Hawaiian Air Case
Preliminary Questions: Assessing Hawaiian Airlines’ Business
1. Factors to use to think about buying HA’s stock:
Customers – 2014 marked the first year that Hawaiian carried more than 10 million guests in a single year which is 80% higher than 10 years ago. The most emerging tourism market for the airline is China which is the reason that the airline added a triweekly service from Beijing to the islands. Although this market seemed to be booming at the end of 2014, the decrease of economic growth in the country recently could hurt the tourism market from China. The customers of Hawaiian are not all identical which makes it critical that the airline’s business is not dependent upon a single or few customers and the loss of any one customer would not have a huge effect on Hawaiian’s business.
Cost Structure – The greatest and most important cost for Hawaiian is the cost of airline fuel. Operations are significantly affected by the availability and price of jet fuel. The lower the fuel, the better for the airline as it is more cost effective, however, because of the binding hedging contracts that the company has to protect itself against low fuel prices, costs will not be cut as much as assumed. Recently, the appreciation of the US dollar, and extremely low oil prices (fuel prices) have cut costs for Hawaiian and other airlines nationwide, and in 2014 Hawaiian consumed more gallons of fuel than in 2013 or 2012 and still maintained lower fuel costs in both years. These low fuel costs help the airline create new flight routes with more airliners while still maintaining low fuel costs which helps the airline become more profitable. Rent expense decreased in 2014 as 3 leases of aircrafts ended in 2013, and although the company is adding 6 new planes later in 2019, they are being swapped for 6 current planes so the rent expense will not increase. Although rent expense might not increase, the costs for acquiring these new planes will be costly, and maintenance costs could increase as current planes become older.
Growth Opportunities – Growth opportunities exist with the addition of new routes both to the United States and to Asia. There has been much speculation about a possible merger or acquisition with a major airline such as Southwest as the airline proves to be a successful and profitable airline consistently which is attractive for major airlines. This merger could open more routes for Hawaiian, possibly to the East cost of the US, and would certainly help attract attention to the airline which will bring in more customers.
Inter-Island vs Mainland/International – Business for Hawaiian heavily depends on routes from the islands to the mainland and other countries as only 24% of its business comes from Inter-Island travel. The other 76% come either from mainland travel or international travel. Inter-island travel will become less important in the future as the airline attempts to create more routes between the mainland and other countries than between the islands.
Fleet Type/Size Over Time – The airline is introducing 6 new airplanes in 2019 which are supposed to improve fuel efficiency and range. The new airplanes, from Airbus, named the A330-800 NEO are replacing the A350 aircrafts in order to create a profitable fleet that offers customers more seats while still maintaining comfort in every single seat.

Value – When thinking about buying a stock, we would want to know if the value of the stock is overvalued or undervalued in the market which we could measure a couple of different ways. One way could be to find the enterprise value of the airline (market value of common stock + market value of preferred stock + market value of debt + minority interest – cash/investments) and divide this by the number of shares outstanding and then compare this to the current stock price in the market. Another important factor in determining if the stock is valuable is if it pays dividends and if it will continue to pay dividends in the future. Hawaiian does not pay any dividends as it is restricted to doing so under certain provisions in the company’s aircraft lease agreements. Instead, the airline re-invests any excess retained.
Risk Factors – Hawaiian’s business can be affected by global economic volatility just like any other airline company that can be affected by systematic risk. Firm specific risk includes the reduction in passenger traffic or increased competitive pressure on ticket fares in the market. Hawaiian is the current leader for flights to and from the islands, but as the market continues to flourish and tourists continue to travel to the islands, competition might increase which could hurt Hawaiian’s business. Foreign currency exchange rates could affect business of Hawaiian, especially as they are trying to expand more internationally, and to protect against these, the company enters into foreign currency forward contracts.
Seasons – Seasons play an important role in Hawaiian’s business, and most business for the airline comes during vacation seasons where tourists can take time off to visit the islands. An extremely rainy season could affect Hawaiian’s business as more people will not want to travel to the islands and will not pay for airline tickets because of the risk of being rained out during their vacation time.
Sector – When thinking about buying a stock, looking at the sector as a whole could be important to determine if the market is in a bull or bear state. Would want a sector that is performing well and shows an opportunity for growth. An investor in Hawaiian would want the opportunity for growth as the company does not pay dividends.
2. Unit economics of Hawaiian Airlines. What should we consider a unit for the company in terms of their assets? How could you calculate the returns on their assets?
Each “unit” in terms of the assets would be a plane. Calculate the return on this unit by subtracting the costs to produce, rent, maintain, and run each plane by the revenues obtained from tickets and non-ticket revenue from passengers.

FY 2014 Earnings Press Release

1.) CASM ex fuel for the first quarter of 2014 is 8.51 cents and 8.15 cents for the full year 2014. 2.) The range for CASM ex fuel for Q1 2015 ranges from 8.64 cents to 8.89 cents due to guidance ranging from 1.5% to 4.5%. 3.) Due to volatility of airline fuel costs are not generally viewed as controllable unless through the short term through fuel hedging, so therefore if management wants to control costs you look at the change in CASM ex fuel each period. Fuel Hedging is used to limit exposure to volatile oil prices. 4.) 13,910,804 miles / 10,191 passengers = 1365 miles per passenger on average. 5.) Shows how efficiently an airline fills seats and generates fair revenue, Revenue passenger miles/ available seat miles. Hawaiian airlines has a passenger load factor of 82.2% for the three months ended December 31, 2014. Airlines need full planes to cover costs such as fuel, pilots, and crew. Having a higher load factor will spread fixed costs among more passengers. Typically the higher the load factor the more profitable and airline is. 6.) Economic fuel expense is calculated using GAAP fuel expense plus (gains)/losses realized through actual cash (receipts)/payments received from or paid to hedge counterparties for fuel hedge derivative contracts settled during the period. 7.) Loss on extinguishment of debt is $2,331,000 net of tax, before taking taxes into consideration they retired $3,885,000 in debt losses for year ended December 31, 2014. 8.) Range of fuel cost for Q1 2015 is $115.42 to $122.98.( ADD Computation) 9.) Retired $54 million of A330 bank debt. 10.) https://newsroom.hawaiianairlines.com/releases/hawaiian-airlines-and-airbus-sign-purchase-agreement-for-delivery-of-six-a330-800neo-aircraft 11.) http://www.airbus.com/aircraftfamilies/passengeraircraft/a330family/spotlight-on-a330neo/ http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/hawaiian-airlines-finalizes-a330-800neo-order/ Hawaiian Airlines reasons for switching to the A330-800NEO seem to be for reasons of cost reduction and a diversification of their customer base. The A330-800NEO is extremely cost effective due to the fact that it has reduced maintenance costs, reduces fuel consumption by $.14/seat, and due to its innovative increased wing span which reduces drag that can cause increased fuel use. Another strategic reason for Hawaiian Airlines making the switch to the A330-800 NEO is to increase their revenue by targeting new customers and encouraging prior customers to fly with them again. The A330-800NEO features excellent passenger customer which will encourage people to fly with them other than competitors. Also, the new aircraft features up to 10 new seats, which does not seem like much in the short term, but in the long run could drastically increase revenue.

12) Part of Hawaiian Airline’s strategic plan is to decrease their Adjusted Debt to EBITDAR ratio and increase their Liquidity Target. These are important industry specific metrics, so we will spend a fair amount of time analyzing them.

a) Rent expense is added to the debt in order to calculate the Adjusted Debt. For the EBITDAR, income tax expense, rent expense, and interest expense are added. b) Hawaiian air adjusts EBITDAR for its leverage ratio by adding changes in fair value of derivative contracts and adding loss on extinguishment of debt. The company would exclude rent expense in calculating EBITDA because it makes it easier to compare it with other companies. c)

d) The liquidity is calculated by by adding cash and short term investments and dividing them by revenue.

10K:
13) It becomes amendable January 1st 2014. The reason that date would be before when the 10-K is issued is because if the union agreement is amendable, Hawaiian Airlines looks more attractive for possible mergers.
14) There are 2,333 workers under union agreement that could be amendable as of the issue date of the 10-K. This is 50.7% of the total workers. (2333/4604)
15) Credit Card Holdbacks are an agreement between credit card companies and airlines that states that credit card companies receive a set percentage of ticket sales as collateral even if the airline ticket was refunded to the customer. Credit card holdbacks may affect Hawaiian’s liquidity because the higher the percentage of the holdback, the less cash flow Hawaiian Airlines has, which reduces their liquidity.
16) 73% of revenue comes from business between the Hawaiian Islands and the U.S. mainland. 24% comes from Inter-Island travel.
17) Hawaiian Airlines has added new routes which has drastically increased revenue. These routes are: * Honolulu to Oakland,CA * Maui to Los Angeles * Maui to San Francisco * Honolulu to San Jose * Lihu'e, Kaua'i and Kona, Hawai'i Island to Oakland and Los Angeles, California
18) Hawaiian Airlines managed a 26.7% increase in Other Operating Revenue in 2014 through increased sales of frequent flyer miles under a new co-branded credit card agreement, an increase in volume of cargo due to increased cargo capacity, and increased revenue from already existing routes.
19) They believe economic fuel expense is the best measure of the effect of fuel prices on their business as it most closely approximates the net cash outflow associated with the purchase of fuel for their operations in a period and is consistent with how management manages their business and assesses their operating performance. It takes into account the realized losses on a settlement of fuel derivative contracts, which shows the true economics of what is occurring.
20) EETC financing is an enhanced equipment trust certificate which many airlines utilize. The certificate is sold to investors in order to finance the purchase of an aircraft. This trust leases the aircraft to the airline. The airline then makes payments to the investors. Upon completion of the payments, the airline receives the title of the aircraft. Hawaiian Air uses EETC financing because EETC financing provides a new source of capital, shows confidence of capital market investors in Hawaiian Airlines, and Hawaiian Airlines receives proceeds from the offering that they then use to acquire equipment notes that they can use to finance the acquisition of new airplanes/equipment.
21) Hawaiian Airlines fuel hedging practices include heating oil puts & swaps and Brent crude oil call options and collars. 39% of their fuel costs are hedges for 2015.
22) Hawaiian Air carries $87.3 million of debt that is pegged to the LIBOR rate.
23a) There are 62.822 million shares are outstanding assuming full dilution.
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23c) Shares Outstanding has consistently increased, but drastically increased between 2013 and 2014 due to the repurchasing of notes with a principal that can be redeemed as common stock. Hawaiian’s plan to decrease the effect of that event is entering into separate call option transactions and separate warrant transactions with certain financial investors to reduce the potential dilution of the Company’s common stock. Hawaiian’s plan includes paying off debt and repurchasing its’ convertible notes. They recently retired $54 million of debt and repurchased 18% of their convertible notes. This allows Hawaiian to stop issuing so many shares which dilutes current investor’s shares.
23d) There was a major decrease in 2013 in air traffic liability from 85.264 mil to 20.44 mil. There was a drastic increase in accrued liabilities in 2014, from 10.756 mil to 45.353 mil. The air traffic liability decreased in 2013 they reduced new routes which reduced liability. The accrued liability increased in 2014 due to hedging 39% of the projected fuel requirements for 2015-the fair value of those agreements reflected in accrued liability.
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25) Hawaiian Airlines Pension plan unfunded $222 mil as of December 31, 2014.
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* 59% for equities * 36% for fixed income * 5% for REITS
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