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Hawaiian continues western expansion on profitable year

Analysis

Fresh from the dual successes of new service to Tokyo-Haneda and South Korea's Incheon, Hawaiian Airlines posted consolidated net income of USD110.3 million on total operating revenues of USD1.3 billion for 2010. The airline benefitted from USD62.5 million in tax adjustments, without which the carrier would otherwise have finished the year with USD45 million in net income. The 2010 statistics were down from the USD116.7 million profit (with the tax adjustment) or USD64.8 million, without it for 2009.

CEO Mark Dunkerley said the new service, part of westward expansion that doubled its international service, was exceeding expectations and would likely achieve maturity this year. "The success lays the groundwork for further expansion in Japan," he told analysts on Tuesday. "Asia is where the growth is."

One third of the airline's ASM increase in the quarter resulted from its Haneda service and executives noted the benefits of the longer stage length on results. Mr Dunkerley said that achieving the recognition it enjoys on the West Coast is the main challenge in its new Asian markets, given the crowded cross-Pacific arena.

Profits for the fourth quarter doubled, however, as the airline reported consolidated net income of USD70.6 million on total operating revenue of USD343.8 million. The earlier-year results included net income of USD35 million on USD297 million. With the tax adjustment, adjusted net income, reflecting economic fuel expenses for the three months, finished at USD11.3 million compared with USD10.5 million in 4Q2009.

"These fourth quarter results round out another good year for Hawaiian Airlines. In 2010, our strong financial performance enabled us to start service on two new international routes, take delivery of the first three of 16 new Airbus widebody aircraft and replace our expiring credit facilities on favourable terms," said Mr Dunkerley. "At the start of 2011 we are well positioned to continue to grow into the rapidly developing travel market in Asia."

The airline is taking an additional 13 A330s over the next four years, replacing 12 retiring 767s, to further enhance its western expansion. It is capitalising on the increased seat and cargo capabilities with 13% more seats to achieve a modest growth. Once it gets its fourth A330 it plans to switch it with the 767 now used on the Haneda route. Mr Dunkerley indicated that the upgauging would not only increase revenues but would reduce unit costs while raising margins. It is currently negotiating with financial institutions to finance coming A330 deliveries and expects to achieve that within the next few months.

Addressing concerns about increased competition in the mainland-Hawaii market, which CFO Peter Ingram reported was up 18% from 2009, Mr Dunkerley said most of the new capacity was in "incredibly small markets" and did not pose a threat to Hawaiian which still enjoys a market recognition advantage over the new competition.

Analysts expressed concern about the increased capacity from the mainland and revisited the question as to whether Hawaiian would do better to join an alliance. Mr Dunkerley explained that while management revisits the question periodically, the cost continues to outweigh the benefits. He indicated that while it might gain traffic from such an alliance, it could lose more from the relationships it now has with multiple carriers. He noted that Hawaiian's market position remains unchanged since the new competition has brought little to the game except more seats.

"The new entrants are using aircraft not ideally suited for the market and we have a cost and revenue advantage over them," he said, adding the company was putting in place strategies to gain more revenues on the consumer side by offering packages, insurance and hotels. "We also understand the market far better. We currently have those offerings and we've seen a very good year-over-year improvement even though that is off a small base. But we have strategies to make them grow."

4Q2010 financial results

Hawaiian reported reported operating income of USD22.4 million compared with USD16.1 million in the previous year. Operating revenue jumped 15.7% to USD343.8 million on a 11.7% capacity increase to 2.7 billion. This resulted in a 3.6% rise in RASM to 12.92 cents. Load factor was up 1.2 points to 85.6% compared with 4Q-2009, while yield rose 3.2% to 13.37 cents and PRASM increased 4.7% to 11.46 cents. Meanwhile, inter-island PRASM rose 20%. Mr Dunkerley cited the merger of Delta and Northwest as well as the loss of its competitor, Aloha.

A 14.4% increase in total operating expenses to USD321.4 million resulted in only a 2.5% increase in CASM to 23.08 cents. Ex fuel CASM declined 1.4% to 8.71 cents. As with its counterparts, Hawaiian cited fuel costs as a major factor, saying it rose 27% in the fourth quarter to USD89.7 million totaling 27.9% of operating expenses. However, it achieved a USD4 million gain from its fuel hedging activity during the quarter.

Hawaiian prefers using economic fuel expense in its metrics, saying it is the best measure of the effect of fuel prices on its business as it most closely approximates the net cash outflow of fuel purchases. Economic fuel expense was USD89.7 million (USD2.45 per gallon), compared with USD69.7 million (USD2.05 per gallon) in the prior-year period

In addition to fuel, Hawaiian cited aircraft rent - which increased 30.5% to USD31.7 million - as well as rising airport costs for its cost increases. While maintenance decline 16.5% in the fourth quarter, maintenance headwinds will characterise much of 2011. Fourth quarter 2010 non-operating income totalled USD1.1 million, compared with non-operating expense of USD2.8 million in the fourth quarter of 2009.

2010 results

Full-year operating income reached USD91.3 million compared with USD107.5 million for the full-year 2009. Operating revenue was USD1.310 billion, a 10.7% increase compared with 2009 on a 4.5% capacity increase to 10.2 billion ASMs. The resulting RASM was up 6% to12.91 cents. Load factor increased to 85.5% from 83.9% in 2009 while yield increased 4.4% to 13.33 cents.

Total operating expenses for 2010 increased 13.3% year over year to USD1.219 billion. CASM was 12.01 cents, up 8.5%. Excluding fuel, full year 2010 CASM increased 3.2% to 8.83 cents.

Liquidity, Capital Resources and Fuel Hedging

  • As of December 31, 2010, the company had:
    • Unrestricted cash and cash equivalents of USD285.0 million, and USD5.2 million in restricted cash.
    • USD55 million outstanding under a revolving credit facility, USD89 million outstanding under floating rate notes issued in conjunction with the acquisition of three Boeing 767-300 ER aircraft in December 2006, and additional notes payable of USD3 million.
    • USD42 million of capital lease obligations primarily associated with four Boeing 717-200 aircraft.

Guidance

Its Asian expansion will account for three quarters of its ASM growth for 2011 with expected full-year capacity growth of 15-17%. The first quarter load factor will echo last year while yields will decline 1-4%. CASM will decline 2-5% for the first quarter while CASM ex fuel will be flat to 2% for the full year. Owing to the higher volatility of fuel, it is not guiding on its expected fuel prices except to say that consumption will rise 14-15%.

Mr Ingram said several cost saving initiatives were underway including improving productivity and establishing a new procurement department to achieve better deals. It is also working on ancillary revenues including vacation packaging and hotels. Mr Dunkerley indicated revenue improvements would also come in the new Asian markets. He noted that, although demand was leisure oriented, an increasing number of passengers on the Sydney-Hawaii route were opting for Hawaiian's business class because of the value for money compared with competitors.

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