Since the company released Q1 earnings on April 24 last, shareholders of Hawaiian Holdings, Inc. (HA), the parent company of Hawaiian Airlines, have seen better than 30% gains. Last week, the company briefly touched a new 52-week high before hitting resistance at the psychologically important $7 level and pulling back. However, the stock price has barely been able to keep up with rising expectations for future earnings growth at Hawaiian. Over the past 90 days, analyst estimates for 2012 earnings have risen by 30% from $1.16 to $1.51 (essentially mirroring the stock price, and vice versa). I expect Hawaiian's shares to continue outperforming the market for the time being, with upside as high as $15 in the next year.
My Earnings Estimate
On June 27, Hawaiian filed an investor update that increased the company's Q2 revenue guidance, although the company also forecasted higher costs. Hawaiian now forecasts a RASM increase of 3-5% from last year's figure of 13.23 cents. CASM excluding fuel and one time charges is now guided at up 0.5-2.5%. The company subsequently reported a Q2 load factor of 84.0% (slightly above the midpoint of expectations) and total available seat miles (ASMs) up 16.8% (also slightly above the midpoint of expectations). Based on these figures, I expect a RASM increase of about 4.3%, leading to revenue of $481 million (slightly better than the average analyst estimate). On the basis of lower fuel costs and the company's cost guidance, I am projecting adjusted EPS of 20 cents, slightly above the average analyst estimate.
Strong Q3 Guidance
While I expect a modest top and bottom line beat from the company, this alone would not move the stock much. However, I expect strong guidance for Q3 that will set the company up for better than $1 EPS for that quarter (well ahead of estimates). First, the company is seeing very strong demand, as evidenced by the slight year-over-year increase in Q2 load factor. Furthermore, Hawaiian's newest routes (to Fukuoka and New York) are likely to perform better in Q3 than in Q2 due to seasonality and increasing brand recognition in these new markets. Furthermore, higher passenger feed during the peak season should improve results from Hawaiian's inter-island routes (which under-performed in Q1). I expect year-over-year RASM growth in the mid-single digits.
Additionally, CASM seems likely to return to year-over-year declines in Q3. While Q2 CASM will show a slight increase, the company took delivery of three new widebody aircraft and opened two new routes during the quarter. All of these activities entail one-time "startup" costs. By contrast, the company is not expected to receive new aircraft or begin new routes in Q3. Hawaiian experienced a 4.2% drop in CASM excluding fuel in Q1FY12, and a 1.3% drop in Q4FY11. I am, therefore, modeling a 2% drop in CASM ex-fuel for Q3FY12. While fuel prices are more difficult to predict, I expect economic fuel cost for Q3 to come in below last year's figure of $3.22/gallon.
With CASM down roughly 2% and RASM up by perhaps 5% year over year, Hawaiian could see adjusted EPS grow from 59 cents in Q3 2011 to somewhere in the $1.00-$1.10 range.
Hawaiian Airlines has been expanding at a breakneck pace, and looks set to continue doing so in the next year. Since the beginning of May, Hawaiian has announced new services to Sapporo, Japan, Brisbane, Australia, and Auckland, New Zealand. The company also announced on Tuesday that it would begin offering turboprop flights through a subsidiary in order to serve smaller markets within Hawaii. These moves to grow capacity indicate management's confidence in the soundness of the company's business model. So far, Mark Dunkerley and company have given investors no reason to doubt them.
Hawaiian's strategy of growing in the Asia-Pacific region makes a good deal of sense, as it allows the company to tap large sources of potential Hawaii tourists. Furthermore, Hawaiian Airlines experiences less competition on most of those routes compared to the company's routes to the U.S. mainland. I expect Hawaiian's next move will be to add service to Taiwan and mainland China. The company could open routes to these countries by late 2013 or 2014. Both Taiwan and Mainland China have large and growing middle class populations that could drive traffic and revenue growth for Hawaiian Airlines for years to come.
Hawaiian was a major beneficiary of the 2008 airline industry shake-up, which led to the demise of competitors Aloha Airlines and ATA. The company continues to face competition from the network carriers, particularly United Continental (UAL). Meanwhile, other players are considering growth in the hot Hawaii market. The main carriers considering expansion in Hawaii are Alaska Air (ALK), Allegiant Travel (ALGT), and Southwest Airlines (LUV). Some of these companies may have success in the Hawaii market, but they will not meaningfully impact Hawaiian's performance.
Southwest Airlines has a significant opportunity in expanding service to Hawaii. Prior to the demise of ATA, Southwest was able to offer service to the Hawaiian islands via a codeshare with ATA. While Southwest seemed to be poised to enter the Hawaii market a few months ago, these plans may have been put on hold for now. In May, the company slowed down the delivery schedule for the 737-800 plane that would fly Hawaii routes. Since many of these planes are being used to add capacity in Southwest's highest-demand markets, there may not be enough aircraft available for Southwest to expand to Hawaii.
Allegiant recently began flights to Hawaii and plans to add a variety of West Coast destinations over the next few months. The company will undercut Hawaiian on fares, but it also offers a much lower level of service, and generally serves smaller airports. Some would-be Hawaiian patrons might switch, but by and large the two airlines do not attract the same kind of customer. Moreover, Allegiant only has 6 Boeing 757 aircraft capable of flying to Hawaii (two of which are not yet in service). This puts sharp limits on the threat to Hawaiian Airlines.
Lastly, Alaska Airlines has been growing its presence in Hawaii in recent years. The carrier has an average of 22 daily flights from a variety of West Coast cities. Since Alaska flies smaller Boeing 737 aircraft on these routes (compared to Hawaiian's widebody aircraft), Alaska is able to offer more point-to-point service such as direct flights from the mainland to Kauai and the Big Island. This creates some competitive advantage vis-a-vis Hawaiian, which operates a hub-and-spoke model via Honolulu and, to a lesser extent, Kahului Airport on Maui. It will be important to keep an eye on the revenue performance of Hawaiian's West Coast routes to see if this added competition is hurting profitability. However, Hawaiian's expansion overseas, within Hawaii, and to New York provides sufficient diversification of revenue so that the company is well positioned to meet any future challenges.