Hawaiian Holdings' (HA 6.12%) profitability has been sinking for the past year, mainly due to an imbalance of supply and demand in the West Coast-Hawaii market, where Hawaiian Airlines gets roughly half of its revenue. Adjusted pre-tax margin plummeted to 12.6% in 2018 from 17% a year earlier. Furthermore, the company's guidance for the first quarter -- published in late January -- implied another sharp profit decline.
Not surprisingly, falling profits led to severe stock price declines for Hawaiian Holdings in 2018, particularly in the second half of the year. Southwest Airlines' (LUV 4.98%) entrance into the Hawaii market last month caused Hawaiian Holdings shares to plunge even further.
However, the stock has already started to bounce back. Moreover, a recent update to Hawaiian's Q1 forecast could give investors more confidence that the worst is over for the company.
The first-quarter outlook improves
Hawaiian Airlines' initial guidance for the first quarter called for revenue per available seat mile (RASM) to tumble 3% to 6% year over year. Meanwhile, the airline expected nonfuel unit costs to rise 1% to 4%, offsetting an expected fuel efficiency improvement of nearly 4%.
On Monday afternoon, Hawaiian Airlines narrowed its RASM guidance range. It now expects a 3% to 5% decline for the first quarter. It also improved its unit cost forecast, due to lower costs for its new interisland freighter business. Nonfuel unit costs likely increased 0.5% to 2.5% year over year last quarter.
This still puts Hawaiian Holdings on pace to report a steep earnings decline in the first quarter. But at least it was able to improve its guidance slightly, after missing its initial forecasts for several consecutive quarters. Indeed, there are multiple reasons for investors to be hopeful that the carrier's performance is already bottoming out.
Comparisons are about to get easier
The first reason for optimism is that Hawaiian Airlines will face much easier year-over-year revenue comparisons going forward. The carrier posted a strong 4.9% RASM increase in the first quarter of 2018, whereas RASM rose just 0.7% in Q2, declined 2% in Q3, and fell 3.3% in Q4.
Thus, Hawaiian's guidance for a 3% to 5% RASM decline in the first quarter implies a modest increase in unit revenue compared to two years ago. If unit revenue trends relative to 2017 were to stay near that level for the rest of 2019, it would imply flattish unit revenue in Q2 and a return to solid RASM growth in the second half of the year.
Other airlines are pulling back in Hawaii
Of course, the big worry is that Southwest Airlines will be ramping up its Hawaii flight schedule over the course of 2019. Southwest's first route to Hawaii started up in mid-March, so it had very little impact on the first quarter. By contrast, the low-fare airline giant could have a bigger effect on the pricing environment later in the year.
However, despite Southwest Airlines' growth, the overall supply-demand dynamics in the West Coast-Hawaii market could be more favorable in 2019 than they were in 2018. Last year, the number of seats offered between the West Coast and Hawaii surged 10.7%, even with no Southwest Airlines flights. By contrast, industry capacity between the West Coast and Hawaii inched up just 1% in the first two months of 2019.
That little bit of growth is more than explained by several new West Coast-Hawaii routes that Hawaiian Airlines launched between May and July of 2018. It appears that other airlines are already starting to cut capacity on West Coast-Hawaii flights to address the supply-demand imbalance. Other airlines' capacity-control efforts are likely to accelerate as Southwest Airlines rolls out more Hawaii flights, dampening the impact of the latter's growth.
Fleet constraints related to the Boeing 737 MAX grounding will also slow Southwest Airlines' growth in Hawaii this year. That will contribute to a better supply-demand balance as well.
Hawaiian Airlines is helping itself, too
Importantly, Hawaiian Airlines isn't standing still and hoping for market conditions to improve. As I recently noted, the carrier is cutting capacity in many of the markets that Southwest plans to enter while pursuing growth in cities with less vicious competition. It's also reducing its costs -- most notably, by replacing its old Boeing 767 fleet with state-of-the-art Airbus A321neos -- and implementing basic economy fares so that it can make money with lower base fares.
Southwest Airlines' growth in Hawaii -- and especially its move into the interisland market, which Hawaiian Airlines dominates today -- could certainly cause some volatility in Hawaiian Airlines' results over the next couple of years. But Hawaiian has plenty of tools to fight back. As a result, investors' fears that Hawaiian Holdings' profit will continue to plunge seem overblown.