Hawaiian Holdings: Very Tough Road Ahead
Summary
- Excluding the CARES Act tax benefit, Hawaiian lost over $140 million in Q1.
- Q2 projections are ugly which has put liquidity under pressure. The firm has responded through a range of actions.
- With the dividend having been scrapped, $12 a share still looks a bit pricey.
- If we tested the lows in the near term, we may dip our toes here in the water once more.
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Despite the rally we have seen in Hawaiian Holdings (NASDAQ:HA), CEO Peter Ingram did not give any strong indication that this recent rally in the share price will be sustained. In fact, if we look at the technical chart, we can see that buying volume over the past 7 weeks has not been able to keep up with the rise in the share price. This brings worrying consequences to the table with respect to the sustainability of this recent rally. The trajectory of the share price acts as a discounting system which means that it is essentially pricing in the eventual upturn in this market. However, the first quarter earnings call did not give much room for encouragement as to when this upturn will occur. In fact, management was very clear in relaying the message that a quick return to pre-pandemic numbers is not viable in the short term.
There are so many trends against the airline industry at present. First, there have been suggestions that in order to comply with social distancing, every second seat should be empty. This is just not feasible, in our opinion, as airlines such as Hawaiian will prefer to keep flights grounded in order to save costs. Another suggestion surrounds the whole area of testing passengers who come from other countries. Ingram though eluded to the fact that this also is not feasible due to the testing capabilities simply not being there at present. Suffice it to say, Hawaiian seems to be caught in a major bind at present.
Hawaiian's whole pretence at the moment is to preserve liquidity to try and ride out this downturn as best as it can. This means protecting its cash reserves as much as possible so the firm can be basically ready for the upturn (however that will look like) when it comes. This has meant that Hawaiian to increase liquidity has either done or is in the process of doing the following.
- The firm delayed taking delivery of its 787s from Boeing (BA) due to a sizable cut to the firm's capex budget
- Management have looked into the viability of financing a portion of its unencumbered aircraft (A321, A330, etc.)
- The firm drew down $235 million in a revolver in March and also can apply for extra credit from the government
- 50% of the airline's staff have taken voluntary leave which will save significant labour costs
- Management has suspended all buyback programs as well as the dividend
The airline really had no choice. Trying to operate an airline when zero revenue is coming through the door means, practically, no investment can be done. Recessions can be the very best time to double down on investment (due to lower pricing), but Hawaiian has had to whittle down its assets (staff, aircraft) and take on more debt. This inevitably means that the projected upturn will be not as swift as some may believe here.
In terms of the numbers, Hawaiian posted a net loss of $144 million on revenue of $559 million. Again, these numbers despite the 15% drop in top-line sales demonstrated the high fixed costs which are prevalent in this industry.
We went long this stock (through options) back in late March when shares were trading close to the $8 mark, but then, subsequently, bought back our sold options for a profit when implied volatility subsided. Many at that time believed the S&P was going to drop to close to the 1500-level. Maximum pessimism is always a good hunting ground for value plays, and it proved correct with Hawaiian at that time.
Currently, shares are trading above $12 a share. The story (from a value investor's perspective) though has changed over the past couple of months. Earnings projections for both this year and next have literally fallen off a cliff. Earnings, for this fiscal year, are now expected to come in at negative $7 per share. If sales do not pick up soon, 2021 could also be a negative earnings year for the airline.
From a sales and assets perspective, shares look cheap. However, the fact that the firm most likely will not turn a profit for a considerable period of time now, we would be looking for a far more attractive risk/reward set-up here in HA. If we could revisit the March lows over the next couple of months, we may look at HA once more. Remember, as traders, our aim is to put ourselves in as many situations as possible where we have limited downside but sizable upside. Because of the lack of strong buying volume in recent sessions, downside risk remains pretty meaningful at present.
Therefore, to sum up, HA is up close to 40% since we penned our last article in late March. Considering, though, now, after Q1 numbers, that the dividend has been scrapped and earnings are expected to be dire this year, we are no longer interested in being long at this price point ($12+). Let's see what the second quarter brings.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (6)
Times have changed and with hardly any revenues to speak of it would not be prudent to stay in this company since the cash generating capabilities, the life blood of any company have practically vanished. This is not the fault of management nor their wonderful employees. As an investor the protection of your money must always be a first step. As Keynes stated when the facts change, you must also change. Wishing HA a better future.
