Hawaiian Holdings: Surviving the turmoil
The airline industry has been among the hardest hit by spiraling oil prices, as carriers scramble to make ends meet by raising fares and levying special fees on passengers. The recent retreat of oil prices has prompted a corresponding rebound in airline stocks, and has helped support small-cap stocks in general.
Hawaiian Holdings, Inc. (Nasdaq:HA), which owns Hawaiian Airlines, stands to gain from both these trends, plus it has some silver lining of its own in the clouds over the airline industry.
At the beginning of the second quarter, Hawaiian Airlines saw its two main competitors, Aloha Airlines and ATA Airlines, both cease operations, more or less from one day to the next. Aloha had 40% of Hawaii’s inter-island traffic and Aloha and ATA together close to 20% of the traffic with the U.S. west coast.
Then at the end of April, a third competitor, Mesa Air Group (Nasdaq:MESA), ended some acrimonious litigation with Hawaiian, agreeing to pay $52.5 million to settle Hawaiian’s claims that Mesa had used confidential passenger information – obtained when it looked into investing in Hawaiian during bankruptcy proceedings – to launch its own Hawaiian business in 2006. (It didn’t help Mesa’s case when it came out that its chief financial officer had solicited information from an acquaintance about how to delete e-mails permanently from the hard drive.)
“Even admidst the tumult in the industry as a whole, I don’t think any airline has found as much change in its operating environment as Hawaiian has,” chief executive Mark Dunkerley said late last month in a conference call discussing the favorable impact of the Mesa windfall as well as the collapse of Hawaiian’s competitors.
Hawaiian Airlines, which dates back to the 1929 founding of Inter-Island Airways in Honolulu, now controls 80% of Hawaii’s inter-island air traffic and 25% of traffic to the western mainland, in a geographic setting where there is really no viable alternative to air travel.
The airline continued to operate when it went into Chapter 11 bankruptcy in 2003, emerging two years later with new union agreements and fresh capital. In June of this year, the parent company moved its listing from the American Stock Exchange to Nasdaq, keeping its two-letter ticker symbol. That same month, the stock became part of the Russell 2000 index.
When Hawaiian in early July reported a 13.4% year-on-year gain in passenger traffic in June, Avondale Partners analysts reiterated their “market outperform” rating and their $14 price target for the stock.
While load factors were down 5.5% in the month, the cause was the much higher component of inter-island traffic following Aloha’s collapse, the Avondale analyst noted. These short-haul flights have a lower load factor, bringing down the average, but also have relatively higher fares – running 70% higher than a year ago.
“We believe Hawaiian Airlines is well positioned to solidify its role as the strongest survivor of the recent turmoil among airlines serving Hawaii,” Avondale analyst Bob McAdoo wrote in his July 9 report.
While there will always be substantial mainland capacity provided by the “legacy airlines,” he wrote, “Hawaiian seems to be the only remaining carrier seeking to provide relatively lower cost transportation from the west coast to Hawaii.”
This doesn’t mean Hawaiian is on easy street. “The net of the beneficial impact of our competitors' collapse and our raising of air fares offset by the costs of more expensive jet fuel was to leave us at roughly break even,” CEO Dunkerley said last week in releasing second quarter earnings. “This is a testament to the severity of the fuel price crisis facing our industry.”
In fact, excluding the Mesa windfall, profit for the quarter ended June 30 was only $0.04 per share, well short of the $0.10 estimate by Avondale, the only analyst covering Hawaiian at the moment. With the Mesa settlement, earnings per share were $1.09, compared with a net loss of $0.08 in the second quarter of 2007.
Other quarterly data were positive – operating revenue rose 30.7% to $319 million, revenue per available seat mile increased 26.4% to $0.1335, and passenger yield rose 29.7% to $0.1451.
In June, Hawaiian said it will add four Boeing 717-200 jets starting this fall to meet the added inter-island demand. In the meantime, according to Avondale’s McAdoo, the hard-pressed legacy airlines may be tempted to cut some of the low-yield flights to Hawaii, opening up further market share to Hawaiian.
In recent trading, Hawaiian has moved off its 52-week high of $9.86 set July 23, compared with its 52-week low of $2.60 last August. Its close Monday at $8.42 gave it a market cap of $398 million.
About the Author
Contributing author Darrell Delamaide is a freelance writer and editor based in Washington, D.C. He has specialized in business and finance over a long career, writing for Barron's, Dow Jones, Institutional Investor, and Bloomberg, among others.
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