Yahoo Finance Will Virgin America Acquisition Increase Alaska Air’s Debt in 2016?
Why Alaska Air Group's Upbeat 1Q16 Results Left Investors Flat
Higher debt
Alaska Air Group (ALK) recently acquired Virgin America (VA) in a $2.6 billion deal. It plans to fund the deal by $600 million in internal cash accruals and $2 billion of additional debt. The airline currently has $1.6 billion of cash on its balance sheet as of the end of March 2016.
Alaska Airlines (ALK) has done a commendable job of reducing its debt in the past two years. ALK’s strong and consistent cash flows have made this possible.
The airline has been successful in reducing its debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio from ~0.64x at the end of 4Q14 to 0.38x at the end of 1Q16.
At the end of 2015, American Airlines (AAL) had a net debt-to-EBITDA ratio of ~1.9x, United Continental (UAL) of 0.93x, Allegiant Travel of 0.66x, JetBlue Airways (JBLU) of 0.62x, Delta Air Lines (DAL) of 0.51x, and Southwest Airlines (LUV) of 0.09x.
Alaska Airlines is one of the few US air carriers to be negative on a net debt level, with more cash than debt, allowing it to enjoy an investment-grade rating. As a result, Alaska Air Group enjoyed a 36% cost advantage over the legacy players in 2015.
However, after the $2 billion debt, Alaska Air Group will have a net debt of $1 billion on its balance sheet. Higher debt means increased interest expenses, which means lower margins.
Outlook
Alaska Air Group (ALK) has been profitable for each of the last ten years. It generated $1.6 billion in cash flow from operations in 2015, and its free cash flow was $753 million.
Alaska Air Group has set strong cash flow expectations for 2016. The airline expects to generate about $1,375 million in cash flow from operations. It expects to generate about $600 million in free cash flow in the upcoming year.
This ability should be the key to being able to serve the additional debt it plans to take on. It also expects to repay $115 million of debt in 2016.
Alaska Air Group (ALK) forms ~4.0% of the DWA Consumer Cyclicals Momentum ETF’s (PEZ) portfolio.
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