Home Value Investing Undervalued Hawaiian Holdings Well Positioned For Further Growth

Undervalued Hawaiian Holdings Well Positioned For Further Growth

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One of the cheapest stocks in our all All Investable – Stock Screener and the cheapest airline stock is Hawaiian Holdings, Inc. (NASDAQ:HA).

Hawaiian Holdings, Inc. (Hawaiian) is the parent company for its subsidiary, Hawaiian Airlines, Inc.

Hawaiian Airlines is now in its 88th year of continuous service, Hawaiian is Hawai’i’s biggest and longest-serving airline, as well as the largest provider of passenger air service from its primary visitor markets on the U.S. Mainland. Hawaiian offers non-stop service to Hawai’i from more U.S. gateway cities (11) than any other airline, along with service from Japan, South Korea, China, Australia, New Zealand, American Samoa and Tahiti. Hawaiian also provides approximately 160 jet flights daily between the Hawaiian Islands, with a total of more than 200 daily flights system-wide.

A quick look at the company’s share price (below) over the past twelve month shows that the price is up 26% to $50.30, 31% off its week two week low.

(Source, Google Finance)

Recently Released Q4 2016 and FY2016 Results

There’s no question that 2016 has been a great year for Hawaiian with Q4 2016 revenue up 10% to $633 million compared to $574 for the pcp, while FY2016 total revenue was also up 6% to $2.5 Billion from $$2.3 Billion compared to FY2015. FY2016 net income was up 28% to $235 million compared to $183 million for FY2015, while net income in Q4 dropped by 94% to $2 million from $38 million in the pcp. It’s important to note however that Q4 2016 included $95 million in special items. Special items included the impairment and contract termination charges related to the early retirement of the company’s fleet of 767 aircraft, engines, and related assets along with the bonuses and a proposed collective bargaining agreement payment.

Hawaiian continues to see strong demand, thanks to its balanced industry capacity and manageable fuel prices. In 2016 the company carried a record 11 million passengers in which it was recognized as the world’s most punctual airline and took home several service awards for outstanding hospitality. Hawaiian remains the nation’s top carrier for punctuality in 2016, as reported by the U.S. Department of Transportation (DOT), marking the airline’s 13th consecutive year holding the title.

The company averaged a 91.1% on-time performance rating in 2016, earning the top ranking in all but one month and exceeding the industry average for the year by 9.7%. For December, Hawaiian posted a leading 85.1% on-time performance rating. The carrier also ranked first in fewest flight cancellations with 0.1 percent, or nine cancellations out of 6,347 flights.

“It’s no secret that our more than 6,000 employees work passionately every day to ensure our guests arrive at their destination on-time,” said Mark Dunkerley, President and CEO of Hawaiian Airlines. “Our success over the past 13 years is a direct result of their hard work, and I continue to be inspired by their dedication to our guests.”

The company is being helped by strong demands for Hawaii as a vacation destination, modest industry capacity growth, and the price of fuel which also remains moderate compared to recent history. Fuel prices however are forecast to grow in 2017.

Most noticeable in the Q4 2016 results was the improvement in system RASM (Revenue Per Average Seat Mile). The company reported system RASM improving by 6%, closing the quarter at the high end of its revised guidance. The improvement was due to better than expected domestic passenger revenue as well as stronger cargo results.

Domestic PRASM (Passenger Revenue per Available Seat Mile), which includes North America and Neighbor Island, grew 8.7% for Q4 2016 on strong demand and balanced industry capacity. Hawaiian continues to outperform the industry on an absolute basis against its competitors on North America to Hawaiian routes.

During the company’s Q4 2016 and FY2016 earnings call Executive Vice President & Chief Commercial Officer Peter Ingram said, “Looking ahead to the first quarter [2017], we expect the positive trends and momentum to continue. There is some variability in performance as we move through the months of the quarter. January and February will post strong year-over-year PRASM gains, while March will be affected by Easter moving to the second quarter in 2017. Overall, we expect another strong performance in North America for the quarter”.

The company’s overall trends on its international routes also remain solid with international PRASM growing 4% in Q4 2016. Japan remains strong and the new services launched from Tokyo were immediately accretive to the company’s international PRASM. While Hawaiian expects moderate industry capacity growth from its international routes, demand continues to grow in its maturing markets and the company should continue to benefit from its new Tokyo routes.

New Investments

Growth for Hawaiian will come via its new investment strategy which includes delivery of its first 3 A321neos in 2017. The company was hoping to have the planes in service before the busy winter peak but received news from Airbus that delivery would be delayed by about three months, Hawaiian still expects delivery in the fourth quarter.

Delivery of the new planes will allow the company to expand its business on existing routes between Hawaii and North America. The new aircraft will also free-up more wide-body aircraft for further long-haul expansion, where in the past several years the company has demonstrated its ability to compete strongly against its global competitors.

Other new investments in 2017 include the completion of a new maintenance hangar, used mainly for A330 cabin reconfiguration, which adds lie-flat seats and increases the number of extra comfort seats and enhancements to the company’s technology infrastructure.

Hawaiian is certainly carrying great momentum into 2017. In the first quarter, the company expects its capacity to grow 2.5% to 4.5% compared to last year. There’s no doubt that delayed delivery of its A321neos will force Hawaiian to modify its 2017 capacity plans but the company still expects full year 2017 capacity growth of 1% to 4%. The company has also stated that it expects continued RASM gains, with projections forecast in the range of 4% to 7% year-over-year.

Tentative Agreement With Air Line Pilots Association

Management appears to be on track in terms of locking in long term contracts will all of its employees. This week the company announced it had reached a tentative agreement with the Air Line Pilots Association (ALPA) on a 63-month contract amendment covering the airline’s 665 pilots. The ALPA will hold a ratification vote scheduled to take place between March 6 and 24. If ratified, the amendment becomes effective April 1 and remains in effect until July 1, 2022.

“I am pleased that we have been able to reach an agreement that offers our pilots a significant increase in compensation,” said Jon Snook, Hawaiian’s chief operating officer and the company’s lead negotiator.

We will have to wait and see what impact this new agreement, once ratified, has on costs.

The company also reached new accords in 2016 with three labor unions representing more than 2,200 employees and is currently in negotiations with the Association of Flight Attendants, whose contract became amendable in January.

Competitive Advantage

Hawaiian continues to enjoy a strong competitive positive thanks to demand for leisure travel and its strategic geographic location in Hawaii. The company is also being assisted by a stronger yen and its new Tokyo flights together with low industry capacity growth to Hawaii by its competitors.

Loads of Free Cash Flow

One thing that constantly gets overlooked about Hawaiian is its ability to generate free cash flow in recent years. A quick look at the company’s annual cash flow statements (below) shows for FY2016 the company had operating cash flow of $417 million (ttm) and Capex of $179 million (ttm). That equates to Free Cash Flow of $238 million (ttm), and based on its current market cap of $2.69 Billion means that Hawaiian has a FCF/Price Yield of 9% (ttm).

Fiscal Period (Amounts in Millions) Dec16 Dec15 Dec14 Dec13
Net Income 235 183 69 52
Cash Flow from Operations 417 476 300 243
Purchase Of Property, Plant, Equipment 179 119 442 342
Free Cash Flow 238 357 -142 -99

(Source, Company reports)

Using this free cash flow the company paid down debt of $214 million and re-purchased $14 million worth of its own shares. This shows that management is making the right decisions in terms of its capital allocation.

Strengthening Balance Sheet

In addition to its strong free cash flow, something else that seems to get overlooked is Hawaiian’s very strong balance sheet. At the end of FY2016 Hawaiian had $610 million in cash and cash equivalents and total debt of $557 million. That means Hawaiian has $53 million in cash and cash equivalents in excess of its total debt and a debt-equity-ratio of 0.80.

Fiscal Period (Amounts in Millions) Dec16
Cash, Cash Equivalents, Marketable Securities 610
Current Portion of Long-Term Debt 59
Long-Term Debt & Capital Lease Obligation 498

(Source, Company reports)

In terms of its financials, management is doing a great job at Hawaiian with strong earnings growth, margin expansion, solid free cash flow and a strong balance sheet.


As mentioned at the top of this article, Hawaiian is one of the cheapest stocks in our all All Investable – Stock Screener and the cheapest airline stock. With its current market cap of $2.69 Billion and cash in excess of total debt we currently have the company trading on an Enterprise Value (EV) of $2.55 Billion.

We favor EV over market capitalization as it includes additional liabilities–like debt, preferred equity and non-controlling interests–if you were to purchase the entire company. EV is calculated as:

Market Cap + Preferred Equity + Non-Controlling Interests + Total Debt – Cash and Equivalents.

With an EV of $2.55 Billion and Operating Earnings* of $505 million (ttm), that means Hawaiian is currently trading on an Acquirer’s Multiple of 5.06 or, 5.06 times Operating Earnings*.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

With a FCF/Price Yield of 9% (ttm), and an Acquirer’s Multiple of 5.06, or 5.06 times Operating Earnings*, that places Hawaiian squarely in undervalued territory.

It’s also important to note that Hawaiian currently trades on a P/E of 11.08 compared to its 5Y average of 15.4 and the industry average of 10.8. This suggests to me that the company has clearly been oversold recently.


Hawaiian is well positioned for continued growth in 2017. The company has clearly transformed itself over the past 10 years by investing in new aircraft and new routes. There’s no question that delivery of the company’s first 3 A321neos, completion of its new maintenance hanger and re-configuration of its A330 cabins will further enhance the company’s ability to compete strongly while reducing costs.

Hawaiian continues to enjoy a strong competitive positive thanks to demand for leisure travel and its strategic geographic location in Hawaii. The company should see further revenue increases due to a strengthening yen and its new Tokyo routes.

Hawaiian is doing a great job of locking in long terms contracts with all of its staff, having recently announced a tentative agreement with the Air Line Pilots Association (ALPA). This comes off the back of its 2016 agreements with three labor unions representing more than 2,200 employees and its current negotiations with the Association of Flight Attendants.

The company is well managed with strong earnings growth, margin expansion, solid free cash flow and a strengthening balance sheet. In terms of its valuation, Hawaiian is currently trading on a P/E of 11.08 compared to its 5Y average of 15.4, a P/S of 1.08, a FCF/Price Yield of 9% (ttm), and an Acquirer’s Multiple of 5.06, or 5.06 times Operating Earnings*, which means Hawaiian is currently undervalued.

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