Hawaiian Holdings Inc (HA)

Asset Class: US Stock (Sector: Industrials / Industry: Airlines)

Original Investment Thesis (11/2017):  I always loved Warren Buffett’s quote (from back in 2007) about how someone should have shot down Orville Wright on that first flight in order to save investors in airline stocks a ton of capital over the decades.  That said I think the entire industry is a little different today than it was back then.  It is heavily regulated and not easy to crank up an airline and start taking market share.  Hawaiian is almost a monopoly on flights to/from Hawaii and between the individual islands themselves.  Has an 80-90% market share on interisland travel (25% of revenue). Their one competitor (Island Air) went bankrupt.  Has diversified out of simply interisland flights and US to HA flights (50% of revenue) to capture intercontinental traffic from other areas (25% of revenue).  They have been growing, good at capital allocation, and are low debt.

Current Thoughts (9/29/2019): Long term holding.  All the news recently has been increased competition.  Southwest Airlines has started up operations to and from HA and also some interisland flights.  This was a known threat but it was still impactful (at least once the headlines started being reported).  Regardless, having competition is not a deal killer for me (doesn’t every company have it).  They continue to decrease their debt outstanding and their margins look similar to much bigger high-quality airlines.  I feel like I’m getting it for a much better value, however.

HA (Hawaiian Holdings Inc) – Annual Reassessment

February 2019

I’ve owned this stock for a little over a year and just completed my annual reassessment on it (using tools I’ve updated significantly since I purchased this stock).  I’ve attached a PDF that has my analysis in case anyone else might find it useful:ha-annual-reassessmentDownload

I purchased this stock back in November 2017 at $37.89. These are my thoughts after reviewing this when I completed my initial purchase in 2017:

• PRO #1 – Great airline that is well run. Has not always been the case.
• PRO #2 – Has an 80-90% market share on interisland travel (25% of revenue). Their one competitor (Island Air) went bankrupt.
• PRO #3 – Has diversified out of simply interisland flights and US to HA flights (50% of revenue) to capture intercontinental traffic from other areas (25% of revenue).
• CON #1 – CEO just retired (planned). This is the CEO that has gotten the company in the good shape it is in today.
• CON #2 – Debt to equity is a bit high but it has been dropping like a rock (and is down to 53% in the most recent quarter). Their quality score that I’m calculating is better than the other airlines (even those with lower debt ratios). So they are focused on it and improving it so I’ll take a chance on it continuing (although it will slow with buybacks and dividends…and cap-ex).
• CON #3 – Other airlines are adding routes from the US to Hawaii. 1) Southwest says they are adding routes to Hawaii in 2018-19 (and maybe interisland too). 2) United Continental said they would enter market too. 3) The threat of competition has been on the table for a while but hasn’t become official yet.

I’m using very conservative earnings estimates in my analysis (which is why some of my very important tests are showing low certainty–especially Test #0 and Test #4). Additionally, these are also skewed to be very low because the free cash flow is non-existent at the moment (which is basically making the DCF show zilch). I do consider this a very real and pertinent risk in this company. The free cash flow is currently low to negative because they are investing heavily in cap-ex. This could be a short-term problem or it could be an ongoing problem.

There is a pretty famous quote that says the best way to “become a millionaire is to invest $2 million dollars in an airline”. Warren Buffett said (in his 2007 shareholder letter) “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

So over the past 10 years, the average FCFPS for Hawaiian Airlines is $.72 but it has swung wildly from big negatives to big positives. Hence the joy of owning a cyclical in a capital intensive industry. The question is will it improve over time.

One thing that has changed a bit in the airline industry over the years is there are only a few players and the industry is regulated heavily. It is decently hard to be in the airline business. It is not a monopoly/duopoly but it does have some characteristics of this. The players are competitive but over the years they have stopped price wars for the most part where they lose money to gain share and coexist much more than in the past. This could change at any time. Hawaiian definitely has semi monopoly characteristics in that they basically own certain routes in their market. Competition is coming and will impact their business (this is/has been a known threat for some time). It is actually happening right now as Southwest is finalizing approval to fly US to HA.

One thing I was surprised by (and that actually supports the thesis that airlines aren’t so bad anymore…particularly this one) is the very decent return on invested capital. It hasn’t always been high as over the past 5 years (the 5 years prior to that were lower). But the average is 16.5% and it is currently a bit ahead of that value. This airline is fairing even better than its peers in that respect. It seems they are making prudent investments as they allocate capital. Debt has decreased dramatically over the past 10 years (and is below the industry average), shares outstanding has decreased fairly dramatically from the all-time high (down 23%). The Free Cash Flows are very choppy (which leads to almost non-existent FCF) and so are the Cap-Ex investments. Regardless, if they are able to invest this cash flow and earn a high return on it that is a good sign long term. I am hopeful that their seemingly great capital allocation will play out in their current very high Cap-Ex number and that this investment will lead to good future results. I have no reason to doubt management in this respect at this point.

So, what am I doing? I’m not going to sell this stock right now (but also not going to add to my position either). There might be better things to invest in and I will look for those and if anything comes up I’ll reassess then. Until then I don’t expect this stock to rise dramatically to new highs but I also don’t see terrible downside risk (barring some sort of overall collapse/recession). If that happens then this cyclical company will likely fall much further. I expect it to probably just hold its own and trade fairly sideways for some time and if things improve beyond the very conservative estimates that I’ve used to value this business I’ll be nicely surprised. Not a bad company at all and one I won’t mind owning for the long term.  I’d much rather own this than the overall market for sure!

I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72