EADSF - Hawaiian Airlines: Was I Wrong?

2023-08-15 14:05:03 ET

Summary

• Hawaiian Airlines has faced headwinds including runway construction and reduced fuel efficiency, but its stock has gained 35% compared to the broader market.
• The slow revival in tourism from Japan is improving, disruptions at Honolulu Airport are over, and the number of grounded airplanes has reduced.
• Hawaiian Airlines' adjusted losses have narrowed, but unit revenues have seen significant reductions.

In a previous report , I marked shares of Hawaiian Holdings' ( HA ) a sell. The company has been facing a flurry of headwinds including runway construction in Honolulu, slow revival in demand from Japan, unit revenue pressure, and reduced fuel efficiency due to grounding of some Airbus A321neo airplanes.

These pressures did not make Hawaiian sound as an appealing investment to me. However, the way it goes with investment at times is that once you become negative on a stock, the price moves in the opposite direction, and that's what happened with Hawaiian Airlines. The stock gained nearly 35% compared to a 9% appreciation of the broader markets. In this report, I will revisit my rating on Hawaiian Airlines.

What Are The Positives And Negatives For Hawaiian Airlines?

The big negative for Hawaiian Airlines in my view was the slow revival in tourism from Japan. However, we're now seeing that market strengthening with 70% of the capacity recovered. Furthermore, the worst of disruptions at Honolulu Airport due to the runway construction are over and the number of grounded Airbus A321neo airplanes has reduced while Hawaiian Airlines is preparing to start operating flights for Amazon ( AMZN ) in October.

Whether the operations for Amazon will provide a meaningful positive contribution remains to be seen, but overall with insourcing of Airbus A330 maintenance we do see some cost cutting measures from the carrier. There are some negatives as well. The fire in Maui is something that's expected to affect tourism for quite some time, but overall should not have a huge impact when considering the full scope of Hawaiian’s operations. More disappointing is the fact that problems with airplanes persist. The first Boeing 787 delivery has been delayed from late this year to next year and the problems with the Pratt & Whitney geared turbofan could potentially have negative consequences and Hawaiian’s operations are currently already constrained by aircraft availability rather than from demand side.

Hawaiian Airlines Adjusted Losses Narrow

Year-over-year, we saw revenues up 2%, driven by an 11% increase in capacity partially offset by an 8% reduction in unit revenues. The operating loss declined from $26.1 million to $9.6 million. Unit costs excluding fuel increased by around 2%, which is not a huge increase given higher input costs.

Hawaiian Airlines has been happy with the unit revenues which were above expectations, but generally I would have liked to see stronger unit revenues. Hawaiian Airlines is still working on expanding capacity, and whereas other airlines recovered with strong unit revenues, Hawaiian Airlines is seeing significant reductions in unit revenues. I wouldn’t want to be the judge saying whether that is good or bad, but it should be kept in mind that with the capacity recovery in Japan and the Hawaiian operations also are changes which does affect the unit revenues.

For the third quarter, capacity is expected on increase by 4.5% to 7.5% with further unit costs pressures while unit costs will increase by 7% to 10%. For the full year, the airline has lowered its capacity expansion from 9.5%-12.5% to 8.5%-10.5% while the lower end of unit cost increase has increased to 3% from 1%. Capital expenditures are expected to be $65 million to $75 million lower driven by aircraft delivery delays which will push some 2023 capex into 2024.

Hawaiian Airlines: A Sell In My Book

I previously had a sell rating on Hawaiian Airlines, and while the stock moved in the opposite direction, based on 2023 estimates there still is no upside. So, this could be one of the moments where an analyst is wrong when looking at the stock price action but might be right when considering the fundamentals. Perhaps marking Hawaiian Airlines stock a sell was rough given the unique position to carry tourists into Hawaii, but a strong buy case does not exist given that the company stock is overvalued with 2023 earnings in mind and upside exists for 2024 and beyond. In those years we could see 50% to 105% upside.

Conclusion: Hawaiian Airlines Is A Tough Stock To Own

Hawaiian Airlines is a really a tough stock to analyze and likely also a tough stock to own. The company is uniquely positioned to feed tourists including international tourists into Hawaii which I would think gives the company bright prospects. At the same time, when considering the fundamentals, for 2023 the stock looks a lot less appealing. Perhaps my sell rating on the stock was harsh, but we also see no fundamental upside for this year despite the charming company that Hawaiian has as a feeder company for Hawaii. Perhaps this is a company one should be interesting to buy and hold for its 2024 earnings.

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