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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836
Rating Aircraft Enhanced Equipment Trust Certificates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717763
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