Hawaiian Air saw record third quarter

Hawaiian Airlines weathered storm-related interruptions and a wrong bet on the direction of jet fuel prices during the third quarter to turn in a record performance.

The storms cost Hawaiian $5 million in lost bookings, while the sharp drop in fuel resulted in the state’s largest carrier paying $5 million more in fuel than if it had not hedged prices by purchasing futures contracts.

"We’ve had a good quarter based largely on improvement in our long-haul business," Hawaiian President and Chief Executive Officer Mark Dunkerley said Tuesday in a phone interview following Hawaiian’s earnings conference call. "Demand remains strong for overseas visitors to Hawaii and for travel between the islands. If these conditions remain, we remain hopeful that this positive trend will continue."

Hawaiian achieved adjusted net income of 79 cents a share — a company record for a third quarter — that beat analysts’ estimates by a penny and topped the year-earlier adjusted net of 78 cents a share.

The company’s stock rose 53 cents, or 3.7 percent, to $15.03 Tuesday after jumping nearly 9 percent Monday. The company has the best-performing Hawaii stock this year on a major exchange with a 56.1 percent gain. The earnings were announced after the market closed.

Hawaiian’s adjusted net income last quarter, which excludes fuel hedging, jumped 34.6 percent to $49.5 million from $36.8 million a year ago.

Without adjusting for hedging, Hawaiian Holdings Inc.’s net income fell 12.4 percent to $35.6 million, or 56 cents a share, compared with $40.6 million, or 76 cents a share, in the year-earlier period.

Normally, a drop in jet fuel would be beneficial to airlines. But due to the volatility of fuel, Hawaiian and other airlines use a strategy called fuel hedging, which is a calculated bet against the future price of fuel that allows companies to lock in a price for the fuel it will need in the future. Oil prices plunged during the quarter from more than $100 a barrel to the mid-$80s.

"For the industry in general, the decline in fuel costs will be a good thing," said Baltimore-based airline analyst Joseph DeNardi of investment bank Stifel. "As the hedges start to roll off, (Hawaiian) will be able to recognize fuel costs, and their fuel costs will go down next quarter — just not to the extent if they would not have been hedged."

Hawaiian incurred $182.2 million in fuel costs last quarter, up 0.5 percent from $181.3 million in the year-earlier quarter. But Hawaiian had 60 percent of its fuel hedged in the July-September period and paid about $3.10 per gallon for fuel. Today’s price for raw fuel, excluding taxes or hedges, is $2.79 a gallon, Hawaiian said.

Dunkerley said Hawaiian either gains or loses $2.4 million per gallon, excluding hedges, for every penny that the price of fuel moves based on a full-year estimate.

"Our approach to fuel hedging is about reducing the volatility to our business," he said. "In regards to fuel, we accept when prices come down we won’t fully benefit in the short term, and we think that’s a very reasonable price to pay to protect ourselves against a rapid rise in the price of fuel."

Hawaiian has 65 percent of its fuel hedged this quarter.

Dunkerley said lower fuel prices don’t automatically mean that fares will come down.

"The price of fuel is only one of many factors that influence fare prices," he said. "We hedge our long-term fuel in order to maintain some stability over what we pay for fuel, so fares are unlikely to change on the basis of short-term changes in the price of fuel."

Hawaiian said Hurricane Iselle, downgraded to a tropical storm just before hitting Hawaii island in August, and Hurricane Julio, which just missed striking the islands a few days later, resulted in a $5 million loss from 30 neighbor island flight cancellations by Hawaiian and its turboprop operation, ‘Ohana by Hawaiian, as well as bookings that did not occur and other costs.

"Frankly, our costs are very similar to whether we fly an airplane or not," Dunkerley said.

"The real issue here is the reduction in revenue for allowing people to change flights and for people who don’t book during a period of time when they’re hunkered down waiting for the storm to pass."

Despite losing income due to the storms, Hawaiian’s revenue rose 6.7 percent last quarter to $639.5 million from $599.3 million in the year-earlier period. Passenger revenue was up just 4.4 percent, but "other" revenue rose 29.5 percent. The other revenue included a 21 percent increase in cargo revenue to $19.9 million. It was the ninth consecutive quarter that cargo revenue had increased at least 20 percent year over year.