Hawaiian Holdings Is Risky, Even At Its 10-Year Lows

Hawaiian Holdings (NASDAQ:HA) is facing a perfect storm this year due to strong headwinds, such as high jet fuel costs, the devastating wildfires in Maui this summer and some technical issues with its A321neo aircraft. Due to all these negative external conditions, the stock has plunged 75% in the last 12 months (including a 10% plunge after its earnings release yesterday, after the market closed), to a fresh 10-year low.

Most of the issues are likely to prove temporary in nature and hence the business of Hawaiian may turnaround. In such a case, the stock is likely to highly reward investors off its depressed price. On the other hand, due to its excessive losses for four consecutive years, the company has accumulated a high debt load. Consequently, if some headwinds persist, such as high jet fuel prices, Hawaiian is likely to keep struggling for an extended period. Overall, the stock may offer attractive returns off its depressed price but investors should be aware of its risks.

Business overview

Hawaiian Holdings is the parent company of Hawaiian Airlines, which has a history of 94 years of connecting Hawaii with 15 U.S. gateway cities. The airline offers approximately 150 flights per day within the Hawaiian Islands.

Hawaiian faced headwinds from an unexpected disaster this summer, namely the devastating wildfires in Maui, which killed several people and destroyed some major tourist and residential areas in the island. Some resort destinations in Maui disappeared from the horizon and thus the air traffic plunged.

During the third quarter, Hawaiian was also hurt by the decision of RTX (RTX), the parent company of Pratt & Whitney, to accelerate removals and inspections of a significant portion of the engine fleet of the A321neo aircraft of Hawaiian. This unexpected decision caused a material decrease in the capacity utilization of the airline.

Moreover, Hawaiian is negatively affected by the surge of jet fuel prices this year. While the price of oil incurred a steep correction earlier this year, OPEC and Russia have implemented unprecedented rounds of production cuts in order to support the price of oil. Given the rally of the oil price in recent months, the cartel has accomplished its goal so far. As a result, the price of jet fuel, which moves in tandem with the price of oil most of the time, has rallied in recent months. As the cost of jet fuel is the most significant cost component of Hawaiian, it exerts great pressure on its results.

Hawaiian reported its financial results for the third quarter yesterday, after the market closed. The above headwinds were evident in the report of the airline. Its revenue per available seat mile decreased 6%, its EBITDA plunged from $46.7 million to -$3.2 million and its adjusted losses per share widened from -$0.15 to -$1.06, missing the analysts’ estimates by $0.13. It was the first earnings miss after four consecutive quarters of earnings beats. Moreover, the loss was over 20% of the current market capitalization of the stock and hence it was excessive.

Even worse, management revised its guidance downwards for the full year. It now expects 4% higher jet fuels costs (vs. its previous guidance) and hence it expects a smaller decrease in its costs per available seat. Due to the revised guidance, the stock plunged 10% after the earnings release. Analysts expect the company to widen its already excessive losses, from -$4.08 in 2022 to -$4.81 this year.

Fortunately for Hawaiian, the effects of the wildfires in Maui and the technical issued related to its aircraft are likely to prove temporary in nature. However, the headwind from the excessive jet fuel costs is not likely to abate anytime soon. This negative factor should not be undermined by investors, as the price of jet fuel is a major determinant of the total operating cost of Hawaiian.

To provide a perspective, the cost of jet fuel comprised 25% of the total operating cost of Hawaiian in the first nine months of the year. Moreover, in 2013 and 2014, when the price of oil was around $100, Hawaiian posted earnings per share of only $0.98 and $1.10, respectively. In 2015-2019, when the prices of oil and jet fuel were much lower, the airline posted earnings per share between $2.98 and $6.19 in each year. It is thus easy to understand how sensitive Hawaiian is to the underlying price of jet fuel.

Even worse, due to the impact of the coronavirus crisis on air traffic, Hawaiian has incurred excessive losses for four consecutive years (including this year). Given the above mentioned estimates of analysts for losses per share of -$4.81 this year, the company is on track to reach aggregate losses per share of -$23.41 over the 4-year period 2020-2023. As these losses are nearly 6 times the current market capitalization of the stock, they are undoubtedly extreme.

Moreover, analysts expect a partial recovery next year, as the headwinds from the wildfires in Maui and the technical issue related to the aircraft are likely to abate, but they still expect the company to incur losses per share of -$1.89 in 2024.

Debt

The recurring losses have greatly weakened the balance sheet of Hawaiian. Its net debt (as per Buffett’s formula, net debt = total liabilities – cash – receivables) is standing at $2.7 billion. This amount is more than 13 times the market capitalization of the stock and about 12 times the earnings of the company in 2019, the last year in which the airline was profitable. Moreover, the company has been posting negative operating income for four consecutive years. Overall, Hawaiian has a high debt load.

If all the above headwinds subside, Hawaiian is likely to return to profitability and thus it will probably be able to service its debt without any problem. On the other hand, if jet fuel costs remain excessive for years, the airline is likely to keep struggling to service its debt. As the trajectory of the price of jet fuel is strongly tied to the trajectory of the price of oil, which has a strong support from OPEC and Russia, it is extremely hard to predict when the price of jet fuel will decrease substantially. That’s why the stock of Hawaiian carries a significant amount of risk in my view.

Final thoughts

Due to the risk that results from the excessive losses of Hawaiian in the last four years, its high debt load and the aforementioned headwinds, the stock has been beaten to the extreme by the market, to a new 10-year low. Whenever business conditions improve, the stock is likely to enjoy a steep relief rally. However, if the adverse business conditions persist for years, the stock is likely to continue to underperform the broad market by a wide margin. Its vast underperformance vs. the S&P 500 over the last five years (-86% vs. +60%) is indicative of the excessive risk of the stock in my view. Overall, I believe Hawaiian is suitable only for the investors who are confident in a substantial decrease in jet fuel costs from next year and can tolerate stock price pressure for a considerable period.