MIAMI — Hawaiian Airlines recorded a net profit of $11.1 million for the fourth quarter last week, down 35.1% year-over-year (YOY) due primarily to losses associated with its portfolio of fuel hedges. For the full year 2014, Hawaiian recorded a net profit of $68.9 million, up 32.9 percent YOY. Results in both periods were adversely impacted by a $35 million noncash charge due to mark to market changes in the valuation of Hawaiian’s fuel hedging portfolio.

There weren’t any specific points of interest beyond the fuel hedging losses, which I’ve already covered ad-nauseum in other analyses for this quarter. With that in mind, I’ll start with some of the items I found interesting during the carrier’s quarterly earnings call.

  • Pretax ROIC of 16.3 percent, and adjusted net income up 108 percent with pretax margin of 6.9 percent;
  • Application for Kona – Tokyo Haneda shows Hawaiian’s ability to prosper in Japan despite the depreciation of the yen;
  • Inter-island routes represented 24 percent of passenger revenues with PRASM rising 2.1 percent on a 1.7 percent decrease in load factor and 8 percent increase in capacity;
  • North American (U.S.) routes represented 49 percent of passenger revenues, with overall revenues on the segment growing 10.4 percent. North American PRASM fell 3.3 percent on a 1.9 percent decrease in load factor;
  • Competitive capacity in Q1 and Q2 2015 to North America will be at record levels, though growth will tail off in Q3;
  • Trans-Pacific routes represented 27 percent of passenger revenue and PRASM rose 11.4 percent on a 5.8 percent increase in load factor;
  • Hedged 45 percent of yen and Australian dollar exposure for 2015;
  • Q4 ancillary revenue per passenger was $21.86, up $7.45 or 52 percent YOY. For calendar 2014, this metric was $19.72 per passenger, up $5.03 or 34 percent YOY;
  • HawaiianMiles sales revenue was $12 million in Q4 and $40 million for the full year, while Extra Comfort and preferred seat sales averaged $2.9 million per month in Q4 versus $800,000 per month a year prior. December revenues for these products was more than $3 million;
  • North American capacity growth will drive down RASM by 3.5 percent to 6.5 percent in Q1;
  • Decline in fuel prices in Q4 net of hedges was $12 million. In 2015, based on current cost curve, Hawaiian will save $240 million in fuel expenses at economic costs of $1.90 to $2.00 per gallon;
  • Hawaiian doesn’t see much ability to boost base fares in highly competitive markets;
  • Since network adjusted to focus more on North America, trans-Pacific PRASM performance has been strong;
  • The three A330-200s that Hawaiian will take delivery of in 2015 will be sold and leased back;
  • Hawaiian unconcerned by the specific carriers from the U.S. (such as Virgin America, Southwest, et. al) that may compete with it from the mainland as it thinks it can match the competitors for pricing and quality. Instead, it is focused on total capacity (how many seats are in the marketplace);
  • Hawaiian will be a cash tax payer from 2015 onwards; and
  • Hawaiian believes that the best way to insulate itself from mainland competitive capacity risk is to diversify its route network with more Pacific capacity.

The earnings call brought up a couple of interesting kernels, primarily with regards to Hawaiian’s revenue performance, I’ll first comment briefly on Hawaiian’s attempt to secure the Haneda slot thrown into competition by the DOJ in response to Delta’s suspension of Seattle-Haneda.

Should Hawaiian receive the slot? Absolutely. Its Honolulu -Tokyo Haneda service is far and away the most profitable Haneda route for a U.S. carrier, and Hawaiian is pretty much the only U.S. carrier that can make the awkward flight timings at Haneda work. But I don’t think Hawaiian will win the slot – American’s proposal would affect more potential passengers (through connections and a larger local market), and accordingly by the DOT’s standard logic, they are likely to receive the slot.

The other interesting thing to note is that Hawaiian’s growth plans keep coming back to bite them, whether in the Pacific or on the mainland. I’ve argued before that Hawaiian’s Pacific gambit was a necessary and calculated risk taken to diversify and de-risk the company’s future. Now, thanks to a moderation of capacity growth and a careful pruning of routes that were too marginal, that segment of the network finally appears to be regaining its legs with strong revenue growth.

Thanks to low fuel prices, Hawaiian should be able to allow these Asian markets to grow into maturity. But at the same time, there is a flood of new competitive capacity into the mainland market, and a lot of it is going into markets that are somewhat marginal. This is partly because Hawaiian has committed itself to fleet growth with new deliveries and partly because it sees opportunities in secondary Hawaiian markets. But those secondary opportunities would be better served by the A321neos coming in a couple of years, and Hawaiian could slow down growth, instead opting to speed up retirements of its Boeing 767-300ER fleet as it takes on A330-200s. I believe, that this pivot towards consolidating strength and market position in existing markets, enabled by the temporary decline in fuel prices, could do wonders to solidify Hawaiian’s business in advance of the next market downturn.