CHICAGO–(BUSINESS WIRE)–Fitch Ratings has affirmed the ratings for Hawaiian Airlines, Inc. and
its parent company Hawaiian Holdings, Inc. at ‘B’. The Rating Outlook is
Stable. Fitch has also affirmed the ratings on Hawaiian’s 2013-1 series
of EETCs as detailed at the end of this release.
The ratings are supported by Hawaiian’s solid market position in its
primary business of flying leisure travelers to and from the Hawaiian
Islands, its near-monopoly position in the neighbor island market, and
its maturing international business. Hawaiian also generates peer
competitive operating margins, maintains adequate liquidity, and
generates credit metrics that Fitch considers to be in line with the
rating.
Concerns for Hawaiian include the company’s leveraged balance sheet,
negative free cash flow, small size and geographic concentration in
comparison to its North American peers, and its exposure to foreign
exchange rates. The Stable Outlook reflects Fitch’s expectations that
while operating margins and leverage metrics should improve over the
intermediate term, improvements are not likely to warrant an upgrade
within the next year.
Slower growth and Maturing Markets: Fitch expects Hawaiian’s operating
margins to expand over the next one to two years as the company steps
back from a period of rapid growth that occurred between 2010 and 2013.
The company focused on expanding its presence in Asia over the past
several years, adding a number of new destinations (Tokyo, Seoul,
Brisbane, etc.). Newly opened routes have tended to be dilutive to
margins as they ramp up. Fitch expects some margin improvement as
Hawaiian’s mix of flying becomes more heavily weighted to routes that
have been opened for more than two years.
The company only expects to open one new market in 2014, represented by
its launch of service to Beijing in April. Hawaiian expects total ASMs
to increase by 1-4% in 2014 compared to growth of more than 14% in 2013.
Hawaiian generated an EBITDAR margin of 18.5% in the LTM period ended
March 31, 2014, up from 17.1% in the comparable period a year ago.
Improved Domestic Environment: Fitch also expects operating performance
in 2014 to benefit from an easier competitive environment in the
mainland U.S. to Hawaii market. Total capacity in this market is
expected to be relatively flat for the year as opposed to 2013 when
capacity in some of Hawaiian’s key markets such as Seattle and San Diego
increased significantly. Limited capacity additions and expectations for
low single digit growth in Hawaiian tourism are expected to support a
healthy yield environment this year.
The company should also gain a tailwind from Mesa Airlines’ recent
decision to suspend operations at go!, its Hawaiian interisland
business. After Aloha Airlines folded in 2008, go! was Hawaiian’s only
sizeable competitor in the interisland market. Hawaiian was already the
dominant carrier, with a market share of roughly 90%, but the exit of
go! will leave Hawaiian in a near monopoly position. Fitch expects the
reduced competition to bolster yields and improve margins for the
interisland business which generates 24% of the company’s passenger
revenue.
Fitch expects revenue improvements to be partially offset by rising unit
costs. The company expects cost per available seat mile (CASM) to
increase in the low single digit range for the year. Cost growth in 2014
will partially be due to unusual items such as start-up costs related to
the launch of ‘Ohana, Hawaiian’s new interisland turboprop service,
cabin modifications to introduce the new extra comfort economy product
onto Hawaiian’s A330s and painting expenses for its 717s. Wages and
salaries will also increase due to increased capacity and the impacts of
FAR 117, a new rule implemented by the FAA which limits the flying time
for pilots.
Weak FCF in 2014/2015: Hawaiian’s recent international expansion has
also entailed a large investment in its fleet, with the company taking
14 A330-200s between 2010 and year end 2013 to replace its 767-300s and
767-300ERs. Hawaiian is scheduled to take five more A330s in 2014 and
three in 2015. Capital spending in 2014 is expected to be in the
$465-475 million range, up from $342 million in 2013. Fitch expects
capital spending to produce sharply negative FCF in 2014, and
potentially neutral or slightly negative in 2015. Hawaiian has no
scheduled aircraft deliveries in 2016 at which point FCF is expected to
turn positive. Importantly, all of the company’s A330 deliveries for
2014 have been pre-funded through Hawaiian’s issuance of its 2013-1
series of EETCs.
Foreign exchange risk: Fitch notes that Hawaiian operating profits are
sensitive to currency fluctuations. Hawaiian is somewhat unique among
North American carriers in the high proportion of its international
seats sold in local currencies rather than in U.S. Dollars. The company
estimates that a 10% strengthening of the U.S. Dollar versus the Yen
would result in a $19 million drop in operating income and a similar. A
10% strengthening against the AUD would result in a $14.5 million drop
in operating income. These represent sizeable potential swings when
compared to Hawaiian’s total operating income (EBIT) which amounted to
$133 million in 2013.
The effects were illustrated throughout 2013 and in the first quarter of
2014 as operating results were negatively impacted by a strengthening
U.S. Dollar compared to the Yen and Australian Dollar. Hawaiian reported
that international passenger unit revenues in the first quarter were
down by 7.1%, but would have only been down by 1% assuming constant
exchange rates over the period.
Leveraged balance sheet: Fitch calculates Hawaiian’s total adjusted debt
to EBITDAR at 5.5x at year end 2013, up from 5.1x at year end 2012. This
puts Hawaiian at the high end of its North American peer group. Fitch
expects the incremental EETC debt added in 2014 to push leverage
slightly higher in the near term, but as the company’s EBITDAR grows,
leverage should fall quickly in 2015 and beyond.
Adequate financial flexibility: Fitch considers Hawaiian’s financial
flexibility to be adequate for the rating. As of March 31, 2014 the
company had a cash balance of $335 million, $144 million in short term
investments and $69.5 million in availability under its $75 million
asset backed revolver. Total liquidity was equal to 25% of LTM revenue,
which is at the high end of Hawaiian’s North American peer group. Fitch
considers the company’s upcoming debt maturities to be manageable.
Maturities in 2014 and 2015 total $53.4 and $65.1 million respectively,
which are manageable given the company’s cash on hand and expected cash
from operations.
RATING SENSITIVITIES:
Future actions that may individually or collectively cause Fitch to take
a positive rating action include:
–Sustained adjusted debt/EBITDAR below 5x;
–A return to positive free cash flow generation;
–EBITDAR margins expanding to the 18-20% range;
–Further evidence that Hawaiian’s Pacific business is firmly
established.
Future actions that may individually or collectively cause Fitch to take
a negative rating action include:
–Capacity additions into the Hawaiian market which cause sustained
weakness in yields;
–Leverage rising and remaining at or above 6x;
–A notable drop in tourism to Hawaii caused by a natural disaster or
economic downturn;
–EBITDAR margins falling and remaining below 15%.
2013-1 EETC:
Fitch has affirmed the senior tranche rating at ‘A-’. Senior EETC
tranche ratings are primarily based on a top down analysis of the level
of overcollateralization featured in the transaction. The ratings also
incorporate the structural benefits of section 1110 of the bankruptcy
code, and the presence of an 18-month liquidity facility.
Fitch’s stress case utilizes a top-down approach assuming a rejection of
the entire pool of aircraft in a severe global aviation downturn. The
stress scenario incorporates a full draw on the liquidity facility, an
assumed 5% repossession/remarketing cost, and a 30% stress to the value
of the aircraft collateral. The 30% value haircut corresponds to the
high end of Fitch’s 20-30% ‘A’ category stress level for Tier 1 aircraft.
The collateral pool in this transaction consists of six A330-200s. Fitch
views the A330-200 as a good quality Tier 1/ 2 aircraft. The A330-200 is
a highly capable aircraft that has outperformed its rival 767 over the
last decade, and maintained a healthy backlog despite the long-awaited
arrival of the 787. Fitch expects this aircraft type to remain a
significant presence in the wide body, medium to long haul market for
the near-to-intermediate term.
Fitch’s stress scenarios produce a maximum LTV of 93.5% when
incorporating ‘A’ category stresses. This analysis suggests that
bondholders could expect a full recovery of principal with some headroom
even in a severe aviation downturn.
Subordinated tranche ratings are linked to Hawaiian’s IDR, and therefore
the B tranche ratings have been affirmed at ‘BB’, which represents a
three-notch uplift from Hawaiian’s IDR of ‘B’.
Subordinated tranche ratings are adjusted from Hawaiian’s IDR based on
three primary factors; 1) affirmation factor, 2) presence of a liquidity
facility, and 3) recovery prospects. Fitch considers the affirmation
factor for this collateral pool to be moderate to high resulting in a +2
notch adjustment (maximum is 3). The B tranche also features an 18 month
liquidity facility, providing a further +1 notch adjustment. No
adjustment has been made for recovery, resulting in a rating of ‘BB’.
Fitch has affirmed the following ratings:
Hawaiian Holdings, Inc.
–IDR at ‘B’;
–Senior unsecured convertible notes at ‘B-/RR5′.
Hawaiian Airlines, Inc.
–IDR at ‘B’;
–Senior 1st lien secured credit facility at ‘BB/RR1′.
Hawaiian Airlines 2013-1 pass-through trust
–Series 2013-1 class A certificates at ‘A-’;
–Series 2013-1 class B certificates at ‘BB’.
The Rating Outlook is Stable.
Additional information is available at ‘www.fitchratings.com‘
Applicable Criteria and Related Research:
–’Corporate Rating Methodology’ (Aug. 5, 2013);
–’Recovery Ratings and Notching Criteria for Nonfinancial Corporate
Issuers’ (Nov. 19, 2013);
–’Rating Aircraft Enhanced Equipment Trust Certificates’ (Sept. 12,
2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers
Rating Aircraft Enhanced Equipment Trust Certificates
Additional Disclosure
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
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