The parent of Hawaiian Airlines posted an eightfold increase in first-quarter earnings Tuesday as the state’s largest carrier saw strong demand for its long-haul services.
President and CEO Mark Dunkerley said Hawaiian Holding Inc.’s international market now represents 27.3 percent of passenger revenue — up from 9 percent in the third quarter of 2010 — and has moved past its interisland operations to become the second-largest part of the company’s business behind the U.S. West Coast. Hawaiian has launched four new routes to Asia in the past 18 months.
Hawaiian, which began nonstop daily service between Honolulu and Fukuoka, Japan, last week, introduced nonstop service to Tokyo in November 2010, Seoul in January 2011 and Osaka last July.
"We continue to believe that our visitors from abroad will grow, and we continue to focus on developing international destinations in the years ahead," Dunkerley said.
But Dunkerley said he was disappointed with the airline’s performance in the interisland market, where Hawaiian’s revenue grew just 3.5 percent from the previous year despite increasing seating capacity by 10 percent.
Overall, Hawaiian had net income of $7.3 million, or 14 cents a share, compared with $855,000, or 2 cents a share, a year ago.
Revenue jumped 19.1 percent to $435.5 million from $365.6 million a year earlier.
"It was a reasonably good quarter," Dunkerley said. "It’s obviously the first quarter of our year, so it’s nice to be modestly profitable during a quarter where traditionally we’re break even or a slight loss."
More than three-quarters of the net income was due to an unrealized $5.8 million gain from fuel hedging, a strategy that allowed Hawaiian to buy fuel at a set price to lock in the cost and guard against possible future price spikes. A year ago Hawaiian recognized $8.4 million in income from fuel hedging. Accounting rules require that Hawaiian report the unrealized gain or loss of future hedge positions and base that increase or decrease on the price of fuel in the quarter that is being reported.
"The issue is we buy some of our fuel for future periods ahead of time, and when the price of fuel goes up, we essentially make money on that fuel we bought ahead of time," he said. "That shows up as a profit in our books, but actually it’s not good news because it only shows a profit if fuel prices are going up and we prefer fuel prices to go down" because the remainder of the airline’s fuel is not hedged.
Hawaiian has 65 percent of its fuel hedged in the second quarter, 59 percent in the third quarter and 36 percent in the fourth quarter.
Excluding the fuel-hedging activities, Hawaiian had net income of $3.3 million, or 6 cents a share. That still handily beat analysts’ consensus estimate of a loss of 2 cents a share, according to FactSet, a Norwalk, Conn.-based financial research firm. In the year-earlier period, Hawaiian had an adjusted loss of $3.2 million, or 6 cents a share.
Hawaiian, which has been changing its long-haul fleet from 264-seat Boeing 767-300ERs to 294-seat Airbus A330-200s, now has six A330s in its fleet, including one delivered in the first quarter. It will have another one delivered Friday with one each delivered in May and June. By midyear Hawaiian will have nine A330s and 16 767s in its long-haul fleet, along with 18 Boeing 717s that are used for interisland flights.
The airline plans to use an A330 on its new nonstop daily service between Honolulu and John F. Kennedy International Airport in New York. Service begins June 4 from Hawaii and June 5 from New York.
"This route is booked to a higher load factor (percentage of seats filled) for the upcoming summer than any of our other U.S. routes. And though it’s still early, the route is also tracking ahead of our internal revenue projection," Dunkerley said on an earnings conference call, noting in a phone interview later that he singled out the route because some analysts have been skeptical of Hawaiian expanding into New York.
However, Hawaiian’s early bookings success for the Honolulu-New York route impressed John Reardon, managing director of institutional sales for Dominick & Dominick LLC, a New York-based investment bank that trades in airline stock and debt.
"The most positive thing I took away from this (earnings conference) call is that they have a higher load factor this summer for the Honolulu-New York route than any North America destination," Reardon said. "That was a big negative last quarter (among wary analysts) that took the stock down 25, 30 percent. I think the stock is very cheap and Hawaiian is a very underappreciated franchise. I think that will be self-evident in the coming quarters. The stock should be about 7 right now, and I think it’s on its way to 10, which is not far-fetched."
The company’s stock rose 3 cents to $5.05 Tuesday on the Nasdaq Stock Market. Earnings were announced after the market closed.
"The whole airline group is undervalued," Reardon added. "This is not your father’s airline industry. This is an airline industry that will have its third year of profitability despite higher oil, which appears to be moderating."
Hawaiian’s fuel costs rose 28.3 percent to $140.3 million from $109.4 million a year ago and represented 33.2 percent of operating expenses. Hawaiian’s average cost per gallon of jet fuel, including taxes and delivery, increased 13.8 percent year over year to $3.25.
Dunkerley said he was surprised the new Maui hub that Hawaiian began last month didn’t translate into additional bookings.
"Whenever we make changes of this magnitude, we have some expectations — in this case passengers coming to fly," he said. "We thought when we added more seats we’d add a lot more passengers, and it was a little bit of a surprise for us. We’ll have to make some adjustments."
Among the adjustments being considered are changing the scheduling of flights, reducing schedules or re-examining fares, he said.
Analyst Fred Lowrance of Prairie Village, Kan.-based Avondale Partners LLC, called it a "good" quarter but said the prevention of the loss he was expecting came from maintenance expenses that were pushed into the second and third quarters instead of in the first quarter as anticipated.
"Obviously they’re growing their (route) system pretty rapidly to go along with strong unit revenue growth," Lowrance said. "The way they are growing is probably why the stock is not performing well. It has to do with the economic landscape and how volatile fuel prices have been in recent months.
"People see a company that’s growing, but they also see them having big new expensive aircraft coming in and going into markets they don’t necessarily have a great read on or know how quickly they’ll perform to expectations," said Lowrance. "I think the company is operating just fine given their internal expectations, but when you move to the outside and talk to customers and investors, they get a little bit nervous with the amount of capacity growth coming online in the next few quarters."
