Hawaiian Holdings, Inc.

Ever since Covid-19 wrecked financial markets, the eminent investor Warren Buffett made one prominent move: He sold all his airline stocks.

Our job is to evaluate whether the value of the equity is worth far more than the current price.

Hawaiian Holdings (HA) is the sole owner of Hawaiian Airlines, which operates flights throughout the Hawaiian Islands, to several cities in mainland USA, South Pacific, Australia, and Asia. Its operations have been fully halted after Covid-19 struck.

It generated revenues of $2.8bn and ebitda of $481m in 2019, its last full year of normal operations. Net debt as at March 31st 2020 was $737m before participation in the government loan programs (below).

The equity is selling for $527m or $11.47/share.

HA availed the US government’s payroll support program (PSP) that provided $292m in loans, with a further option for $364m in secured loans. HA received $146m of the PSP in April 2020 with the balance due between May and July. Management is evaluating participation in the secured loan program.

The US government put restrictions on the payouts of dividends and share repurchases till September 2021. And it received 488,477 warrants to purchase common at $11.82/share. While the warrants are distasteful in itself, it shouldn’t be over-emphasized as it represents just 1% of outstanding shares, equivalent to many executive share compensation programs in the US.

Ben Graham said it’s the analyst’s job to be penetrating rather than prophetic. Nobody knows when flying restrictions will ease, and when they do, if demand will return as before.

Considering the full halt to HA’s operations, the key matter is the evaluation of HA’s credit risk for stockholders.

Though our job is to make an independent judgment on the value of the equity, in this case, it makes sense to compare the market’s evaluation of the equity against the debt owed by HA as a proxy for financial risk.

Setting the market cap of $527m against current debt of $1.03bn (after receipt of the PSP loan but not counting the secured loan facility) - a ratio below 1:1 - doesn’t indicate unquestioned safety of principal.

Further, HA has non-debt contractual obligations of over $2bn by 2024 along with obligations to service certain routes. This along with high fixed costs (wages, fuel, etc.) entails high operating leverage if demand is below expectations.

Investors are better off giving a hard pass to HA.