HRBR - Harbor Diversified: An Airline In Disguise

2023-04-04 07:18:26 ET

Summary

• Air Wisconsin, due to its name and limited visibility, is flying under the radar.
• Company results looked somewhat boring but better than those seen by some peers. Boring is good in this case.
• A ramp-up in activity indicates that revenues might be down for some time this year as the fleet transitions from United Airlines to American Airlines.
• The lack of insights and access to management or presentations makes me hesitant putting a buy rating on this name.

I've been analyzing regional airlines for a while. One regional airline that I am commencing coverage on now is Air Wisconsin (Harbor Diversified) ( OTCPK:HRBR ) and that is an airline whose stock name does not directly suggest it is in any way affiliated with anything related to airlines. In this report, I will explain why and analyze the most recent earnings report.

What does Harbor Diversified do?

The name does not directly make it clear but Harbor Diversified is in essence Air Wisconsin. The company was originally formed in November 1992 as Initial Acquisition and merged with Hollis-Ede becoming Hollis-Eden Pharmaceuticals in 1997. In February 2010, Hollis-Eden Pharmaceuticals was merged with its wholly owned subsidiary and renamed Harbor BioSciences and in January 2012, the company acquired 80% of the issued and outstanding capital stock of AWAC from Amun LLC ("Amun"). In February 2012, Harbor BioSciences was merged with its wholly owned subsidiary and renamed Harbor Diversified. In January 2016, said company acquired the remaining 20% of the issued and outstanding capital stock of AWAC from Amun. Air Wisconsin basically acquired Harbor Diversified, a pharmaceutical company, for its tax assets and didn't file for years until a shareholder sued the company and won. It's quite the story on how the airline was flying under the radar even for its shareholders and even now if you look for an investor website, you won't find one. Just for that reason alone, I will not be regarding this a buy as I find transparency with management to be of importance and not being able to reach out to management or investor relations in a clear way is reason for concern.

For the full year, revenues rose 13.4% mostly driven by deferred revenue recognition of $31.8 million and to a smaller extent by performance based incentives and stand ready obligations. Overall, 7% lower block hours were executed offsetting an improvement over variable pay. Mesa Air Group ( MESA ) had 16% lower block hours for the year, so the lower block hour count of Air Wisconsin compares favorably. Costs excluding payroll support rose from $208.4 million to $225 million or an increase of 8%. So, what we can conclude is that the improvement in income from operations on adjusted level was driven by the deferred revenue recognition. Overall, results are not glamorous but also not poor and that is what makes the regional airlines somewhat desirable. If these airlines have the pilots available they provide investment opportunities that are well insulated against fluctuations in oil prices and air fares. So, with result being somewhat boring and operational statistics being somewhat underwhelming I am actually not too concerned.

What Are The Risks For Air Wisconsin?

Obviously, continued attrition continues to play a role for all regional airlines and as long as mainline carriers continue to fish in the pilot pool of regional airlines there will be a pressure on block hour production. In March 2023, Air Wisconsin commenced operations for American Airlines ( AAL ) while by June 2023 the final flights for United Airlines ( UAL ) will be halted. In a ramp up schedule by October, 40 airplanes will be utilized. We are seeing no sign that the transition will keep the revenues stable, hence I do expect a reduction in revenues further amplified by the fact that under the CPA (Capacity Purchase Agreement) with American Airlines initially only 40 airplanes will be covered with options of another 20 to be added. The current United Airlines CPA covers 63 aircraft, so one would say there will be quite a mismatch initially through the ramp up if the options for the other 20 airplanes are not utilized the ability to produce block hours will be even more limited beyond the pilot shortage scope. Does that hurt Air Wisconsin tremendously? No. Effectively there are only 38 airplanes in operations right now driven by the pilot shortage, but it is the ramp up with a mismatch in United flight activity (ending June 2023) and American Airlines flight activity being fully ramped up by October 2023 for the 40 airplanes that makes me wonder how strong their revenues are going to be.

Conclusion: I Am Not Buying Air Wisconsin Stock

I would most likely mark Air Wisconsin stock a buy given that its block hour production is "only" 7% lower year-over-year despite the significant challenges faced by regional airlines. However, what does keep me back from putting a Buy tag on this is not the ramp up, which I expect will result in lower revenues, but the fact that it is really to actually get access to information and management. With all my investments and all companies I have covered, I have always been able to get in touch with Investor Relations and had positive interactions to get questions answered. With Air Wisconsin, I couldn't even locate an overview of management presentations, an Investor Relations website or a way to contact management. That hardly makes me feel comfortable investing or assigning a Buy label. If you believe in this company and have no issues not having access to management and presentations, this might be your cup of tea but it just isn't for me.

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