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CAPA Live: Hawaiian Air successfully restructures its US govt loan

Analysis

Airlines worldwide have built up unprecedented levels of liquidity during the COVID-19 crisis, and it is not yet clear how those operators will approach balance sheet management over the long term. 

But in the short term, some airlines are working to restructure the debt that they have taken on during the pandemic on more favourable terms – particularly government loans that were more restrictive than more traditional financing vehicles. 

Hawaiian Airlines is one of those operators that are attempting to determine the more optimal liquidity levels over the longer term, but in the short term it has just tapped the markets for a transaction to pay off its loan from the US government, putting the airline in a more favourable position to manage its debt. 

Summary

  • Hawaiian Airlines is using a new financing transition to pay off its government loan, on better terms than Federal financing. 
  • Now the airline can pivot its thinking to the way it plans to approach managing its balance sheet for the next two to four years. 
  • The company is prepping to launch its first routes to the US states of Texas and Florida. 

Hawaiian joins other airlines in working to determine optimal liquidity in the future

“I think we will probably carry some of the scars of this period for a while as reminders to think a little differently about some of our long term decisions”, said Hawaiian CEO Peter Ingram during the recent CAPA Live February conference.

“Using liquidity as an example, right now we’ve gone and taken a tremendous amount of debt to ensure we have the liquidity to survive this crisis”, Mr Ingram said. 

But as Hawaiian moves back into whatever the new normal may be, “What’s the right amount of liquidity to have? Do we carry a little bit more buffer in terms of cash on our balance sheet”, he said. 

Hawaiian just closed on a USD800 million financing package backed by its loyalty programme that will be used, in part, to pay back the USD45 million initial draw from its USD622 million loan from the US government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Hawaiian replaces its government loan with more favourable financing 

Hawaiian believes the restructuring of that debt was successful.

“We were really pleased with the demand we had, and the financing was substantially oversubscribed”, said Mr Ingram. He explained that Hawaiian was able to obtain a total cost of borrowing that “was in line with our expectations going into the programme, maybe even on the better end”. 

He explained that the overall cost of the new financing was cheaper, and that it is also “a longer term borrowing, so we didn’t have the amortisation in the next couple of years, which we would have had under the CARES loan.” 

Additionally, Mr Ingram noted that it was important for Hawaiian to forge the new financing package before a deadline near the end of Mar-2021 to draw additional funds from the CARES loan, “because that would have triggered some of the warrants and other things that made the CARES loan more expensive.”

Under the terms of the agreement of the CARES loan, the US Treasury would have received warrants from Hawaiian to purchase its common stock with an aggregate value equal to 10% of the total loan amount drawn. The CARES act also required restrictions on employee compensation and stock repurchases.   

Hawaiian can now contemplate balance sheet management for the longer term 

With the new transaction closed, Hawaiian has ample liquidity, said Mr Ingram. He added that while he needs to be careful about presupposing he has a crystal ball for the future, Hawaiian’s CEO does believe the airline has the liquidity to manage through the pandemic “as we see it evolving”. 

Mr Ingram said that Hawaiian could now pivot to thinking “now that we’ve taken this debt on, how do we think about where our balance sheet needs to be in the next two, three, four years.” 

Hawaiian's fleet composition is firmed up for the foreseeable future

Mr Ingram believes that Hawaiian was fortunate enough to enter the COVID-19 crisis in a strong financial position, noting that the airline did not have to make any big decisions about its fleet, after retiring its Boeing 767s a couple of years ago. 

“All of the airplanes that are in our fleet now are things we expect to have for a while”, said Mr Ingram.

The airline operates a fleet of Airbus A321neos, Boeing 717s and Airbus A330s. 

Hawaiian looks at its fleet of Airbus A321neos as “a little bit of a Swiss Army knife”, said Mr Ingram. He explained that the airline had been operating those narrowbodies on some short haul, interi-sland flights, while at the same time the operator could place those jets in US mainland flights that might have been an A330 market in previous times. 

Most of the planning that Hawaiian has undertaken about the way its network ramps back up has the airline flying its A321neos “more fully at historical utilisation”, before other aircraft in its fleet, Mr Ingram explained.

Hawaiian has also reached an agreement with Boeing to defer deliveries of its Boeing 787-9 widebodies by one year, to 2022. The airline has a total of ten 787s on order and two deliveries scheduled for late 2022, and plans to put the aircraft into service during early 2023. 

Hawaiian readies to add new mainland routes to Texas and Florida 

Similarly to other airlines, Hawaiian has taken the opportunity to add new routes during the pandemic, and in the Mar-2020 and Apr-2020 period the airline plans to launch flights from Honolulu to Austin, Orlando and Ontario (California), as well from Long Beach to Maui. 

The three new routes from Honolulu do not have any competition, and Mr Ingram stated that in the case of Ontario and Long Beach to Maui, “those are medium haul West Coast routes in the core of our Western geography[,] where we’re a very well known brand.” 

Austin and Orlando represent Hawaiian’s first flights to the US states of Texas and Florida, and Mr Ingram noted that the airline needed to build some brand awareness; but he also remarked that in the case of Orlando, some of the traffic base for that market originates in Hawaii. 

Mr Ingram has noted that the new routes “are booking fine right now. They’re generally in line with how we’re booking system average for our existing routes.” 

Hawaiian forges a solid balance sheet to navigate the crisis

The COVID-19 pandemic has forced airlines worldwide to rethink all aspects of their business.

It seems certain that aspects of the airline business will be permanently changed, but Hawaiian believes it has crafted a solid balance sheet to move forward as the crisis evolves. 

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