UAL - Hawaiian Airlines Stock Falls Behind U.S. Airline Peers

Summary

• Hawaiian Airlines has a strong business proposition, but growth and recovery drivers are materializing slower than hoped for.
• Stock has underperformed due to dilutive pressure from Amazon deal.
• There's not a lot that excites me in 2023 for Hawaiian Airlines.

Hawaiian Holdings ( HA ) reported its full-year earnings in mid February. Overall, what we're seeing is that while Hawaiian Airlines has significant potential there's some delay in the recovery and with Hawaiian's unique business concept that is making the airline more vulnerable. In this report, I analyze the full-year results and comment on the pressures that Hawaiian faces both in its business and in its stock price.

Hawaiian Airlines Adjusted Losses Narrow

Year-over-year, we saw revenues up 62%, driven by a 53% increase in number of passengers flown and higher revenues per passenger. While the growth is significant with strong international performance as well as strong North American operations, the recovery in tourism from Japan was slower than expected. Hawaiian Airlines is a bit of a unique airline in the sense that it heavily relies on carrying tourists to and from Hawaii opposed to other airlines such as Southwest Airlines ( LUV ) and United Airlines ( UAL ) which have a less concentrated network. As a result, Hawaiian Airlines faces more topline risk compared to its peers. They have been able to offset some of that by deploying more capacity to the US Mainland and in fact that capacity was 11% higher compared to pre-pandemic levels, but it's putting a damper on the recovery overall.

The adjusted operating loss in 2020 was $888.25 million and a year later this had reduced to a $403.2 million loss and in 2022, the loss had narrowed to $210 million. That's still a significant loss, which was for a major part driven by $335 million higher fuel costs when viewing the year-over-year progression in fuel costs per gallon. Cost per available seat-mile rose 3.9% which is not bad considering that Hawaiian Airlines is absorbing some additional training costs including costs for starting its cargo operations for Amazon ( AMZN ) as well as the delivery of the Boeing 787-9 expected later this year. So, overall while there are pressures on the business the performance was slightly better than expected.

Hawaiian Airlines Faces Slow Build Back Of Japan Tourism

Hawaiian Airlines is facing a set of specific issues such as runway availability at Honolulu Airport and some maintenance issues on the Pratt & Whitney ( RTX ) geared turbofan on the Airbus A321neo, which requires deploying the less efficient Airbus A330-200 to be deployed to the US Mainland in the first quarter. The fact that Hawaiian Airlines can swap the aircraft is partially because the slow build back of its capacity to and from Japan as tourism from Japan is not recovering as fast as Hawaiian Airlines would like. There are a couple of reasons for that. Obviously, international traffic build back is slower but overall we saw comments from AerCap (AER) recently suggesting that international traffic in key regions is nearly 90% recovered. In Japan, however, there's some hesitance to embark on long haul holidays and Japan is actively promoting domestic tourism. Next to that, the weak yen makes a holiday in the US more expensive. So, those are all factors that affect the pace of the recovery. The positive thing is that it allows for some capacity to be deployed toward US Mainland which is seeing strong demand. Hawaiian Airlines has little exposure in central US, and while I don't expect that to change anytime soon, they might want to explore opportunities there.

Hawaiian Holdings Stock Tumbled After Amazon Cargo Deal

In October, Hawaiian Airlines reached an agreement with Amazon to carry e-commerce products for the e-commerce giant. However, while the deal initially seemed to be well received by investors, I pointed out that the deal dilutes shareholders and we have seen that back in the stock performance as Hawaiian Holdings stock significantly underperformed industry peers. In order for the deal to be accretive to shareholders, the added business growth needs to be higher than the potential dilution and shareholders seem to be extremely well aware of this.

Conclusion: Hawaiian Airlines Stock Remains A Hold

If we would have seen any signs on an improving demand environment in Japan, I would most likely have upgraded Hawaiian Holdings to buy. However, that is not the case. In fact, the return of demand in Japan is slower than anticipated. That allows Hawaiian Airlines to deploy some capacity to the US Mainland, and while demand there remains strong and the first quarter capacity is expected to be up 15% year-over-year with all other pressures that the company faces such as the engine issues, runway availability in Honolulu and an introduction of the Dreamliner next year, I do not see a lot of things that really excited me when reviewing Hawaiian Airlines for a potential investment and that's a shame because absent of the Amazon stock dilution pressure and a better demand environment from Japan, Hawaiian Airlines has a very strong business proposition.

For further details see: