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Hawaiinan Airlines Presents Increasing Risk: Is It Time To Sell?

Summary

Hawaiian Airlines is trading at a premium to U.S. airlines despite having worse financials and fundamentals.

Hawaiian Airlines should if anything be trading at a discount to U.S. airlines due to its high exposure to a single market that fluctuates heavily based on economic conditions.

Hawaiian Airlines has good long term potential but near-term negatives.

Img 1: Hawaiian Airlines Stock

Hawaiian Airlines (NASDAQ:HA) shareholders have fared tremendously well over the past 5 years as the stock has soared over 777%. I have been bullish on airlines for the past several years and continue to be bullish on many, however, with potential issues ahead, continuing to own or buying Hawaiian airlines at this price may present substantial downside versus upside risk in the short to medium term.

A closer look at Hawaiian versus its U.S. peers shows the airline has outperformed every single one and outperformed the second best, Alaska Airlines by over 370%! Since late 2015 Hawaiian Airlines stock has broke away from the uptrend the rest of its peers have stayed in. The question is what has caused it to do so and does Hawaiian deserve such a steep valuation?

A Premium Valuation For A Low Yield Airline

Hawaiian Airlines focuses primarily on the Hawaii market. This presents some risk to the airline as they are highly susceptible to the ups and downs of the economy. In good times, demand for luxury vacations to more exotic destinations like Hawaii are in demand. Demand for destinations such as Australia which passengers can connect to on Hawaiian from the mainland United States also rise in demand. However as soon as things take a turn for the worse these expensive vacations are among the first things to be cut from consumers budgets.

Table 1: Airline Operating & Net Margins 2015

A look at the margins for the major U.S. airlines in 2015 shows that while Hawaiian Airlines operating margin is around the middle of the pack, when it comes to the net margin Hawaiian Airlines has the worst by a large margin. It should also be noted that this 7.88% net margin was achieved while oil prices saw a steep drop.

Img 3: Airline PE Based On Debt/Equity Ratio

Debt is a concern for many investors these days in the airline industry so my gut instinct told me that Hawaiian must have very little debt and risk to have such a premium valuation, but this is not the case at all. I put together a chart to show the relation between the debt/equity ratio and the PE ratio an airline stock trades at. The trend shows that as debt/equity increases, airlines tend to trade at lower PE multiples. Not so with Hawaiian however, with the airline trading at a multiple that only airlines with less than a third of the debt/equity of Hawaiian...


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