Hawaiian Holdings, Inc. is a holding company whose primary asset is Hawaiian Airlines, Inc. (HA). HA is engaged in the scheduled air transportation of passengers and cargo among the Hawaiian Islands, certain cities in the Western United States, the South Pacific, Australia and Asia. It is the largest Hawaiian-based airline with the #1 market share in inter-island flight between the Hawaiian Islands (87% share) and the #1 in market share to/from Hawaii to/from Western U.S. (28%). HA has had 10 consecutive quarters as of Q4 2010 without negative earnings. As of December 31, 2009, HAs fleet consisted of 15 Boeing 717-200 aircraft for its inter-island routes and 18 Boeing 767-300 aircraft for its transpacific, South Pacific/Australia/Asia and charter routes.
HA has marketing alliances with other airlines that provide frequent flyer mileage accrual and code sharing on certain flights. Hawaiian Airlines allows customers to earn “HawaiianMiles”, miles for use in its own frequent flyer program, on several carriers including, Continental, Delta, Island Air, Virgin Atlantic, and Korean Air. However the ways in which miles are awarded can differ from airline to airline. Delta, Virgin Atlantic, and Korean Air allow Hawaiian customers to earn “HawaiianMiles” on all routes flown, while Island Air and Continental only allow customers to earn “HawaiianMiles” on select flights that can be found on each carriers respective website. .
HA competes with Alaska Air, Delta Airlines, Republic Airways, US Airways Group, and Southwest Airlines in the Continental US market. In Hawaii, HA competes with Mokulele Airlines, Island Air Hawaii, and Pacific Wings Airlines. It used to formerly compete with Aloha Airlines.
HA has a very conservative capital structure compared to its competitors. Its Debt to Equity ratio has been decreasing for the past three years going from 4.86 to 1.44 to 0.68 (2008-2010).
Increased capacity in conjunction with expansion into Asia and a solid cash position are key drivers for HA in the upcoming fiscal year.
HA plans to increase capacity by 15% - 17% in 2011. This increase is almost entirely a function of longer haul travel and greater seating capacity. Departures for 2011 are expected to remain flat when compared to 2010. ¾ of the company’s capacity growth is due to its expansion into Tokyo and Seoul. The remaining capacity growth is attributable to the larger A330 being incorporated into HA’s fleet( the plane carries 10% more passengers than HA’s other planes).
HA also has a large cash position. It ended fiscal year 2010 with $285 million in cash (21% of TTM revenue) and has no balloon payments due in the next two years. This will give HA ample flexibility in managing its liquidity position as well as further possible expansion. It also makes HA a good target for acquisition by a larger airline. It has a large cash balance and a conservative capital structure.
HA leases aircraft, engines, property, airport and terminal facilities, maintenance facilities, training centers and general offices. As of December 31, 2010, HA had lease contracts for 29 of its 36 aircraft. Of those 29 contracts, four Boeing 717-200 aircraft leases were accounted for as capital leases with the remaining 25 contracts being accounted for as operating leases.
By accounting for the majority of leases as operating leases opposed to capital leases, HA is able to keep the assets off of the balance sheet and account for the expense as an operating expense. Under these lease agreements, HA is required to pay specified monthly amounts of rent plus maintenance reserves (fees paid to the aircraft lessor as a deposit for certain future scheduled airframe, engine and landing gear overhaul costs).
As of December 31, 2010, HA is scheduled to pay the following amounts in capital leases and operating leases:
HA currently has the majority of its revenue come from passengers from Hawaii traveling to the Western US (58% of its revenue). Inter-island flights account for 32% and international revenue comprises of 10% of HA's revenue.
According to HA's CFO and Investor Relations, HA plans to continue to expand into international markets (Southeast Pacific) and grow to 28% from 10%. This growth would come a decrease in revenue share from passengers from Hawaii traveling to the Western US and inter-island flights. These two segments are still expected to maintain positive growth; however, with HA's push into international markets, this segment is expected to grow faster.
HA has several key persons as part of their corporate governance. Below are the names and brief biographies of these key persons.
Mark Dunkerley: He has been a member of HA’s Board of Directors as well as the President and Chief Executive Officer since June 2, 2005. He previously was President and Chief Operating Officer of HA from December 2002 and President and Chief Operating Officer of HA from February 2003 until he resigned from HA following HA’s Chapter 11 filing and the appointment of the bankruptcy trustee. He received a Bachelor's of Science in Economics from the London School of Economics (1984) and a Master's degree in Air Transportation Economics from the Cranfield Institute of Technology (1985).
Peter Ingram: He became the Executive Vice President, Chief Financial Officer and Treasurer of HA as of November 16, 2005. Mr. Ingram had worked at AMR Corporation, the parent company of American Airlines and American Eagle Airlines, for 11 years prior to joining the Company. From 2002 to 2005, he served as Vice President of Finance and Chief Financial Officer for American Eagle Airlines. Ingram received a B.A. in Business Administration from the University of Western Ontario (1988) and has an M.B.A. from Duke University (1994).
Lawrence Hershfield: He has been the Chair of HA’s Board of Directors since July 2004. Hershfield served as HA’s President and Chief Executive Officer from June 14, 2004 through June 2, 2005. He has been the Chief Executive Officer of Ranch Capital, LLC, which he founded to pursue investments in undervalued or distressed assets or companies, since October 2002. Hershfield received a B.S. in Biology from Bucknell University (1977) and has an M.B.A. from Stanford University Graduate School of Business (1981).
Shown below is a table of key stats for the HA management team:
|Mr. Mark Dunkerley||CEO (since 2005)||$1.74M||COO, Sabena Airlines Group (2001); COO, Worldwide Flight Services (2000)||B.S. Economics, London School of Economics; M.S. Air Transportation Economics, Cranfield Institute of Technology||47|
|Mr. Peter R. Ingram||CFO (since 2005)||$872.00K||CFO, American Eagle Airlines (2005)||B.A. Business Administration, Western Ontario||44|
|Mr. David J. Osborne||CIO (since 2005)||$793.00K||MD/CIO positions, Bank of New York, and Deutsche Bank (20 years)||University of Aston in Birmingham, and Charles Keene University in Leicester||55|
|Mr. Glenn G. Taniguchi||VP Sales & Marketing (since 2006)||$574.00K||30-plus years at Hawaiian Airlines||B.A. Business Administration, University of Hawaii||68|
|Ms. Barbara D. Falvey||VP Human Resources (since 2005)||$642.00k||VP HR, Ameristar Casinos (2005), VP HR, Aladdin Gaming (2003)||B.A. English, University of California; M.S. Organization Development, Pepperdine University||52|
Jet fuel is another major expense, which accounted for 26.5% and 22.7% of operating expenses for 2010 and 2009 respectively. For every one cent increase in the cost of jet fuel per gallon, HA's fuel expense would increase by $1.6 million.. HA has fuel purchase contracts that will cover flights originating in Honolulu during 2011, and has purchased call and collar options. Despite this, the price of WTI crude oil is inversely related with HA's earnings potential. Its biggest input is subject to the price volatility of a commodity that is particularly sensitive to Middle East tensions. When HA renews its fuel agreements and derivative contracts the price of WTI crude will be a major factor and could severely affect its business.
HA's current revenues are heavily dependent on Hawaii's economic health, and Hawaii's economic health is heavily dependent on its tourism industry. Part of this risk is idiosyncratic to Hawaii's politics, hospitality industry, and its ability to attract tourists to Hawaii as opposed to other vacation destinations. Other broader risks are associated with the tourism industry's cyclical volatility. Demand is strong during the summer and the month of December and is much weaker during other times of year. HA provides a service that both tourists and businesses view as discretionary. Ultimately, HA's revenue stream is not very diversified and their expansion into the South Korean and Japanese markets are crucial to achieving more stable revenues.
Below are 11 years of ratio data. The years highlighted in blue reflect the years the HA was in bankruptcy.
Hawaii: Within the state of Hawaii, the demand for inter-island service has been reduced in recent years the. In 2010, this segment of the business accounted for around one third of HA’s revenue. Although it may be profitable, the decrease in demand and the capital-intensive nature of the industry deters any entrants to the inter-island air-travel market.
The demand for inter-island service has reduced in recent years as other airlines have increased direct service from the mainland to neighbor islands. This is obviating the need for inter-island transfers. Further, as the infrastructure in the neighbor islands improves (particularly the availability of goods and services), there will be less demand for inter-island service. A further decline in the level of inter-island passenger traffic could have a negative effect on HA's revenue.
Domestic and international: The airline industry is extremely capital intensive and thus the barriers to entry are high. Extremely high amounts of capital are required to start an airline company and with an industry historically as unprofitable as the airline industry, it is unlikely that any new competitors will enter the industry.
Further, another barrier to entry in the international market is the quotas. New slots are extremely hard to come by and even when new slots become available, it is quite a battle among US airlines to lobby the DOT for the slots. An example of this is given by HA being given a slot by the DOT for its expansion into Tokya via Haneda.
First, to give some background, there was an open skies agreement between the US and Japan which gave four daily slots to US carriers once the Haneda airport "closed" and Japan's airlines had completed their daily routes. There were five airlines which lobbied to receive slots to Haneda including Continental, United, Delta, American and HA. The DOT gave Delta, American, and HA slots to Haneda.
The decision, "gave no Haneda routes to United Airlines lines, which wanted to fly there from San Francisco and have no Haneda routes to Continental Airlines, which proposed Newark-Haneda service and Guam-Haneda service . Further, even the airlines tapped for service to Haneda were disappointed. American also wanted the Los Angeles-Haneda route, Delta wanted routes from Seattle and Honolulu, and Hawaiian wanted two flights a day from Honolulu, not just one. As one can see, it is an extremely competitive process which serves as a massive barrier to entry.
The airline industry is extremely competitive. The principal competitive factors in the airline industry are: price, flight frequency and schedule, on-time performance and reliability, name recognition, marketing affiliations, frequent flyer benefits, customer service, aircraft type, and in-flight services.
Hawaii Inter-island routes are served by several carriers including Island Air, Mesa (through its Go!Mokulele joint venture), Pacific Wings and a number of "air taxi" companies. In January 2011, HA operated approximately 150 daily interisland flights.
Domestic Most of HA’s domestic competition comes from airlines such as Alaska, American, Delta, United and US Airways. Network carriers have a number of competitive advantages relative to HA that may enable them to obtain higher fares or attract higher customer traffic levels. Network carriers generate passenger traffic from throughout the U.S. mainland. In contrast, HA lacks a comparable network to feed passengers to transpacific flights and therefore are more reliant on passenger demand in the specific cities they specialize. Most network carriers operate from hubs, which can provide a built-in market of passengers, depending on the economic strength of the hub city and the size of the customer group that frequent the airline. Passengers in the transpacific market, for the most part, do not originate in Honolulu, but rather on the mainland, making Honolulu primarily a destination rather than origin of passenger traffic.
International (and other US territories) Currently, HA is the only provider of nonstop service between Honolulu, Hawaii and Pago Pago, American Samoa and Papeete, Tahiti. They also operate roundtrip flights between Honolulu, Hawaii and Sydney, Australia (competing directly with Qantas Airways and its low-cost affiliate Jetstar) and between Honolulu, Hawaii and Manila, Philippines (competing directly with Philippine Airlines). In November 2010, HA launched roundtrip flights between Honolulu, Hawaii and Tokyo's Haneda International Airport competing directly with Japan Airlines and All Nippon Airways. They indirectly compete with Delta and United on this route as they operate from Narita, Japan (the other airport servicing Tokyo, Japan). In January 2011, HA launched roundtrip service between Honolulu, Hawaii and Incheon International Airport in Seoul, South Korea competing directly with Korean Airlines.
Do to their proximity to one another; there are alternatives to traveling between the Hawaiian Islands by air. Aquatic travel is becoming more popular in the economic recession.
HA derives their revenue primarily from transporting passengers. Revenue is recognized when either the transportation is provided or when the related ticket expires unused. They measure capacity in terms of available seat miles, which represent the number of seats available for passengers multiplied by the number of miles the seats are flown. The average amount one passenger pays to fly one mile, is calculated by dividing passenger revenue by revenue passenger miles. The goal of HA is to strive to increase passenger revenue primarily by increasing the yield per flight or by filling a higher proportion of available seats, which produces higher revenue per available seat mile. Other revenue includes cargo, charter services, sale of frequent flyer miles, ticket change fees and other incidental services.
Hawaiian Airlines, In an effort to lower distribution costs and reduce travel agent reliance, has started to make a push towards e-commerce initiatives. Since 2003, Hawaiian Airlines has pushed use of it's website, www.HawaiianAirlines.com, as a distribution channel. During 2010, more than half of the passenger revenue collected by Hawaiian originated through it's website. In addition, internet check-in and self-service kiosks have been put into place in order to improve the customer check-in process. The website offers customers information on flight schedules, HawaiianMiles frequent flyer program, ability to book reservations on flights or connecting flights with any code share partners, the status of flights as well as the ability to purchase tickets or travel packages. Additionally Hawaiian has started publishing fares with web-based travel services such as Orbitz, Travelocity, Expedia, Hotwire and Priceline. These comprehensive travel planning websites provide customers with convenient online access to airline, hotel, car rental and other travel services.
The marketing strategy utilized by HA includes a company website, www.HawaiianAirlines.com, and visibility on other travel websites suck as Orbitz, Travelocity, Expedia, Hotwire and Priceline. Since 2003 HA has increasingly pursued e-commerce marketing, which is a less costly distribution channel, reducing their reliance on travel agencies. Additionally Hawaiian also offers customers a frequent flyer program called HawiianMiles as well as convenience services on their website.
As of December 31, 2010, HA had a total fleet of 36 aircraft, leasing 26 and owning 7. The aircraft designated for the transpacific, Pacific, and charter routes consist of three Airbus A330-200s, fourteen Boeing 767-300ERs and four Boeing 767-300 aircrafts with seating capacities of 294 passengers, 252-264 passengers, and 264 passengers respectively.
To serve the interisland routes, HA uses fifteen Boeing 717-200 aircrafts. Of these, they plan to retire four Boeing 767’s between 2013-2015. This will consequently remove 1,056 seats. They also signed a purchase agreement with Airbus in 2008, which will provide for the delivery of twelve new aircraft between 2012 and 2020 which will add 3,528 seats. The net change in seats will be an increase of 2,472 seats. As of December 31, 2010, HA had in total of around 7,350 seats available. This should eventually lead to a total seat availability of around 9,288, ceteris paribus.
HA also derives revenue from the transportation of cargo and is expanding this segment of their business with the addition of planes with larger cargo capacities.
Hawaiian Airlines has many strengths that separate it from its competitors. One of the greatest strengths is that Hawaiian is the largest airline based in the State of Hawaii. This is especially advantageous as many Hawaiians travel from island to island by air rather than boat. In addition to providing inter-island services Hawaiian provides service to nineteen destinations that span the Pacific and the West coast of the United States. Hawaiian passengers enjoy on-time service that has led to Hawaiian’s recognition, as the number one on-time carrier in the United States from 2003 to 2006, with regards to safety Hawaiian has never had a fatal accident. Furthermore, Hawaiian has a significant cash position that allows them to continue to expand service to new destinations around the world. These strengths, in addition to having impeccable customer service and efficiency allow Hawaiian Airlines to continue to improve profitability and generate alpha for investors.
Hawaiian Airlines has several weaknesses that if not dealt with appropriately in the future could have adverse effects on profitability. The first of these weaknesses is Hawaiian’s relationship with third party contractors. Hawaiian has third party agreements with Air New Zealand, US Airways, American, Continental, Delta, Island Air, and several others. These agreements provide facilities and services including aircraft maintenance, code sharing, reservations, computer services, accounting, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling and personnel training. Hawaiian’s reliance on these third parties to provide such important services and facilities could have an adverse effect on the ability to operate business efficiently in the event of a disagreement. The second of these weaknesses is Increased competition. Several other airlines have either begun providing service to Hawaii, or are looking at adding Hawaiian service. New entries to the Hawaiian market include Alaska Airlines, which has already added several routes originating from the West coast of the United States, and Southwest, which has ordered twenty jets that are capable of reaching Hawaii. The final and perhaps greatest weakness is Hawaiian Airlines sensitivity to macroeconomic conditions. Since Hawaiian Airlines specializes in providing service to and from the Hawaiian Islands discretionary spending, or lack of, can have a drastic effect on the profitability of Hawaiian.
Hawaiian Airlines has several unique opportunities that will help it to expand and differentiate itself amongst competitors. The first of which is Hawaiian’s expansion into the Japanese market. On September 23rd 2010 Hawaiian Airlines announced that it had received authorization from Japan’s Ministry of Land, Infrastructure, Transport and Tourism to begin operation of international service to and from Japan. On November 17th 2010 Hawaiian Airlines began providing daily non-stop service between Honolulu International Airport and Tokyo's Haneda International Airport. This is a significant development with regards to opportunity as it makes Hawaiian Airlines the only U.S. carrier that provides flights between Japan and Hawaii. In addition to Japan, On January 12th 2011 Hawaiian Airlines began providing nonstop service between Honolulu and Soule South Korea.
Hawaiian Airlines faces several challenges moving forward that could have diverse effects on future profitability. The first challenge is rising fuel costs. Fuel costs typically represent approximately 25% of Hawaiian’s operating expense, however every one-cent change in cost per gallon of jet fuel represents approximately a $1.6 million increase or decrease in annual fuel expense. Another significant challenge is the challenge of diversification outside of the Western United States and Hawaiian Islands. The majority of Hawaiian’s revenue is generated by transportation between the Hawaiian Islands, the Western United States, and within Islands. Moving forward a significant challenge will be to diversity outside of these regions and expand to help future profitability. Although, Hawaiian has begun to expand to Asia it will need to expand to many more destinations in order to be diversified enough that it can remain profitable even when Hawaii is in a period of economic downturn.
General Information regarding HA’s key competitors include market capitalization (market cap), enterprise value, beta, cost of equity, cost of debt, and WACC.
With regard to enterprise value, HA actually has an enterprise value less than its market cap. Many airlines have enterprise values far greater than their market cap because of the large amount of debt that companies take on (mostly pension liabilities). HA has an enterprise value of $234.7mm mostly due to a relatively very large cash balance. Out of HA’s competitors, Southwest Airlines has an enterprise value of $8.6B and Delta Airlines has the smallest enterprise value at $2.37B (this compares to Delta’s market cap of $8.47B).
HA has the highest beta out of its competitors at 1.91. Republic Airways has the lowest beta at -0.09 which is somewhat surprising since most airline companies are positively correlated with the market. Alaska Air has the lowest positive beta at 0.57.
HA’s cost of equity in line with the industry norm. Delta Airlines has the highest cost of equity at 14.21% and US Airways has the lowest with 4.42%. Southwest Airlines had the next lowest cost of equity at 11.3%. HA has a cost of equity of 13.49% which is the 2nd highest out of its competitors. HA’s cost of debt of 4.46% is almost the same as the average of its competitors’ cost of debt. Republic Airways has the lowest cost at 1.75% and Delta has the highest at 7.26%. Due to Republic Airways high leverage, it has a WACC of 2.81%. The industry norm seems to be around 10% with HA having a WACC of 10.57%.
Looking at financial strength ratios such as Debt / Equity (D / E), Cash / Share, Current Ratio, and Interest Coverage, HA is fairly consistently in the middle of the pack. Southwest has the lowest D / E ratio at 0.54. HA has the next lowest at 0.67. This compares to US Airways Group having a ratio of 52.38 and Delta Airlines having a ratio of 17. HA’s competitors have an average D /E ratio of 12.86 which reflects HA’s relatively conservative capital structure.
US Airways Group has the highest cash balance per share as a percentage of share price at 144% (they have a higher cash balance per share than their current share price). However, US Airways Group is very highly levered (52.38x) and requires a large cash balance to service their debt. Republic Airways has a 97% cash balance per share as a percentage of share price with HA having around 90%. Southwest Airlines had the lowest number at just under 41%. HA’s competitors have an average cash balance per share as a percentage of share price of around 80%. HA has around a 90% of their stock price in cash which shows how well capitalized it is.
Southwest has the highest current ratio at 1.29 with HA having a ratio of 1.11. Alaska Air has a ratio of 1.17, Delta Airlines has a ratio 0.64, Republic Airways has a ratio of 0.82 and US Airways has a ratio of 1.02. As one can see, almost all of HA’s competitors had current ratios greater than 1 which is important from an operational perspective.
Southwest also has the highest interest coverage ratio at 6.63. HA has an interest coverage ratio of 6.44 compared to its competitors’ average of just under 4.3.
HA is considerably smaller than many of its competitors. It made $1.31B in revenue compared to Delta Airlines’ $31.76B, Southwest Airlines’ $12.1B, US Airways Group’s $11.9B, Alaska Air’s $3.83B, and Republic Airways’ $2.65B. HA had the highest revenue growth year over year at 15.7% compared to its competitor’s average of 11.83%. All of HA’s competitors posted positive 2010 yearly earnings less Republic Airways which made a loss of $0.38.
Interestingly enough, HA had one of the lowest gross profit margins (2nd lowest out of its competitors) at 13.26% but had the highest net profit margin at 8.42%. This compares to a competitor gross profit margin average of 19.45% and net profit margin average of 4.05%.
Valuations ratios used to analyze HA and its competitors include Price / Earnings (P / E), PEG Ratio, Price / Sales (P / S), and Price / Book (Price / B).
HA has the lowest trailing P / E ratio at 3.01 partially due to a one-time tax benefit of $25 million. US Airways had the next lowest trailing P / E multiple at 3.05 and Delta had the highest trailing P / E multiple at 14.5. Republic Airways does not have a meaningful trailing P / E ratio since it had negative 2010 annual earnings. US Airways has the lowest forward P / E multiple at 3.33. This can be attributed to the fact that is highly levered and investors are most likely hesitant to value the company at a higher multiple. Southwest Airlines had the highest forward P / E multiple at 10.92. HA had a multiple of 8.79 which was the second highest.
Southwest has the highest PEG ratio at 2.47 with HA having the second highest with a ratio of 2.44. This compares to a competitor average of 1.76. Republic Airways has the lowest ratio at 1.02. US Airways has a PEG ratio of 1.41, Alaska Air has a ratio of 1.34 and Delta Airlines has a ratio of 1.85.
Republic Airways has the lowest P / S ratio at 0.08. HA has a P / S ratio of 0.25 (second lowest). Southwest Airlines has the highest P / S ratio at 0.72 with Alaska Air having the second highest with a ratio of 2.44. This compares to a competitor average of 0.33. Alaska Air has a ratio of 0.53 and Delta Airlines has a ratio of 0.28.
Republic Airways has the lowest ratio P / B at 0.41. US Airways has the highest P / B ratio at 15.32 with Delta Airlines having the second highest with a ratio of 9.88. This compares to a competitor average of 5.01. Alaska Air has a P /B ratio of 1.85, Southwest Airlines has a ratio of 1.4 and HA has a ratio of 1.19 (second lowest).
Looking at Return on Assets (ROA), Return on Investment (ROI), Return on Equity (ROE), and Return on Invested Capital (ROIC), HA has leading returns among its competitors. Republic Airways is the only HA competitor with negative yearly earnings and therefore negative management effectiveness ratios. As a result, its returns have not been included for the sake of an apples-to-apples comparison.
HA has a ROA of 10.27% (TTM) which is far above the competitor average of 5.26%. US Airways has the closest return of 6.57% (TTM) and Delta Airlines has the lowest return of 1.36%. This suggests that HA has management which is successfully employing resources compared to its competitors.
HA has a ROI of 16.2% (TTM) which is also far above the competitor average of 7.83%. US Airways again has the closest return of 10.41% and Delta Airlines has the lowest return of 1.8%.
HA has a ROE of 48.6% (TTM) however, Delta Airlines and US Airways have higher ROEs. Delta Airlines’ ROE is 103.9% and US Airways’ is 597.6%. It is important to note that US Airways has negative retained earnings to the tune of $2.1B which is why their ROE is extremely higher (a lower denominator means a higher return). Alaska Airways has a return of 25.4% and Southwest Airlines has a return of 7.85%.
HA has a ROIC of 10.8% which is less than its competitors’ average of 11.6%. US Airways has the highest ROIC at 15.1% and Southwest Airlines has the lowest ROIC at 8.21%.
Hawaiian airlines is currently trading at multiples lower than industry averages when looking at Enterprise Value / Revenue (EV / R), Enterprise Value / EBITDA (EV / EBITDA), and Price / Earnings (P / E) multiples.
EV / R in the airline industry using 2010 revenue is roughly 0.62x while HA is trading at 0.18x. This is close to the lowest multiple in the airline industry (currently held by Delta Airlines at 0.06x). Using 2011 estimated revenue, HA is trading at 0.15x while the industry average is around 0.57x. The lowest EV / 2011E Revenue multiple belongs to DAL at 0.06x.
EV / 2010 EBITDA in the airline industry is roughly 3.61x with the lowest multiple belonging to Delta at 0.5x. HA has a multiple of 1.51x which is far below the mean; however, it is more than triple Delta’s multiple. Looking at EV / 2011E EBITDA, the industry average jumps to 4.0x with Delta once again having the lowest multiple at 0.49x. HA is trading at a multiple of 1.50x.
TTM P / E in the airline industry is roughly 11.39x with the lowest multiple belonging to HA at 3.01x. The next lowest competitor was United Airways Group at 3.05x. Looking at forward P / E for the industry, the average is 7.46x with US Airways Group having the lowest multiple at 3.95x. HA’s forward P / E multiple is estimated to rise to 7.03x.
Hawaiian Airlines sponsors three defined benefit pension plans, and a separate pilots' disability benefit. At the end of 2010, HA's disability obligation was $129.6 million. In 2010 and 2009 respectively, HA made contributions of $37.9 million and $10.5 million, and they anticipate funding of $12.0 million. The present value of their future pension contribution totals $218.29 million and contributions for the next 5 years are estimated between $18 and $21 million per year.
Asset returns on the pension plans declined in concert with the market during the 2008 financial crisis, but the asset values have recovered since then. HA's current pension funding ratio is well below 100%. The ratio dropped from 88% to 50% because of the market downturn in 2008, however over the past 3 years HA has steadily increased its contribution bringing the ratio to its most recent 66% level. The sought after status of greater than 100% pension funding will depend on HA's solvency and market conditions.
The graph above shows fair value of plan assets and that HA's pension is currently underfunded (has been historically underfunded as well). The pension funding ratio decreased considerably; however, HA has increased the ratio as of late. The actuarial assumption show the next several year's pension payments.
HA has increased its compensation to employees from 2009 to 2010 by 9.1% due to pay rate increases from union negotiations, increased contributions to 401k plans, and broader profit sharing with employees. Also a factor was training costs, and new flight activity from the three A330-200 aircraft. In 2008 to 2009, this figure was 12.3% due mostly to higher than normal pension contributions to cover the losses incurred in 2008.
The chart below shows HA's percentage increase (decrease) of its workforce year over year. After cutting the size of its workforce in 2007, HA expanded considerably during 2008 and has continued to expand its workforce into the present.
At the end of 2010, HA actively employed 4,023 people, an increase from 3,844 at the end of 2009. Approximately 86% of these employees are covered by labor agreements. Wages and benefits are major expense, and represented roughly 25% of operating expenses for the past two years. The following is a table of associated organized labor groups:
|Employee Group||Represented by||Number of Employees||Agreement amendable on|
|Flight deck crew members||Air Line Pilots Association (ALPA)||437||September 14, 2015|
|Cabin crew members||Association of Flight Attendants (AFA)||1,080||March 31, 2011|
|Maintenance and engineering personnel||International Association of Machinists and Aerospace Workers (IAM)||605||April 18, 2014|
|Customer service representatives||IAM||1,327||January 1, 2014|
|Flight dispatch personnel||Transport Workers Union (TWU)||29||November 9, 2013|
Since labor accounts for a big chunk of operating expenses, negotiating labor agreements in HA's favor are crucial. Listed in the table are the upcoming dates in which specific labor agreements are eligible for review.
The below graph shows that HA leases the majority of their aircraft (29/36). The aircraft HA owns are the oldest in its fleet. HA has 4 aircraft with an average age of 24.1 (767-300); all 4 are owned by HA.
|Aircraft Type||Leased||Owned||Total||Capacity||Average Age (In Years)|
From 2011-2015, HA will receive several A330-220 planes which seat 294 passengers. This will allowed for capacity expansion as HA will have more seats on each flight it makes. From 2016-2020, HA will receive several A350XWB-800 planes which seat around 270 passengers. If these planes replace the old 767-300 planes, this move will also increase capacity.
HA operates in five airports within Hawaii including:
HA operates in 10 continental U.S. airports including:
Internationally, HA operates in five cities including:
HA also has operations in Pago Pago International Airport (Pago Pago, American Samoa)