Cleared for Takeoff

Hawaiian Airlines’ sales and passenger counts are flying high, but Wall Street is keeping the airline’s valuation grounded.

September, 2000

You’d never guess that Hawaiian Airlines seems bound for bigger and better things. Its chief financial officer, John Garibaldi, recently left the carrier. And investors have been remarkably reluctant to boost Hawaiian’s share price, which has been stalled in low single digits for more than four years.

Despite the market’s lack of enthusiasm for Hawaiian Air shares, the carrier is moving ahead aggressively on a number of fronts. A major expansion at its Koapaka Street headquarters near Honolulu Airport is underway. Space will increase by almost 30 percent from 97,000 to 126,000 square feet by the end of the year. And the 12th largest airline in the United States continues to eye new routes. Top priority? A company source says Hawaiian has been pushing to get a gate assignment at New York’s JFK Airport.

“We believe that we should be the flag carrier for the state of Hawaii,” says CEO Paul Casey. “So we will continue to expand both on the U.S. mainland where we are a very well-known and well-thought-of product. Also into Asia and maybe into the South Pacific.”

Hawaiian Airlines Inc. (AMEX:HA) ranked No. 12 in this year Hawaii Business Top 250 with 1999 gross sales of $488.9 million. This was a healthy 14.7 percent increase over 1998 revenues of $426.4 million. Hawaiian says total passenger revenues for 1999 increased 14.6 percent over 1998.

Hawaiian increased the number of passengers carried by 8.5 percent in 1999 over 1998. It recently added a code sharing agreement with Continental Airlines to its established agreements with Northwest Airlines and American Airlines—three of the nation’s five largest airlines. Also, transpacific passenger traffic increased 12.8 percent in 1999 over 1998.

Casey calls the traffic increase “phenomenal” and credits an aggressive marketing push. “We have learned to generate revenue,” says Case. “And it’s by seeking new sources of business and frankly by increasing prices. We’ve pushed prices up and there’s been no resistance from consumers.”

Given all that, why haven’t investors pushed Hawaiian shares higher?

“We think it’s undervalued, but if the market says it’s worth $2.50 or thereabouts, that’s what it’s worth,” says Casey.

“A lot of it just has to do with profitability and Hawaiian has struggled recently with being profitable on an earnings per share basis where other airlines, well-established airlines that have been in business over five years, really haven’t had too much of a problem with putting profit on the bottom line,” says RedChip Report Analyst Lantz Stringham.

“Hawaiian Airlines’ earnings potential and as a result, its stock price, is limited by its duopoly position (with Aloha) in the overall island market and the nature of the markets it serves, a mix of quasi-public service for islanders, and wholesale/leisure for tour operators and inter-airlines clients desiring add-ons to mainland-Hawaii service,” adds airline industry consultant Robert Mann with R. W. Mann & Company, Inc. “The leisure and public service mix overwhelms any business travel mix, thus yields and earnings tend to be punished.”

Hawaiian Air’s position today is in marked contrast to where it was just a few years back. Casey took over in 1997 after heading the Hawaii Visitors and Convention Bureau for two years. He was handed the reigns of an airline that had emerged from bankruptcy in 1994. Airline labor unions made major concessions to keep the airline afloat along the way and in late August the company was deep into renegotiations with all of its major unions.

Says Casey: “The company is now making a little bit of money. It is clearly not out of the woods, but it is making some money and making some headway and so what John [Adams, Hawaiian Airlines chairman] was saying [at this year’s shareholders meeting] is the employees deserve some of that ‘give back’ to be returned to them.”

Casey says his strategy has not been to focus on the low stock price but to concentrate on raising revenues and reaching an accord with labor unions. “The biggest challenge was frankly bridging the gap between labor and management and getting the trust of the employees aback. One of the things that helped us do that was e-mail. My predecessor (airline executive Bruce Nobles) did not have or did not believe in e-mail. Practically from the first day I walked in here we installed e-mail to the point where probably there’s 300 to 400 employees online within the company on email. I hear from employees every single day.”

And his New Economy quest for more high-tech productivity didn’t end there. He estimates Hawaiian has spent about $14 million in the last four years on automation. Today, there are new software systems for yield management, accounting and human resources.

Online sales are also exploding. Casey says sales off of Hawaiian Airlines’ Web site ( and others such as Expedia, Travelocity, Priceline, Cheap Tickets and Panda Online, have increased 400 percent from the last quarter of 1999 to the first quarter of 2000. And Hawaiian is a charter subscriber to the new airline supersite Orbitz.

“It is called survival and I think that’s true of any company anywhere in the world. Unless you are selling products and services online, you will die because consumers, at least in North America or in most western countries, are now using online services,” says Casey.

If Hawaiian is on its way to smoother flying, might there be an ownership change in the near future? That was the guessing in May when the airline announced that it hired a financial advisor to “explore strategic alternatives.”

“Over the past 12 months we’ve had a number of expressions of interest from various parties wanting to buy all or part of stock of the company. So we’ve hired an investment banker, Lazard (Freres & Co. LLC), out of New York, to put a book together and to look at these people and see if they’re in this for real and if they have the financial wherewithal to carry out a transaction,” is the most Casey will say on the subject.

“I think the natural tendency of the market would be to think that they are putting themselves on the selling block. I don’t think that’s the case necessarily,” notes RedChip’s Stringham. He says that based on Hawaiian’s current share price, a purchase price of $110 million to $120 million would be a legitimate offer. However, Stringham believes that chances are well under 50 percent that someone will make an offer to buy.

Says Stringham, “I think the reason for hiring the advisor has to do with their high level of insider ownership and the possibility of some of those insiders wanting to divest all of those shares.”

A foreign suitor also seems unlikely. According toCommerzbank analyst Paul Migliorato in Tokyo, “If an airline is in a position to expand, it is Japan Air Lines, but I’d be surprised. JAL already services some of the West Coast, and the advantage of flights from Hawaii to there would be limited, plus the acquisition would put them into direct competition with American airlines that have far better feeder networks.”

Shortly before the financial advisor announcement, Hawaiian initiated a stock buy back program. In May the company said there might be a time when it would be appropriate to discontinue the program because of the “process currently being considered.”

Higher fuel prices hit all airlines hard early this year, including Hawaiian. In the first quarter of 2000 the company had operating losses of $4.5 million and net losses of $2.6 million. But RedChip analyst Stringham says he expects fuel prices to come down shortly, which will put the airline back in the black. In fact, he’s projecting profitability through all of 2001. He sees earnings per share of $.02 in 2000 and $.26 in 2001. And his price target for Hawaiian Air’s stock in 2001 based on his earnings per share forecast is 3 and 3/8.

Hawaiian reported a 170 percent increase in net income for the second quarter of this year, up to $4.6 million compared to $1.7 million in the same quarter last year.

Stringham says Hawaiian appears to have been gaining market share over competitor Aloha Airlines slowly, but surely over the last year. He says it increased from 40 percent to 46 percent in 12 months.

“This is not a game of market share,” says Casey. “What we want to do is make money on the share that we have. The fact that we have increased market share is kind of a byproduct of being more aggressive in the marketing arena and I think providing a better product.”

Now, if only the financial markets would feel the same way about Hawaiian Air.


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Kelli Abe Trifonovitch