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Coverage Initiation: Hawaiian Holdings
Hawaiian Holdings (HA) is a holding company whose primary asset is the sole ownership of Hawaiian Airlines, the largest airline headquartered in Hawaii and the thirteenth largest domestic carrier in the United States based on revenue passenger miles. It was originally founded in 1929 under the name Inter-Island Airways. In 2003, the company declared bankruptcy, ultimately emerging, restructured, in 2005, to be listed on the NASDAQ. Hawaiian is engaged in the transportation of passengers and cargo amongst the Hawaiian Islands, between the Hawaiian Islands and certain cities in the Western United States, and between the Hawaiian Islands and the South Pacific, Australia and Asia. Additionally, it operates various charter flights. Hawaiian’s fleet consists of fifteen Boeing 717-200 aircraft, eighteen Boeing 767-300’s, and four Airbus A330-200’s. It currently operates approximately 185 scheduled flights per day, and competes primarily with US Airways (LCC), Delta Air (DAL), Alaska Air (ALK), United Continental (UAL), AMR (AMR), as well a number of foreign competitors.
Hawaiian derives nearly 90% of its revenues through the sale of airline tickets to individual passengers. To a lesser extent, it also makes money from sales of charter and cargo services, as well as ancillary revenues from baggage-checking fees and items such as food and beverages.
In general, the company’s operations and financial results are subject to substantial seasonal and cyclical volatility, primarily because of leisure and holiday travel patterns. Demand levels are typically weaker in the first quarter of the year, with stronger demand periods occurring during June, July, August, and December. On a larger scale, passenger demand relies heavily on consumer discretionary spending levels; indeed, times of economic hardship often induce consumers to pare back on discretionary purchases, such as leisure travel spending.
One particular point of interest is the company’s cost structure; In any given quarter, fuel costs can consist of anywhere from 20% to 40% of operating expenses. Due to the high degree of oil-price volatility, Hawaiian (like many other airlines) engages in hedging practices designed to mitigate the effects of wide price swings. However, due to the imperfect nature of these practices, rarely are the effects fully offset. As a result, quarterly earnings are prone to fluctuations depending on both the price-action of oil and the particulars of the relevant hedging activity.
Hawaiian’s second-biggest operating expense is employee wages. Although this tends to fluctuate more predictably, it is still an important consideration in light of the company’s high percentage of unionized employees. Indeed, 86% of employees were covered by labor agreements in 2010. Although the coast seems clear for now, should some conflict arise between the company’s management and its employees (or their respective unions), it could have a detrimental effect on operating profits. Moreover, given the historically turbulent nature of airline unionization, the potential for future discrepancies is certainly a consideration.
Hawaiian operates using a good deal of leverage, with long-term debt currently representing more than 60% of total capital. This could become an issue, should the company come to lack the necessary liquidity to continue operations. Moreover, given scheduled capacity increases and an absence of cash on hand, the debt load could well rise further over the coming years, posing additional investor risk.
Performance and Investor Prospects
Following its relisting in 2005, Hawaiian has experienced a large amount of earnings volatility. One contributing factor has been the fluctuation in oil prices (as discussed above). Another is the recent recession and its lackluster aftermath, which took a toll on passenger volume and induced pricing-changes.
Over the past several months, however, several key industry metrics have shown improvement. Revenue passenger miles, a measure of passenger traffic, have been trending upward. Accordingly, the company has been able to enact price hikes and add further flight capacity. As a result, the load factor, a measure of utilized capacity, has decreased somewhat. Nonetheless, should positive passenger volume trends persist, demand ought to come into line with existing supply in the near future.
Over the past year or so, management has begun to focus on expanding international flight operations in a bid to diversify the company geographically and take advantage of growth opportunities in Asia and elsewhere. Although the company faces tougher competition on an international scale, so far, the moves have been met with success. All told, they ought to augur well for both the top and bottom lines.
Although Hawaiian has solid longer-term growth prospects, cemented by its dominant market position in a very popular vacation destination and promising top-line trends, its profits are unpredictable on a short-term basis and thus result in considerable stock-price volatility. Moreover, its heavy debt load and shortage of cash present further risk for investors. Accordingly, these shares are likely suitable only for more risk-tolerant accounts.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.