How Slower Growth, Falling Oil Will Boost This Airline

After posting disappointing results in late 2012 and early 2013, Hawaiian Holdings (NASDAQ: HA  ) has bounced back in a big way. The company returned to earnings growth last quarter, sending the stock flying to a new 52-week high.

HA Chart

Hawaiian Holdings 1 Year Price Chart, data by YCharts

Luckily for shareholders, there may be even better things to come. A more benign capacity environment in the West Coast-Hawaii travel market is starting to boost Hawaiian's domestic fares. Meanwhile, with the prospect of military action in Syria dimming, oil prices are receding. The resulting combination of higher fares and lower costs positions Hawaiian to deliver rapid earnings growth this fall and beyond.

Capacity moderation

Hawaiian Airlines executives have been looking forward to the fourth quarter for a long time. That's when the airlines flying between the U.S. West Coast and Hawaii are finally set to undo a series of damaging capacity increases from last year.

Industry capacity grew by double-digits in Q4 2012 and Q1 2013, and by 5% last quarter . Hawaiian and its primary competitors, Alaska Air (NYSE: ALK  ) and United Continental (NYSE: UAL  ) , therefore had to offer deep discounts to lure passengers.

United responded by trimming capacity between its western hubs and Hawaii by 6% for the second half of 2013 . Alaska Airlines is making similarly deep cuts. Alaska has cut capacity by more than 35% between the Bay Area and Hawaii for its fall schedule . Hawaiian Airlines is also cutting U.S. capacity for the fall, by redeploying some capacity from its New York, San Jose, and Las Vegas routes to Australia and New Zealand .

As a result of these schedule changes, industry capacity probably declined by about 1% in the current quarter. Hawaiian has projected that this capacity moderation will lead to a year-over-year unit revenue increase for the first time in more than a year .

In Q4, industry capacity is expected to drop by 5%. This should lead to even stronger unit revenue growth for Hawaiian, boosting profitability. Alaska and United will also benefit somewhat from these adjustments, but their flying is much less concentrated in the Hawaii market.

Falling fuel costs

The airline industry may also benefit from cheaper jet fuel costs this fall. U.S. oil production has been growing rapidly since 2011 (up approximately 50% in that time period). However, international crises surrounding the Middle East and North Africa have disrupted production, while also adding a significant risk premium to oil prices. Therefore, the U.S. production boom has not created much price relief yet.

The prospect of U.S. military action in Syria -- which seemed quite likely just a few weeks ago -- is now dimming. This has reduced the "risk premium" in oil prices . Moreover, Libya is starting to ramp up production again after strikes crippled production over the summer. Production is expected to rebound to 700,000 barrels per day by the end of this week, up from just 150,000 bpd recently .

If these trends remain intact, oil prices may retreat to the more moderate levels seen this spring. In Q2, Hawaiian Airlines' economic fuel cost per gallon was $3.07 , whereas in Q4 2012 that cost was $3.27/gallon and in Q1 2013 it was $3.29/gallon . A $0.20/gallon reduction in fuel costs would boost Hawaiian's quarterly EPS by approximately $0.13, all else equal.

Foolish bottom line

Lower fuel prices alone could give a nice boost to Hawaiian Airlines' earnings. However, the company is also likely to return to solid unit revenue growth this fall, due primarily to the capacity cuts outlined above.

This combination of lower fuel prices and higher unit revenue is a formula for rapid earnings growth, which could portend significant upside to analyst estimates for Hawaiian's profitability in Q4 and beyond.  . As a result, there is plenty of opportunity left for investors in Hawaiian Airlines.

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