Hawaiian posts profit in a sea of industry red ink

The results showed a significant improvement from 1Q2010 when it posted a USD200,000 profit on revenues of USD298.4 million.

CFO Peter Ingram, however, reported, with the rise in economic fuel costs, the company recognised an adjusted net loss of USD3.2 million for the quarter compared to an adjusted net income of USD100,000 in 1Q-2010. Aircraft fuel costs for Hawaiian in the first quarter increased 55.6% year over year to USD109.4 million and represented 29.5% of operating expenses. Fuel contributed to its USD4.9 million operating costs an USD11 million negative swing from 1Q-2010

"In the first quarter, the company did a good job of mitigating the effects of the rising cost of fuel and the tragedy in Japan," said CEO Mark Dunkerley. "Fuel prices have climbed further since then, creating a substantial challenge for all airlines, including Hawaiian. We will continue our focus on controlling those costs that lie within our grasp. At the same time, we expect that strong demand in our core markets, the recovery in Japan... and, rising revenues will help offset some of the increase in fuel prices."

Earthquake damage

The airline reported the impact of the Japan quake was not as bad as the doom and gloom predicted by the Hawaiian hotel industry in the immediate wake of the disaster.

Indeed, the company reported strong yields and revenues across its network but especially in its new markets, Hong Kong, Incheon, and Tokyo Haneda which are performing beyond expectations.

"I don't think today the hotel industry experience is much different from ours," said Mr Dunkerly in response to a question. "They reported recently that they are not seeing those big initial drops persisting. I will say our expectation, formed from talking to our travel partners, a sharp downturn was predictable and they believe a recovery will commence in early May at the conclusion of Golden Week. But it will take awhile for demand to build back again. "

Hawaiian opted not to reduce service and is continuing with plans to begin Osaka service in July. The company acknowledged Tokyo traffic was down over 20%. Mr Dunkerly cast back to the Kobe earthquake as well as conversations with travel partners such as ANA for his expectations.

"What we saw in Tokyo and Osaka contrasts to the chaos presented by the media," he explained. "Tokyo infrastructure appears unharmed and when you go further south to Osaka you see even less affect. You did notice the absence of Western faces in Tokyo after the quake. I think that is why airlines that are more business oriented and carry more passengers from outside Japan were more severely affected than we were. We have a leisure focus and one daily frequency so that would naturally have less impact on us.That is why we decided against a capacity reduction. We have, however, postponed A330 introduction to Haneda allocating the aircraft to the West Coast markets. The business case for Osaka has not changed. In fact, Japan-Hawaii capacity has been down since JAL."

Australia, he reported, remained strong and the demand from Sydney was three times what it was a year ago driving daily summer service which will cut to five times a week later in the year. He called Australia one of the company's strongest routes.

Hawaiian holds back-up authority for the US-Haneda route and it has requested primary authority since Delta has opted to postpone its new Haneda service because of the Japan crisis.

Double-digit spike in capacity expected

Full-year capacity is expected to increase between 20-22% over 2010, according to Peter Ingram, who cited the addition of three wide-bodies to serve its new international markets. Indeed, 80% of the increase relates to Incheon, Tokyo and increased frequencies in the Sydney market.

Its trans-Pacific and inter-island routes will remain steady with the airline suggesting there might be a rise in yield from the drop in overcapacity in the trans-Pacific (US west coast to Hawaii) market. That market experienced a 12% increase in capacity but Mr Ingram said capacity was contracting on rising fuel.

Second quarter load factor, he said, will be lower year on year between flat and down 3% with Japan diluting the number. Yield is expected to improve 5-8% while PRASM is expected to be up 3-6% reflecting an uptick in trans-Pacific PRASM on industry capacity stabilization. The stabilisation comes after four quarters of increase. He indicated inter-island will dampen system because short-haul flying tends to have lower RASM and CASM.

Similar to the first quarter, Mr Ingram said that other revenue will grow at a slower rate than PRASM, diluting the growth on operating revenue per ASM, compared to passenger revenue per ASM.

CASM ex fuel will be flat to up 3% on increasing maintenance, aircraft rent and airport costs, which were also cited for increases in the first quarter. Both maintenance and aircraft rent grew faster than ASMs on the new aircraft because the airline opted for power-by-the-hour contracts instead of having a maintenance holiday on its new aircraft. Its Boeing 717s are also in their midlife checks which further inflates the maintenance line, said Mr Ingram. Finally, he reported that commissions and credit card fees as well as revenue-related expenses will continue to rise as they did in the first quarter.

Revenues exceed expectations

The revenue performance exceeded executive expectations going into the year, according to Mr Dunkerly. Inter-island, 31% of passenger revenue for the first quarter and with flat capacity, showed traffic declining 1.5% year on year. However, yields were 13% higher resulting in a PRASM improvement on 12%.

"That was less than we experienced through last year but it is impressive nonetheless on tougher comparisons," he said. He pointed out that, at 52% of capacity trans-Pacific was the largest portion of the company's business. "Trans-Pacific did not experience the same robust revenues as the inter-island markets did but the 2% rise in PRASM was against a backdrop of a 12% increase in industry capacity. The 2% increase was the largest in two years and the first positive result since the first quarter of 2010."

He also reported that on routes operated this time last year, every single operation had a positive year-on-year RASM improvement.

He reported that industry capacity rose 12%, 18%, 13% and 10% year on year in each of the last four quarters. For the remainder of 2011, he said, it will be essential flat in the second quarter while third and fourth quarters would see 3% and 2% decline, respectively.

Mr Dunkerly expects the favorable revenue results to continue in the next months for a double-digit improvement in trans-Pacific PRASM. He pointed to the early stages of growth for its new Asian expansion, saying the region was not only the fastest growing aviation market but also the fastest growing to Hawaii.

Capacity for the quarter increased 21.2% year over year to 2.8 billion ASMs, resulting in RASM of 13.13 cents, up 1.1% from the first quarter a year ago. First quarter passenger load factor increased 0.5 percentage points to 84.1% compared to the same period a year ago, while passenger yield increased 1.2% to 13.89 cents resulting in a PRASM increase of 2.0% to 11.69 cents.

Mr Ingram reported that non-passenger revenue did not grow as fast as the passenger line but improvements in bag fees and cargo contributed to the USD5.3m improvement in the other-revenue line.

Expenses

Total operating expenses for the first quarter of 2011 increased 26.6% year over year to $370.6 million, resulting in CASM of 13.31 cents, up 4.5% versus the same period a year ago. Excluding fuel, first quarter CASM decreased to 9.38 cents, down 3.1% compared to the same period a year ago.

Hawaiian's average cost per gallon of jet fuel increased 32.4% year on year to USD2.86 (including taxes and delivery). Non-operating income in the first quarter reflects USD8.4 million in net gains from Hawaiian's fuel hedging activity.

For the three months ended March 31, 2011, economic fuel expense was USD107.8 million (USD2.82 per gallon), compared with USD71.1 million (USD2.19 per gallon) in the prior year period.

First quarter 2011 non-operating income totaled USD6.4 million, compared with non-operating expense of USD5.2 million in the first quarter of 2010.

Liquidity

During the first quarter of 2011, the company received net proceeds of USD78.7 million from the issuance of Convertible Senior Notes, Convertible Note Hedges and Warrants, due March 15, 2016, a portion of which were used to repay the outstanding balance on the company's existing credit agreement of USD54.7 million.

Hawaiian ended the quarter with USD323.7 million in unrestricted cash and cash equivalents and USD5.2 million in restricted cash. It reported available borrowing capacity of USD63.1 million and outstanding long-term debt and capital lease obligations of USD196.2 million which was pushed up USD65 million on action it took in April for a secured loan due April 2023 for financing its Airbus A330-200 aircraft.