Description

Hawaiian Holdings, Inc. ("Hawaiian Holdings", ticker: HA) is a peculiar bird in the airline sector:  1) the company has been profitable for each of the last nine quarters; 2) its managers carefully consider and make each capital allocation decision as if they owned the company; 3) the company has a significant net cash position on its balance sheet; and, 4) its customers actually like to fly with them.  

Despite these advantages, Hawaiian's stock trades for under 2.5 times free cash flow and its enterprise trades for under 1.5 times EBITDA.

Company Overview and History

Hawaiian Holdings, through its wholly owned subsidiary Hawaiian Airlines, Inc. ("Hawaiian"), provides scheduled passenger and cargo air transportation on more than 150 flights per day amongst the Hawaiian Islands (the interisland routes), between the Hawaiian Islands and 10 gateway cities on the US west coast (the transpacific routes), and between the Hawaiian Islands and the Philippines, Australia, American Samoa, Tahiti, and, in the coming months, Japan and South Korea (the Australasian routes). 

Hawaiian operates a fleet of 15 Boeing 717-200 aircraft for its interisland routes, 18 Boeing 767-300 aircraft for its transpacific and Australasian routes, and two Airbus A330-200 aircraft for its transpacific routes.  Approximately 60% of the company's revenues come from its transpacific routes, 30% from its interisland routes, and 10% from its Australasian routes.

Based in Honolulu, Hawaiian has approximately 3,950 active employees, 86% of whom were covered by collective bargaining agreements.  Hawaiian recently struck a deal with its maintenance personnel (the IAM), which becomes amendable in 2014.  The next upcoming labor negotiation is with the 1,000+ employees represented by the AFA, whose contracts become amendable on March 31, 2011.  Contracts for the company's other employee groups do not begin to become amendable until November 9, 2013.

Hawaiian began operations on October 6, 1929 as Inter-Island Airways, a subsidiary of Inter-Island Steam Navigation Company.  Hawaiian has never had a fatal accident in its entire history and is the oldest US carrier with this distinction.  The company operated continuously until March 21, 2003, when pension issues and a liquidity crunch forced the subsidiary into bankruptcy (Hawaiian Holdings, the parent company, did not file).  The company emerged from bankruptcy on June 2, 2005 with renegotiated union contracts, restructured lease terms, and $173mm in funding from an investor group led by RC Aviation, a unit of Ranch Capital.  Lawrence Hershfield, CEO of Ranch Capital, serves as Chairman of the Board, and personally owns just over 1 million shares.

Fleet Status 

Hawaiian currently operates 35 aircraft.  Its fleet consists of 15 717-200s for the interisland routes, two Airbus A330-200s for the transpacific routes, and 18 767-300s for transpacific and Australasian routes:

This year the company began a transition to the Airbus A330-200 aircraft, two of which have already joined the fleet (see above).  A third leased A330-200 is scheduled to join the fleet in April 2001, followed by firm orders for deliveries in March and May of 2012, three more aircraft in 2013, and another one in the first quarter of 2014.  These deliveries will replace expiring leased Boeing 767-300ER aircraft and the four owned Boeing 767-300 aircraft that are being retired.  While the company has expressed confidence in its ability to obtain favorable financing for these commitments and their associated costs, management has not yet provided any detail on its expectations regarding the terms of such financing.

Current Capital Structure

Current Debt and Capital Leases                                  $99.6mm

Long-Term Debt and Capital Leases                             $124.4mm

Total Debt                                                                 $224.0mm

Less:

Cash, restricted cash, and ST Investments                   $350.9mm

Long term investments*                                             $24.9mm

Total Cash                                                                $375.8mm       

Net Cash                                                                  $151.8mm

Diluted shares outstanding                                         53.2mm

Net Cash / Share                                                      $2.85

Share Price                                                              $5.25

Market Cap                                                              $279.3mm

"Simple" Enterprise Value                                          $127.5mm

Add:

Pension/OPEB Underfunding                                      $233.2mm

7x LTM Aircraft Rent   ($101.1 x 7)                            $707.7mm

Adjusted Enterprise Value                                         $1,068.4mm                       

* - accounts for auction rate securities that Hawaiian reached an agreement to sell above book value in July 2010.

Valuation

For the period ending 6/30/10, LTM EBITDA was $125mm and LTM FCF (after subtracting $23mm in interest, $35mm in maintenance capex, and $6mm in taxes)  was $61mm.  Hawaiian Holdings' "Simple" Enterprise Value therefore trades at just over one times LTM EBITDA and just over two times LTM FCF.

Most industry analysts prefer to normalize EBITDA and enterprise values to compute what they believe is an apples to apples comparison among carriers that adjusts for fleets which are predominantly leased rather than owned and to adjust for varying pension and OPEB obligations.  Under this convention, the enterprise value is adjusted upward by seven times the annual aircraft rent payments and an EBITDAR income number is preferred by increasing EBITDA by the amount of this rent.  Underfunded pension and OPEB amounts are also added to the enterprise value.  Hawaiian Holdings' Adjusted Enterprise Value of $1,068.4mm is equal to 4.7 times its trailing EBITDAR of $226.1mm.  Using analysts' 2011 estimated EBITDAR of $271mm, Hawaiian is trading at 3.9 times forward estimates.

The following table provides valuation data for Hawaiian Holdings relative to its industry comparables:

Moat

On its transpacific routes, Hawaiian is the #1 carrier from the US West Coast to Hawaii.  It possesses the largest seat share and has the most gateways on these routes.  Hawaiian also has an 85% market share in the interisland business, thanks to the bankruptcy and retraction from operations by its two major competitors - Go! and Aloha.  Codeshare agreements with the major carriers serving Honolulu reinforce its competitive advantage in this business.

All of the major airlines are fierce competitors with Hawaiian on its US mainland - Hawaii routes, and capacity between Hawaiian's 11 gateways and Honolulu has risen by approximately 10% year over year.  Currently the price setter appears to be Alaskan Air, which has not historically resorted to irrationally low pricing as a competitive tool in our experience.

Growth

Hawaiian has always taken a very measured approach to capacity growth.  Its fleet upgrade plan involves transitioning from 260-seat 767s to 294-seat A330s.  RASM increases should be realized from better configurations (more first class seating), state of the art in flight entertainment, and wider, more comfortable seating.  Growth in the company's more profitable Australasian routes includes the recently awarded route between Tokyo's Haneda Airport and Honolulu and the expansion of its code sharing agreement with Korean Air, allowing customers of Hawaiian to book flights between Honolulu and Bangkok, Thailand.  Management is particularly optimistic about the Haneda route, citing the airport's proximity to downtown Tokyo and the fact that over one million Japanese tourists come to Hawaii each year.  Management expects the route to be profitable within a few months of its opening, in contrast with an estimated 18 to 24 months of seasoning required to achieve full profitability on more typical routes. 

Other growth initiatives include ancillary revenue strategies, such as premium exit-row pricing and upgraded meal offerings, as well as exploitation of the substantial incremental cargo capabilities of the new A330 aircraft.    

Other Recent Points 

1.  Approximately six million warrants struck at $7.20 per share expired worthless on 6/1/10, reducing potential dilution and a possibly significant overhang on the stock.  These warrants were awarded to the Ranch Capital group as part of the restructuring financing arranged in 2005.

2.  On July 1, 2010, Hawaiian Holdings' board of directors approved a share buyback program, authorizing repurchase of up to $10mm worth of common stock.  On Hawaiian's latest conference call, CEO Mark Dunkerley emphasized that the program was implemented based up the stock's current valuation, stating, "The reason for it is that we think that as the board of directors that our shares were trading well, well, well below the implicit value of our equity and we thought it was the best use of the Company's cash at the time."

Risks 

Oil prices, exogenous events, competitor capacity expansion, and labor disruptions all represent risks to the investment thesis.

Catalyst