In our previous article on Hawaiian Airlines (HA) we highlighted the challenges that the airline faces in light of a COVID-19 pandemic. The latest developments suggest that the worst for the airline is yet to come. In Q2 alone, Hawaiian Airlines load factor was only 23.2%, way below its peers. The company will continue to have such a low load factor in the upcoming months, as the State of Hawaii is about to introduce a 14-day quarantine for interisland travelers. While it seems that the airline has enough liquidity to survive the pandemic, as it doesn’t have an overleveraged balance sheet, its growth prospects look grim. By being exposed to the Hawaiian islands, which are currently closed for most travelers, the airline will not be able to create any value anytime soon. For that reason, we believe that buying Hawaiian Airlines shares is not worth it, as they are likely going to trade in a distressed territory in the foreseeable future.

Lack of Competitive Advantages

For nearly a decade, after the bankruptcy of its closest competitor Aloha Air in 2009, Hawaiian Airlines enjoyed its near-monopoly status in the Hawaiian air travel market. The airline was able to charge higher ticket prices for flights and increase its margins, as there was little to no competition for the company. However, that started to change in the last few quarters, as airlines like Southwest (LUV) and Alaska Air (ALK) started to prepare for an aggressive expansion in the region. While Hawaiian Airlines was able to avoid a price war in the last few months, the spread of COVID-19 in the region acted as an even greater threat to the airline’s business model. After the State of Hawaii imposed a 14-day self-quarantine rule for all incoming travelers to the islands back in March, Hawaiian Airlines business stalled. While the airline will not face a liquidity crisis, its balance sheet will not be as attractive as before and it will not be able to avoid a price war in a post-pandemic world, as its competitors will significantly drop down prices to ensure that their flights are full. For that reason, Hawaiian Airlines is not going to have any competitive advantages that could justify opening a long position in the company, even at the current price, as the upside is limited.

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The recent earnings report for Q2 showed that the worst for Hawaiian Airlines is yet to come. From April to June, the airline’s revenues decreased by 91.6% Y/Y to $60 million, while its adjusted net loss was $174.7 million. The company also burned $3.3 million per day just to stay alive and its load factor for the period was only 23.2%, way below its peers. Considering this, it’s unlikely that Hawaiian Airlines will be able to recover anytime soon and without any competitive advantages, we believe that its stock will continue to trade in a distressed territory.

Limited Growth Opportunities

The latest news is that starting September 1, the State of Hawaii will no longer require all the incoming travelers to go through a 14-day self-quarantine, if they provide negative test results for COVID-19. However, the recent spike of new cases in Hawaii suggests that that date could be pushed further. Currently, the State of Hawaii has over 3000 confirmed cases and its health system is under immense pressure, as its ICU beds are 53% filled right now. Considering the spike, the governor of the state David Ige will reinstate a 14-day self-quarantine rule for interisland travelers, which is expected to last until the end of August. However, there’s no guarantee that interisland and trans-pacific restrictions are going to be lifted in late August and early September. In one of its latest press briefings, the governor said:

If there are too many cases here and we haven’t stopped the increase, then we would be looking at delaying the September 1st date.

The good news is that Hawaiian Airlines has enough liquidity to stay afloat amid the implementation of those restrictions. At the end of June, the airline had $761 million in liquidity. In July, Hawaiian Airlines received additional $114 million thanks to the leaseback of two A321neo planes and it also signed an agreement with the U.S. Treasury to get an additional $364 million under the CARES Act in exchange for warrants. Considering this, Hawaiian Airlines currently has a Pro-forma liquidity position of over $1 billion and it also has 4 unencumbered A321neos with a total book value of over $200 million, which could be sold to boost its cash position. With a total debt of only $1.56 billion at the end of June, Hawaiian Airlines is not going to face a liquidity crisis and it will be able to stay afloat for more than a year, even though it expects to burn $3.2 million per day in Q3. The problem is that when compared to its airline peers, Hawaiian Airlines has one of the worst margins and valuation ratios, which suggests that there are more attractive airline recovery plays in the market at this stage.

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Source: Capital IQ

The problem is that as long as those restrictions are in place, Hawaiian Airlines will not be able to recover anytime soon. Its high exposure to the Hawaiian islands is a downside in the current environment and its limited flight schedule will prevent growth in the foreseeable future. Considering this, Hawaiian Airlines will not be able to create shareholder value anytime soon. Since the management didn’t issue any guidance for the year and it’s unlikely that investors will see any dividends in the near-term, we believe that it’s better to avoid Hawaiian Airlines.

Disclosure: I am/we are long LUV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.