Raising its unit revenue guidance during the quarter has become something of a tradition in recent years for leisure-focused airline Hawaiian Holdings (NASDAQ: HA). Indeed, strong unit revenue growth has allowed the company to nearly double its adjusted earnings per share in the past two years, from $3.09 in 2015 to $5.64 in 2017.
Back in January, Hawaiian's initial first-quarter forecast called for a 1% increase in revenue per available seat mile (RASM) at the midpoint of the guidance range. A big increase in competitive capacity on West Coast-Hawaii routes -- much of it coming from United Continental (NYSE: UAL) -- was expected to weigh on unit revenue in that region.
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However, earlier this week, Hawaiian Airlines revealed that RASM is on track to come in well ahead of its previous forecast. This should address investors' concerns about the threat from elevated capacity growth by United Airlines and other competitors.
A new forecast
On Monday afternoon, Hawaiian Airlines updated its first quarter guidance. The carrier now expects RASM to rise 3%-5% this quarter, citing better-than-expected passenger revenue in each of its major regions, as well as strong cargo revenue.
Hawaiian's first-quarter cost guidance remains essentially unchanged. Thus, the company's adjusted pre-tax margin is likely to be much higher than its initial guidance implied. As a result, adjusted EPS will come in well ahead of the average analyst estimate of $0.65, most likely in the range of $0.90-$1.00.
The demise of Hawaiian Airlines' main competitor in the inter-island market, favorable capacity trends in Tokyo, and the recent strengthening of the Japanese yen are all probably contributing to the carrier's strong unit revenue trends. However, the guidance update also shows that Hawaiian Airlines isn't having trouble coping with higher competition on West Coast-Hawaii routes.
In January, industry capacity between the western U.S. and Hawaii rose 13.6% year over year, according to the Hawaii Tourism Authority. That's roughly in line with the 14% industry capacity growth that Hawaiian's management expects for the full quarter. Despite this headwind, Hawaiian's load factor -- the percentage of seats filled with paying customers -- is actually higher year to date than it was in the first two months of 2017.
United Continental also seems to be doing fine despite the rapid industry capacity growth in Hawaii. United increased its first-quarter unit revenue guidance this week as well.
The outlook for the rest of 2018 looks good, too
Hawaiian Holdings also updated certain aspects of its full-year guidance on Monday. Most notably, it increased its non-fuel unit cost guidance by 1.5 percentage points. The main culprit here is the delayed delivery of its new Airbus A321neos. This matter forced Hawaiian Airlines to cut several routes from its summer schedule. It will also probably have to substitute less-efficient aircraft for some flights.
The good news is that unit revenue trends should remain quite favorable in the inter-island and international regions for the rest of the year. In addition, based on current schedules, it appears that competitive capacity growth in the West Coast-Hawaii market will decelerate beginning in the third quarter.
Hawaiian Airlines' success in the cargo market is likely to continue as well. Its long-delayed inter-island freighter service is set to begin this month. This development will open up opportunities to send cargo between its network of nearly two dozen long-haul destinations and the outlying islands.
Hawaiian Holdings stock is still dramatically undervalued
Shares of Hawaiian Holdings rose a little more than 3% on Tuesday, following the company's guidance update. However, that still leaves the stock trading for less than 7 times trailing earnings. Furthermore, tax reform will give the company an automatic earnings boost of about 20%.
With unit revenue still rising despite double-digit industry capacity growth on West Coast-Hawaii routes, it seems that Hawaiian Airlines is not nearly as vulnerable to overcapacity as the bears had feared. Indeed, for 2018 as a whole, EPS could easily come in 20%-30% ahead of what analysts were expecting as of Monday -- particularly if the company continues to be aggressive about share buybacks.
If anything, the outlook for 2019 could be even brighter. The replacement of Hawaiian's aging 767s with state-of-the-art A321neos should reduce non-fuel unit costs next year while driving substantial fuel efficiency gains. This situation should be enough to offset any unit revenue headwinds.
Investors still don't believe in Hawaiian Holdings, despite its consistently strong performance over the past few years. But as analysts reassess their downbeat projections for the company, Hawaiian Holdings stock could soar to new heights in the next couple of years.
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