Asia/Oceania: the real growth story
Hawaiian’s travails on the West Coast have certainly hurt performance in the past year. (For that matter, overcapacity on routes within Hawaii also dragged down profitability in 2012.) However, the key to Hawaiian’s future lies in the company’s rapid growth in international markets. In the airline industry, there is almost always a trade-off between growth and short-term profitability. That said, Hawaiian’s current growth will position it well for higher profit in the years ahead, as its newer markets mature.
Airline executives and analysts generally agree that it takes at least two years for new routes to “mature” and reach peak profitability. During that time, the airline needs to engage customers so that they become aware of the new service. Hawaiian Airlines faces an especially difficult task, because it has begun operations in a variety of new countries, with different customs and — in some cases — different languages. It may thus take a little longer than average for Hawaiian to build brand awareness in its new markets.
This is critical for understanding the company’s future earnings trajectory. Since November 2010, Hawaiian has begun service to six new international destinations: Tokyo, Seoul, Osaka, Fukuoka, Sapporo, and Brisbane, along with a new domestic route to New York. Hawaiian plans to add another three international destinations in the next few months: Auckland, Sendai, and Taipei. The Tokyo and Osaka markets have already (more or less) matured, but demand is still ramping up in the others. With much of its capacity deployed in new markets, Hawaiian’s margins have been artificially depressed for the past two years.
Long term earnings power
If we look back to 2009 and 2010 (i.e. before Hawaiian embarked on its strategy of rapid international growth) the company delivered pre-tax margins of 8.2% and 6.3%, respectively. This compares to a pre-tax margin of just 4.4% last year. Based on the current growth trajectory, revenue will approach $3 billion by 2016, while growth will have slowed to a moderate pace. With slower growth, Hawaiian’s pre-tax margin is likely to return to the 6%-8% range. This implies EPS of approximately $2-$3, up from non-GAAP EPS of $1.06 last year.
With strong long-term earnings growth likely at Hawaiian, the stock looks like a bargain at less than $6. Based on my expectation for 2016 EPS of at least $2, I believe the stock has upside to $20 over the next three years.
The article Hawaiian Airlines: Growth at a Great Price originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg owns shares of Hawaiian Holdings. The Motley Fool has no position in any of the stocks mentioned.
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