MIAMI — Hawaiian Holdings, parent company to Hawaiian Airlines, announced a second quarter net profit of $27.37 million, or $0.43 cents per diluted share on Tuesday. The results represent a 58% year-over-year (YOY) increase from Q2 2013’s $11.31 million dollar profit.
Operating revenues grew 7.8% over 2013 to $575 million. Passenger revenues rose 5.3% YOY to $506.8 million on a 5.7% YOY climb in yield to 14.94 cents; which drove a 4.1% YOY rise in passenger revenues per air seat mile (PRASM) to 11.90 cents. The remainder came from other operating revenues, which jumped 31.4% YOY to $68.92 million. Cargo revenues played a major role in the growth of non-passenger revenues, growing 24% YOY to $19 million.
Capacity as measured in available seat miles (ASMs) increased just 1.2% YOY, due to route cancellations across the Pacific and the back-loading of a domestic expansion into June. ASM growth for the second quarter will likely be a percentage point or two higher, but the broader trend remains.
Broken down by region, PRASM for routes to the mainland United States rose 4% YOY with said routes generating 50% of Hawaiian’s passenger revenue in the quarter (roughly $252 million) despite a four percentage point decrease in load factor. Hawaiian expects industry capacity in the third and fourth quarter to grow by 9%, and that adverse tailwind will likely affect PRASM figures downwards in the second half of the year. PRASM on inter-island routes, which Hawaiian predictably refers to as “Neighbor Island routes,” grew 8.3% YOY, though this figure was skewed upwards by the Ohana turboprop operation. Inter-island operations represented 24% of Hawaiian’s passenger revenue ($122 million), with international operations making up the remaining 26% ($132 million).
International operations continued to weigh down Hawaiian’s revenue numbers, with PRASM falling 1.6% YOY. However, as Hawaiian CEO Mark Dunkerley noted in the carrier’s quarterly results conference call, the “results continue a trend of sequential improvements driven in part by lapping of the period last year where the strengthening U.S. dollar undermined the value of our foreign currency sales.” In particular, the value of the Japanese yen has stabilized as Premier Shinzo Abe moves into a phase of his Abenomics reform plan not centered around massive monetary stimulus.
After several consecutive quarters worth of growth into the Pacific, Hawaiian has retrenched by canceling services to Fukuoka, Manila, Taipei, and Tokyo Narita, as well as reducing frequencies to several other destinations. These aircraft have been redeployed to stronger markets like South Korea and in particular the West Coast of the United States, with 35 new frequencies added in the second quarter, including 28 to Kona, Maui, and Lihu’e.
After years of becoming increasingly superseded by Alaska Airlines on services to secondary Hawaiian airports, Hawaiian has begun to fight back in the market segment, in particular adding services from Los Angeles and Oakland to Kona and Lihu’e in June. Commensurately, overall PRASM growth performance, at 4.1% was strongly improved, though that figure was certainly skewed by the launch of Ohana by Hawaiian, which operates on routes that are so short that PRASM over $0.50 is not uncommon.
Operating expenses conversely, rose 5.6% YOY to $524.2 million. Fuel cost increased modestly, rising 2.9% on a 2.3% increase in per-gallon prices and the aforementioned 1.2% rise in ASMs. While fuel costs are not low per-se, they have been exceedingly stable over the past year-and-a-half by the standards of the market. This is an enormous boon to airlines, even if it’s not as visible on financial statements, because it allows them to make decisions with relatively precise information (frequently leading to crisper and more decisive action).
Labor expenses, rose sharply, jumping 8.8% YOY to $112.5 million in the quarter, while maintenance expenses rose 10.1% to $58.4 million. Landing fees and non-aircraft rental expenses grew 10.3% YOY to $21.7 million, while depreciation and amortization expenses rose to $23.8 million. The various cost-line increases drove up the carrier’s cost per ASM (CASM) to 12.30 cents, a 4.4% increase YOY. Excluding fuel, CASM rose roughly in line with expenses overall; 5.8% to 8.21 cents.
The airline ended the quarter with $564 million in cash and short term investments, as well as available borrowing capacity of $69.4 million under a Revolving Credit Facility. Outstanding debt and capital lease obligations totaled $1.07 billion. As compared to the end of the first quarter of 2014, Hawaiian’s cash position at the end of the second quarter was $85 million higher, while debt and capital lease obligations were $131 million higher, tied to secured loan agreements to help finance the purchase of two further Airbus A330-200 aircraft.
Capital expenditures for the quarter totaled $165 million, but after delivery of the remainder of Hawaiian’s A330-200 order over the next year, that number should decline sharply. This will allow a recovery in Hawaiian’s mediocre free cash flow numbers.
On an operating basis, Hawaiian recorded an operating profit of $51.6 million, which translates to a 9.0% operating margin, up from 7.0% a year prior. Pre-tax return on invested capital (ROIC) totaled 13.5%, while post-tax ROIC came in at 8.1%. Despite middling net profit figures, Hawaiian tends to deliver above average ROIC performance, likely because the compensation of Mr. Dunkerley and other executives is tied to that metric.
Hawaiian’s revenue performance was promising and the profit improvement was driven largely by that element of its operations. Expenses rose in the quarter, but a large element of that was increased investment and headcount due to the Ohana operation. As Ohana spools up, revenue figures should get an added boost. A slowdown in growth (even the uptake of the A330-800neo and A321neo are only expected to drive “single-digit” capacity increases annually) will allow Hawaiian to crystallize Pacific operations and solidify dominance over inter-island service.
More importantly, the carrier is entering a new strategic phase, one that doesn’t completely eradicate the growth ethos we outlined in our analysis of the carrier’s first quarter results but more accurately, tones it down. “What we are recognizing is that we’re going into a new period,” opined Mr. Dunkerley on the call, noting that Hawaiian is entering, “a period that feels very different from the period that we’re [Hawaiian are] exiting this year.”