So far, 2018 hasn't gone exactly according to plan for Hawaiian Holdings (NASDAQ:HA). Hawaiian Airlines has had to cope with delivery delays for its new Airbus (NASDAQOTH:EADSY) A321neo fleet, a sharp increase in volcanic activity on Hawaii's Big Island, and even a glancing blow to Hawaii from a powerful hurricane.
These mishaps added to the earnings pressure from a sharp increase in industry capacity between the West Coast and Hawaii this year. However, it looks like Hawaiian Airlines will soon put all of these issues in the past. This could lead to better-than-expected results in 2019.
Fleet transition is back on track
Hawaiian Airlines entered 2018 planning to launch several new routes (and to add capacity on others) during the first half of the year. It expected to have eight Airbus A321neos in its fleet by midyear, up from zero a year earlier. The A321neos were also to be used to replace the carrier's remaining Boeing 767s over the course of the year.
However, problems with the Pratt & Whitney engine that Hawaiian Airlines selected for its A321neos caused significant delivery delays. As of June 30, Hawaiian had only received six A321neos, three of which had been delivered in the last three weeks of the second quarter.
This forced the carrier to eliminate two seasonal summer routes from its schedule and delay the launch of its daily Oakland-Lihue route by three months. Additionally, Hawaiian didn't have enough work for the pilots it had trained to fly the A321neo and it had to do extra maintenance to put a 767 that it had planned to retire back into service on a temporary basis.
Fortunately, Airbus is starting to catch up on A321neo deliveries. By mid-July, Hawaiian Airlines had received all eight A321neos that it was supposed to have by the end of June. Three more are expected to arrive between now and year-end.
Looking ahead to the fourth quarter and 2019, Hawaiian will no longer face the maintenance and pilot productivity cost headwinds that have weighed on its year-to-date cost performance. The replacement of the 767s with A321neos will also drive substantial fuel efficiency gains and will bolster unit revenue by allowing the carrier to reduce capacity on several lower-demand routes.
Natural disaster headwinds will quickly fade
Hawaiian Airlines has faced additional earnings headwinds from natural disasters in the past few months. Most notably, the activity of Kilauea -- a Big Island volcano that has been erupting continuously for 35 years -- spiked beginning in May. The eruption captured national headlines, caused immense damage to nearby residential areas, and forced a multimonth closure of Hawaii Volcanoes National Park.
While the main tourist areas on the Big Island remained open -- and the other islands were completely unaffected -- Hawaiian Airlines still saw a decrease in bookings beginning in early May. This reduced unit revenue by almost 1 percentage point last quarter. As of late July, booking trends had started to improve, but management still expected the unit revenue impact to increase this quarter relative to the second quarter.
Furthermore, while hurricanes rarely strike Hawaii, the island chain did receive a glancing blow from Hurricane Lane last month. The hurricane dumped as much as 52 inches of rainfall on Hawaii, causing widespread flooding and forcing Hawaiian Airlines to cancel numerous flights.
Fortunately, the hurricane is gone and volcanic activity has been subsiding in recent weeks. This should lead to a quick rebound in tourism, driving an improvement in Hawaiian's unit revenue trend starting as soon as the fourth quarter.
Capacity growth might not be as threatening as it seems
The combination of getting the fleet transition back on track and more normal weather should drive unit revenue and unit cost tailwinds for Hawaiian Airlines in 2019. Nevertheless, analysts on average expect earnings per share to decline by roughly 10% next year. This implies about 2 percentage points of pre-tax margin contraction.
Analysts are clearly worried about the pending launch of Southwest Airlines flights to Hawaii. Yet it's important to recognize that Hawaiian has been facing double-digit competitive capacity growth in the domestic market during 2018, and unit revenue has held up quite well.
This capacity growth started to taper off in July. It's quite possible that West Coast-Hawaii industry capacity will be flat or down next year excluding Southwest. In other words, the competitive threat seems quite manageable, and may be more than offset by self-help moves and easy comparisons following a tough 2018.
With Hawaiian Holdings stock trading for just seven times projected 2018 earnings, it wouldn't take much good news to ignite a big rally.