Hawaiian Airlines posts falling profits as it expands at a rapid clip


Kicking off the third quarter earnings season, Hawaiian Airlines posted USD25.6 million in net income for the quarter, down from the USD30.5 million posted in 3Q2010 on a higher tax rate. The tax rate was 46% compared with 26% in the earlier period, but looking ahead it should level out to between 37-40%, said the company.

Analysts, clearly worried that the optimistic reports about strong demand across the industry might abate, probed Hawaiian executives for any indication that demand was softening. But they were told forward bookings remain strong. The demand picture has been accompanied by a moderation in fuel, which improved profits over the summer months.

CEO Mark Dunkerley reported the company is not seeing any slowdown in bookings. The outsized RASM improvement, at over 14%, came from being conservative on the Japanese recovery, which exceeded even best assumptions. He indicated guidance on the domestic and other international services had not changed since it was announced in July. In response to a question about fare sales, Mr Dunkerley noted they are part of the business and not indicative of any bigger picture concern about bookings.

He also said that the lesson learned from 2009 was a Hawaiian vacation was not as discretionary as many had assumed. Growth in domestic capacity will be flat, rising only to accommodate the switch from B767s to A330s while the capacity growth will be in new markets where purchasing power of foreign currency against the US dollar is going up and where there is a lot of demand.

Solid fourth quarter guidance

Fourth quarter capacity will rise between 15.5-17.5% as Hawaiian continues its westward expansion into Asia. Load factors are expected to be down 1% to up 1% while yield is expected to rise 8-11% for a passenger revenue per available seat mile (PRASM) increase of 7.5-10.5%. While lower than the third quarter, management cited the seasonality of the fourth quarter along with a stronger seasonality in the Japan market than it had originally anticipated. Other revenue will grow between 5.5% and 8.5%.

It expects cost per available seat mile (CASM) ex fuel to stabilise to down 1% to up 2% in the fourth quarter, although maintenance will be higher year-on-year. Hawaiian cited increasing credit card and commission fees as it moves into the more-commission-based Asian market. However, it said that should be offset by lower costs as it increases capacity. When asked whether CASM ex-fuel might return to 2009 levels, CFO Peter Ingram indicated that while it is expected to decline in 2012, the company was not going to provide guidance on that.

The company also reported double-digit PRASM in its domestic, neighbour island and West Coast-Hawaii markets, as well as stronger than expected demand from Japan and Asia. The PRASM increase was 12% in that market and 14.6% for the network, at the higher end of the company’s previous guidance. CEO Mark Dunkerly said the West Coast-Hawaii routes are declining in importance in overall operations owing to its diversification into Asia. However, it still accounts for just under half of the total revenue, down from 60%.

Hawaiian reported industry capacity in the West Coast-Hawaii market fell during the quarter, continuing a decline experienced in the second quarter, something not seen since 2009 when capacity continually rose. It expects capacity to increase 1.6% in the fourth quarter and another 1.3% in the first half of 2012.

Neighbour-island service constitutes a quarter of revenues and experienced a decline in the early summer on connecting passengers out of Japan in the wake of the earthquake. International capacity now accounts for a quarter of revenues for the first time and Mr Dunkerley indicated the company experienced a four-fold increase in international revenues during the third quarter. Hawaiian reported the rebound in Japanese demand during the third quarter validated its decision to not only maintain capacity at Haneda but open Osaka-Hawaii as well. It is scheduled to add a third route, Fukuoku-Hawaii, service in Apr-2012.

He also reported that it wants to increase Haneda service given the suspension of operations by competitors and unused slots, but the Department of Transportation has not re-assigned the slots. However, Hawaiian plans to move very quickly if that situation should change. Mr Dunkerley reported that its decision to remain at full capacity in the post-earthquake period may have helped cement relationships with both tour operators and ANA.

Other revenue grew at a slower pace, largely because ancillary items such as bag fees do not apply to the international business where it is growing most. That means other revenues will continue to grow at a slow pace.

Hawaiian has been approached to gauge its level of interest in joining an alliance but its cost/benefit assumptions have not changed. Mr Dunkerley rejected joining an alliance at this point, saying the costs continued to overwhelm the benefits. Instead it now has a codesharing relationship with ANA to help meet demand out of Japan and a similar deal with Virgin Australia. He noted that alliances are more geared toward business connectivity which did not fit its Hawaii destination leisure model.

Its South Korean service is not as strong as Japan because it is a developing, rather than mature market, but load factors still exceed 80% and it has the potential to be as strong as the Japanese market. Hawaiian has benefited from the lifting of US visa requirements for Hawaii-bound travelers from the peninsula. Mr Dunkerley has been an outspoken opponent of the visa requirements saying they only serve to force the US to forego increasing travel and tourism surpluses. Given the breadth of the Chinese market and the growing middle class there and in India, waiving visa requirements would considerably boost tourism to the US.

Now that CFO Peter Ingram is moving into the chief commercial officer role, he teased analysts by saying that Hawaiian is working on building its package business and will likely have an announcement on cross selling hotels in the fourth quarter.

Return to profitability after rough 2Q

The results marked a return to quarterly profitability for the airline which posted a USD50 million net loss in the second quarter.

It added USD100 million to its operating revenue in what is expected to be the continuing theme for the rest of the year for the US airline industry. See related report: US airlines to report increasing revenue and strong demand

Hawaiian posted operating revenue of USD455.9 million up 29.5% from the USD352 million in 3Q2010. Operating income also rose, 55.2%, in the quarter to USD60.9 million. Citing economic fuel expense, the company reported an adjusted net income of USD30 million compared to adjusted net income of USD28.5 million.

One of the few US airlines with robust growth plans tapping Hawaii’s Western markets, Hawaiian increased capacity 16.1% to 3.2 billion available seat miles but increased revenue per available seat mile (RASM) by 11.7% to 14.40 cents. Yield jumped 16.9% to 15.32 cents despite a 1.7%-point decline in load factor to 75.2%. This pushed passenger revenue per ASM to 13.05 cents, up 14.6%.

Costs also growing

As can be expected with strong growth, costs were up, 26.3% year-on-year to USD394.9 million for a CASM of 12.47 cents, up 8.8% year on year. Ex fuel CASM declined, however, 2.3% to 8.18 cents. Fuel rose 61.1% year on year to USD136 million, representing 34.4% of operating expense. Average cost per gallon jumped 40.9% to USD3.17 all in and fuel hedging lost it USD9.7 million net. It measures fuel as economic fuel expense which was USD3.22 during the quarter for a total of USD138.3 million, up substantially from the USD2.28 per gallon or USD85.6 million in the 2010 third quarter.

Maintenance costs continue to plague the airline, but the higher maintenance experienced this year as well as that expected in the fourth quarter is expected to abate in 2012. Non operating expenses rose to USD13.6 million compared to USD2.9 million in 3Q2010 owing to losses in fuel hedging and increase interest expense.

Hawaiian finished the quarter with unrestricted cash and cash equivalents of USD286.8 million with another USD35.2 million in restricted cash. Debt and capital lease obligations totaled USD401.2 million. After the end of the quarter it also arranged for the sale and leaseback of three A330-200 aircraft for deliveries in 2Q2012 and the first half of 2013.

If bookings hold and fuel prices continue to be tempered, Mr Dunkerley predicts the second half to be far better than the first half when its USD855 million first quarter profit was compromised by second quarter results.

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