Hawaiian Holdings Inc. (NGS: HA). For most of the second quarter, Hawaii imposed a 14-day quarantine on arriving airline passengers, decimating the company’s business. However, on June 16, the quarantine was lifted for passengers traveling within the islands, and on August 1, it was also lifted for passengers testing negative prior to arrival in Hawaii. We think that the new guidelines could help the Hawaiian tourism industry – and Hawaiian Holdings – to recover. However, we note that some counties in the state have maintained 14-day quarantines. We also expect the company to post large losses over the remainder of the year given passenger uncertainty about state and local regulations and general concerns about air travel during the pandemic.
On October 27, HA reported a 3Q20 adjusted loss of $3.76 per share, down from earnings of $1.72 per share. The consensus estimate had called for a loss of $3.56 per share. The loss reflected the negative impact of COVID-19 and quarantines in parts of Hawaii, which brought tourism to a near standstill. The 3Q adjusted net loss totaled $173 million (including proceeds from the CARES Act), down from earnings of $81 million in the prior-year period. Passenger revenue fell 94% to approximately $40 million and ‘other revenue’ declined 41% to just over $36 million.
Total revenue fell almost 90% from the prior year to $76 million and came in below the consensus estimate of $107 million. Revenue passenger miles, a measure of traffic, dropped 96% to 182 million miles. Available seat miles fell 87% to 718 million miles. Operating revenue per available seat mile (RASM) fell 25% to $0.106. Total operating expenses fell 69%, to $197 million. Aircraft fuel costs, including taxes and delivery, dropped 90% to $15.0 million. Due to the fixed-cost nature of most of the company’s expenses, costs per available seat mile (CASM), excluding fuel and nonrecurring items, rose to $0.41 per share from $0.38. Interest expense rose to $11.6 million from $6.4 million.
Hawaiian Airlines expects fourth-quarter capacity to decrease 70% from the prior year.
As discussed in a previous note, in 2019, revenue declined 20 basis points to $2.8 billion, while adjusted earnings declined to $4.61 per share from $5.44.
EARNINGS & GROWTH ANALYSIS
In view of the decline in air travel due to quarantines and other coronavirus concerns, we project large losses over the remainder of 2020. For 2021, we are also widening our loss estimate to $2.10 per share from $0.60
FINANCIAL STRENGTH & DIVIDEND
During the third quarter, to raise $420 million in cash, HA sold and leased back two Airbus A321neo aircraft and issued Enhanced Equipment Trust Certificates secured by two Airbus aircraft. On June 30, 2020, Hawaiian Holdings received $214 million in grants and a $49 million loan under the CARES Act Payroll Support Program.
Outstanding debt and finance lease obligations totaled $1.3 billion.
Our dividend estimates are $0.24 for 2020 and $0.12 for 2021.
MANAGEMENT & RISKS
Mark B. Dunkley has been the CEO of Hawaiian Holdings and its subsidiary, Hawaiian Airlines, since 2005. In 2011, he began to expand the carrier’s route network beyond inter-island flights with service from Hawaii to Asia and the West Coast.
The company faces stiff competition from other low-cost airlines and from legacy carriers that have cut ticket prices over the past several years.
In times of high oil prices, fuel costs represent more than a third of an airline’s costs. Hawaiian Holdings’ earnings and share price could suffer if oil prices increase significantly.
Hawaiian Holdings, through its subsidiary Hawaiian Airlines, is a leading carrier for inter-island flights, which account for about a quarter of revenue. The airline also has the largest share of flights between Hawaii and the West Coast, which account for half of revenue.
Given management’s projections for higher costs and weak demand in the near term, our rating remains HOLD.
On November 23, HOLD-rated HA closed at $20.23, up $1.65.