HA - Hawaiian Airlines Stock Is A Sell

2023-05-17 01:25:21 ET

Summary

• Hawaiian Airlines is hit by a set of specific headwinds.
• For this year, I see more downside than upside to the stock from a fundamental perspective.
• Hawaiian Airlines offers a solid business case connecting the world with Hawaii, but 2023 will likely be another slow year with improvements that are already reflected in the share price.

Hawaiian Holdings' ( HA ) Hawaiian Airlines, as the gateway for tourists to Hawaii, is uniquely positioned to capitalize on the appeal of the island group. However, what normally makes the airline attractive for investment is now a headwind as I discuss in this report, making Hawaiian Airlines one of the least airlines desired for investment in my view.

What Hurts Hawaiian Airlines?

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 the US Mainland in the first quarter and going forward for an unspecified timeframe. During the first quarter earnings call, it was mentioned that five Airbus A321neo airplanes have been grounded. For an airline with around 60 airplanes, having five planes grounded is something that can be felt on the operations side.

Hawaiian Airlines can put some Airbus A330-200 airplanes in services to the North American cities, but that is a suboptimal solution as the A330-200 is a plane designed for a different mission than the Airbus A321neo. For instance, the cargo capacity of the Airbus A330-200 cannot be fully utilized when being put on typical A321neo routes and its fuel efficiency is significantly lower while the Airbus A321neo flight crews are basically being less efficient due to the lower number of available airplanes. So, this is costing Hawaiian Airlines.

The fact that the company can swap A330s for A321s is also not a very good one. The build back of capacity to and from Japan is also slow as tourism from Japan is not recovering as fast as Hawaiian Airlines would like.

In Japan, 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.

On top of all of that, work on the arrival runways of Honolulu International Airport and ATC delays provide operational challenges for the network including Hawaiian's Neighbor Island network. The work on the arrival runway was supposed to be finished by February this year but that is now delayed until May.

Hawaiian Airlines Adjusted Losses Narrow

Year-over-year, we saw revenues up 28%, driven by a 15% increase in capacity, 11% increase in unit revenues and an 8.1 percentage point increase in load factor. Operating costs increased by 17%, which I think overall is quite strong given that fuel costs have increased 8% and the suboptimal use of the A321neo and A330-200 fleet which drives up the fuel consumption per airplane on top of inflationary pressures. This also shows in the unit costs excluding fuel which reduced by 0.3%.

Hawaiian Airlines is far from recovered, dragged down by operational challenges and a slow demand recovery in Japan and I believe that will significantly affect the company's performance throughout the year but sequential improvement in demand in key markets should ultimately benefit the airline. Q1 is naturally the weakest quarter for airlines, so I do see significantly better results in the quarters ahead, but in my view what is normally supporting Hawaiian's business is now working against it, making it the less desirable airline investment in my view.

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 as 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.

Hawaiian Airlines: A Sell In My Book

The risk with signaling Buys or Sells is that you call on the top or the bottom, and I see some potential improvements for Hawaiian Airlines such as improved operations on Honolulu airport, lower fuel prices and sequential improvement in demand from Japan. However, if I put the projections in my valuation model, Hawaiian Airlines actually has little to nothing to offer for investors. With regard to its company median but also the passenger airlines median for enterprise valuation, there only seems downside for Hawaiian Airlines this year. For next year, significant upside exists but I don't quite find Hawaiian Airlines stock appealing at this point. You could buy and hold for the longer term but generally airlines are not great names to hold for an extended timeframe and generally I don't see reason to hold an airline stock for the prospects it offers next year on an uncertain basis. Hawaiian Airlines would look more interesting for investment at the $5.70 level than at its current level.

Conclusion: Hawaiian Airlines From Hold To Sell

Strong signs on an improving demand environment in Japan would lead to an upgrade for Hawaiian Holdings to buy. However, that is once again not the case. The recovery continues to be slow and Hawaiian Airlines is countering some of it with deploying capacity to US Mainland but it is also battling the grounding of five A321neos.

Just like the previous quarter, 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 the Amazon stock dilution pressure, Hawaiian Airlines has a very strong business proposition but what makes the airline desirable on a normal day is now working somewhat against it.

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