Thursday, March 17, 2016

Hawaiian Airlines Flying The Friendly Pacific Rim Skies

Hawaiian Airlines Airbus A330-243 (c/n 1114) N381H "Hokule'a" on short final to Rwy 25L at Las Vegas McCarran International Airport (LAS/KLAS) on November 23, 2013.
(Photo by Michael Carter)

Most airlines court business customers — or more accurately their business expense accounts — but Hawaiian Airlines is finding success catering primarily to vacationers in the U.S., Asia and elsewhere in the Pacific Rim.

Mai Tais and pupus, truly friendly skies and an on-time record that’s the envy of the industry: these are the competitive advantages of the airline and its parent, Hawaiian Holdings. Its unique model focuses sharply on bringing an island-like experience to its patrons.

“It really caters to the leisure customer,” CRT Capital analyst Michael Derchin told IBD. “Maybe 1% of their market is business.”

Derchin, who has a buy rating on Hawaiian, says he initiated coverage with a buy rating back in February 2014, when the stock was trading around 11. Now it’s approaching 50.

“It’s been a grand slam home run,” he said.

Hawaiian, which expanded into Australia in 2004 and began daily service to Tokyo’s Haneda airport in 2010, has been growing its long-haul business. This year, it will begin service to Tokyo’s Narita airport. Hawaiian says it flew a record 10.7 million passengers in 2015, a 4.7% increase from 2014.

“The allure of Hawaii is really pretty universal,” Hawaiian Chief Commercial Officer Peter Ingram told IBD. As the middle class grows in Korea and China, the airline expects to fly more Asian tourists to Hawaii, he said.

Branching Out

Ingram notes that Japan has always had a big presence in Hawaii and that tourism from Japan is rising with the strengthening yen. The airline currently flies from Hawaii to Australia, New Zealand, American Samoa, Tahiti, Japan, South Korea and China.

He also said that Hawaiian offers service to smaller cities on the Pacific Rim, such as Auckland in New Zealand, Brisbane in Australia, and Japan’s Sapporo, that “don’t register on the map of the big carriers.” Though, after Hawaiian began service to Auckland, American Airlines started flying there too, says Ingram.

And of course, the airline outpaces everyone on inter-island flights within the Hawaiian chain, with about 160 daily departures.

“We understand travel to Hawaii better than anyone. We’re prepared to take on any competitor who enters the market,” said Ingram.

All of the big three U.S. carriers, American, United Airlines and Delta Air Lines compete with Hawaiian for the mainland-to-Hawaii business. Alaska Airlines and Virgin America also offer flights. And Japanese carrier All Nippon Airways also flies to Hawaii from Japan.

Additionally, wags have predicted for years that Southwest Airlines would enter the Hawaii market. But it won’t happen this year, says Helane Becker, an analyst with Cowen & Co., who spoke with IBD.

“Southwest doesn’t have any aircraft with extended over-water operations certification,” she said. “It would take about a year to get … certified from the FAA on the existing fleet. And we would know if they applied for it. … They haven’t, so we don’t view Southwest as a short-term threat.”

Becker rates Hawaiian at market perform. She says the stock is at a high valuation, but adds, “They’re a very strong competitor on the West Coast, and they’ve been growing aggressively.”

On-Time Arrivals

For each of the past 12 years, Hawaiian has led U.S. carriers in on-time performance, according the U.S. Department of Transportation. And the airline is noted for its top-notch service; it even still serves food, included in the fare on mainland-to-Hawaii flights.

It’s also adding luxury to its liners. In October 2015, Hawaiian said it will put lie-flat seating in its Airbus A330 premium cabins.

“Those airplanes do all our long-haul flying outside Hawaii,” said Ingram. Hawaiian’s customers are couples or families, he said. And unlike business travelers, they don’t necessarily want isolation.

“We’ve worked to custom design” the seats to accommodate our customers, he said. “We will have planes with these seats in the second or third quarter of this year.”

Ingram says the majority of Hawaiian’s A330s will be retrofitted by the end of 2017.

The airline is also adding the A321 NEO to its fleet this year — a single-aisle, smaller long-haul aircraft. It will enable Hawaiian to fly more cost-effectively from smaller locations on the West Coast of North America to Hawaii, said Ingram.

The airline’s net income for its fourth quarter, ended Dec. 31, more than tripled to $37.9 million from $11.1 million in the year-earlier period. Similarly, diluted earnings per share rocketed up to 66 cents from 17 cents in the year-earlier quarter.

Yet, total revenue declined slightly in the fourth quarter to $574.2 million from $574.8 million. For the full year, total revenue grew a bit to $2.32 billion from $2.31 billion. The company’s revenue took a hit from foreign-currency impacts, reduced fuel surcharges (from lower fuel costs) and thus lower total fares, as well as higher capacity from competitors, which put pressure on the fares in North America, Ingram said.

Fueling Profits

So what’s fueling the jump in income and earnings on declining revenue? Well, cheap fuel. For the fourth quarter, Hawaiian’s aircraft fuel costs dropped 41.4% to $88.4 million from $150.8 million.

Asked if Hawaiian would stockpile or hedge fuel at the current low prices, Ingram demurred: “We do hedge fuel, but we’re not speculators.”

Zack’s puts Hawaiian’s first-quarter 2016 earnings at 73 cents a share and full-year 2016 earnings at $4.57 per share. But both Derchin and Becker estimate Hawaiian will earn $5 per share for 2016.

Not long ago, its stock price was at 5. Hawaiian (in business for 87 years) went through its second bankruptcy in 2003-2005, and its stock was still bumping along at a dismal 5 to 6 from 2011 through early 2013, when it finally started climbing. In the past year, the stock has jumped up from a low of 19.66 in mid-March 2015 to 52-week intraday high of 46.98 on Wednesday.

“We’re feeling very optimistic about our prospects for 2016,” Ingram said. “We’re seeing flatter comparisons on foreign exchange, and we’re seeing continued strong demand throughout our network.”

(Kathleen Doler - Investor's Business Daily)

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