pay with a travel credit, you are often willing to pay more for airfares.
That means Alaska Airlines can potentially sell higher-priced fares. It reduces the liability quicker and sees the customer paying a higher cost-per-kilometer traveled. But, as Mr Tackett admits, this is theory. He says Alaska Airlines cannot control market dynamics and the external environment.
“It’s a very competitive industry… and to the degree that there are seats out there that are empty … I’ve never seen that result in anything but pretty low pricing.”