Fitch Assigns Initial 'B' IDR to Hawaiian Airlines; Outlook Stable
NEW YORK -- May 7, 2013
Fitch Ratings has assigned initial Issuer Default Ratings (IDR) of 'B' to
Hawaiian Holdings, Inc. (HA) and its subsidiary Hawaiian Airlines, Inc. The
rating Outlook is Stable. A full list of ratings follows at the end of this
The ratings reflect HA's strong brand and reputation in the market for travel
to and from Hawaii, one of the world's leading vacation destinations; dominant
share (88%) of the Neighbor Island airline market; solid liquidity position;
healthy EBITDAR margins; and credit metrics that Fitch considers in line with
Concerns include risks associated with HA's aggressive growth plan, including
higher debt levels in the next two years; geographic concentration; size
relative to competing air carriers; recent overcapacity issues on North
American routes; low or negative free cash flow (FCF) due to high capital
expenditures; potential new entrants in its markets; and underfunded pension
position. Overall, Fitch considers the company's financial profile to be
sensitive to slower revenue growth and margin levels.
HA's credit quality is also affected by broader risks that most air carriers
face such as exposure to fuel and foreign exchange prices; high percentage of
unionized workforce; and susceptibility to various shocks such as disease
pandemics, terrorism, and natural disasters.
KEY RATING DRIVERS
HA is in the midst of executing a significant growth strategy which is the
source of both positive developments and risks. In 2012 available seat miles
(ASMs) grew 22% and revenues grew nearly 19%. This followed 26% revenue growth
and 19% ASM growth in 2011. The growth strategy is focused mainly on expanding
international routes (Asia-Pacific). The company has recently announced it
will begin flying to Beijing, China starting in 2014 marking the 10th new
international destination since November 2010. Although annual growth rates
should decelerate, Fitch expects growth in the low to middle double digits in
capacity and revenues through 2015, and growth is likely to continue beyond
2015 given the company's aircraft order book.
The benefits of HA's growth strategy include a more diversified revenue base,
improved scale versus some competitors and more flexibility in deploying
aircraft to match demand. So far, HA has successfully managed the growth
strategy, as evidenced by the financial results and credit profile achieved in
the past few years.
However, Fitch also believes the growth strategy could generate risks. High
capital expenditures for new, larger aircraft will pressure FCF for the next
two years and the aircraft deliveries will largely be funded with debt. The
company must meet revenue and profit targets to support the higher capacity
and debt levels. With higher international revenues, FX exposure has
increased, as evidenced in the first quarter when the weak Yen had an impact
on the company's results; 50% of the company's FX exposure could be the Yen,
and HA recently began a hedging program. The company is also adding new
employees at a rapid pace, with 500 new hires planned for 2013, or up more
than 10% off the 4,900 employee base at the end of 2012.
Size vs. Competitors:
HA is the 11th largest airline in the U.S. market. With approximately $2
billion of revenues in 2012 and a fleet of 44 aircraft, it is much smaller
than most of its competitors on both North American and Asia-Pacific routes.
HA has fewer resources to compete with these larger airlines, and one of the
drivers of its growth strategy is to build more scale. More than 75% of HA's
revenues are from the North American and Asia-Pacific routes on which the
larger players participate. Heavy competition in the industry could pose a
risk to the company's growth strategy. For example, HA announced that it plans
to terminate its service to Manila as the route has become unattractive due to
While Hawaii is a marquee vacation destination and HA has a solid position and
brand in the market, the company's credit profile reflects weak geographic
diversification, with all of its flights related to one market. Developments
that weaken travel to the Islands, even temporarily, could have a negative
impact on HA's financial performance.
Partly mitigating this geographic concentration is the unique position HA has
within the Neighbor Islands (travel to and from the various Hawaiian Islands).
With the exit of a key competitor several years ago, HA was left with a
dominant position in the market (approximately 88% market share). This
business serves both Hawaiian island residents and tourists; an estimated 67%
of traffic is related to local passengers. This segment accounted for about
24% of HA's revenues in 2012, but the market is mature, so growth should be
modest going forward. There is always the threat of new entrants into this
market, but HA tries to keep prices low enough to discourage new investment,
although it does have good pricing power in this segment.
Liquidity and Financial Metrics:
Through the past two years of substantial growth, HA has maintained a
financial profile that is consistent with the 'B' ratings. Liquidity
(unrestricted cash of $406 million) was fairly strong at 21% of revenues at
the end of 2012, and the company also has a $75 million asset based revolving
credit facility which had $69 million of availability at the end of 2012.
Fitch expects HA will maintain this liquidity level over the next few years if
it meets its growth plan. The company has few material unencumbered assets
that could serve as additional sources of liquidity. HA's financial covenants
consist of a fixed charge coverage ratio and minimum liquidity.
EBITDAR margins of 18.7% - 19.0% in the past two years are also relatively
strong in the industry, and could be considered strong for the rating. Fitch
calculates these margins using all operating lease rents. Fitch expects
margins could trend down slightly in the next several years, but margins would
still remain healthy. Fitch has some concerns about whether HA's margins could
attract competitors in some areas.
HA's balance sheet debt totaled $661 million at the end of 2012, and Fitch
expects this total will grow by several hundred million in the next two years
to support new aircraft deliveries before steadying or declining in 2015,
depending on the level of cash generation. Fitch expects HA will have adequate
access to the debt markets to fund its A330 deliveries given the current state
of the aircraft finance market. HA's existing maturity schedule is reasonably
spread out, with required debt and capital lease payments of approximately
$114 million in 2013 and less than $54 million in each of the following two
years. Amortization payments on the expected new debt could increase these
required payments modestly in the next two years.
Leverage, whether Funds from Operations (FFO) Adjusted Gross Leverage (4.9x in
2012) or Adjusted Debt to EBITDAR (5.1x in 2012), are solid for the
recommended ratings. However, the company must meet its revenue and cash
generation targets to keep pace with expected higher debt levels, thereby
keeping the leverage statistics steady with 2012 levels. Fitch calculates
these leverage metrics by adding all operating lease rents to debt using an
8-times capitalization factor.
Free cash flow has been break-even or negative in the past three years as a
result of higher capital expenditures. Fitch expects HA will have significant
negative FCF in 2013 and 2014 due to high capital expenditures for aircraft.
HA's defined benefit pension plans were 56% funded ($184 million deficit) at
the end of 2012, but the company took advantage of temporary pension relief,
reducing minimum required contributions ($14.7 million in 2013).
As of the end of 2012 HA had purchase commitments for 13 Airbus A330-200's
(delivery through 2015, with three already delivered in 2013), six Airbus
A350XWB-800's, and four Rolls-Royce spare engines. The company also recently
signed firm orders for 16 Airbus A321neo aircraft for delivery between 2017
and 2020. The company plans to take delivery of five A330's in both 2013 and
2014, up from two in 2011 and 4 in 2012. HA's Boeing 767's are gradually being
phased out of its fleet. Boeing 717's remain the core of HA's Neighbor Island
The Recovery Ratings and notching in the debt structure for HA's unsecured and
secured debt (see below) reflect Fitch's recovery expectations under a
scenario in which distressed enterprise value is allocated to the various debt
classes. Most of HA's debt is secured by aircraft and would likely see
substantial recovery in Fitch's view, as would the company's credit facility,
which is secured by most non-aircraft assets. The unsecured convertible notes
will likely be pressured in a recovery scenario, reflected in the Recovery
Rating (RR) 5 (11-30% recovery). The convertible notes do not qualify for
equity credit under Fitch's rating criteria.
Given the significant growth forecast for the next two years, and the
accompanying increase in capacity and debt (particularly in 2014), a positive
rating action is unlikely in the next 18 to 24 months. After that, if HA has
successfully executed its expansion into new routes and has maintained its
margins and cash generation, a positive outlook revision or rating action
could be considered.
Various factors could lead to a downward review of the Outlook or the ratings.
Poor execution of the growth strategy, including lower than expected volume on
new routes or operational issues, could hurt HA's credit profile. Competitor
actions, negative economic developments or demand shocks which hurt load
factors and/or yields could also pressure the company's credit profile. Cost
pressures, particularly from fuel, could also be a catalyst to review the
outlook or the ratings. Overall, Fitch considers the company's financial
profile to be sensitive to slower revenue growth and margin levels.
Fitch has assigned the following ratings:
Hawaiian Holdings, Inc.
--Senior Unsecured Convertible Notes 'B-/RR5'.
Hawaiian Airlines, Inc.
--Senior 1st Lien Secured Credit Facility 'BB/RR1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(Nov. 13, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 2012);
--'Rating Airline Companies-Sector Credit Factors' (Dec. 14, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Rating Airline Companies
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