Why Hawaiian Holdings, Inc. Stock Jumped 11% in December

By Adam Levine-Weinberg Markets Fool.com

What

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Hawaii-focused airline operator Hawaiian Holdings (NASDAQ: HA) was one of the best-performing stocks in the airline industry last year, soaring 61%. The stock also closed out the year in a strong fashion, gaining 11% in December, according to data from S&P Global Market Intelligence.

Hawaiian Holdings 2016 Stock Performance, data by YCharts.

So what

For most of 2016, Hawaiian Airlines was the only U.S. airline with rising unit revenue. Through the first nine months of the year, Hawaiian's revenue per available seat mile (RASM) increased 0.7% year over year. Moreover, in mid-October, the company projected that unit revenue growth would accelerate in Q4, with RASM up 0.5%-3.5%.

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Last month, in conjunction with its 2016 investor day, Hawaiian Airlines dramatically increased its fourth-quarter revenue guidance. Hawaiian now expects to post a strong 3%-6% gain in RASM during Q4. By contrast, nearly all of its competitors forecast that unit revenue would be flat or down on a year-over-year basis in the fourth quarter.

If Hawaiian Airlines can maintain RASM growth at this mid-single-digit level during 2017, it should be able to keep its profit margin at an elevated level despite the impact of rising fuel prices and a variety of other near-term cost headwinds.

Hawaiian Airlines is generating industry-leading unit revenue growth. Image source: The Motley Fool.

Due to the improved revenue outlook, analysts have raised their earnings estimates for Hawaiian Holdings significantly over the past month. The average EPS estimate for 2016 has risen from $5.11 to $5.28, while the average estimate for 2017 has jumped from $4.52 to $4.84.

Now what

Looking beyond 2017, Hawaiian Airlines is in the midst of a major fleet transition that should improve its long-term margin potential. The carrier plans to retire its eight remaining 767s -- which are 18 years old on average -- by the end of 2018. They will be replaced primarily by the smaller, more fuel-efficient A321neo. Meanwhile, Hawaiian is retrofitting all of its A330s with lie-flat seats in the first class cabin to attract higher-paying customers.

On the other hand, Hawaiian Holdings now trades for about 12 times the company's projected 2017 earnings. That's a pretty high valuation by airline standards. This could make it hard for Hawaiian Holdings stock to continue rising.

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Adam Levine-Weinberg owns shares of Hawaiian Holdings and is short January 2017 $50 calls on Hawaiian Holdings. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.