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Fitch Revises Hawaiian Holdings Rating Outlook to Negative; Affirms Ratings
Thu 12 Oct, 2023 - 10:01 AM ET

https://www.fitchratings.com/research/corporate-finance/fitch-revises-hawaiian-holdings-rating-outlook-to-negative-affirms-ratings-12-10-2023

Fitch Ratings - Toronto - 12 Oct 2023: Fitch Ratings has revised the Rating Outlook for Hawaiian Holdings, Inc. and Hawaiian Airlines, Inc. to Negative from Stable and has affirmed both entities' IDRs at 'B-'. In addition, Fitch has affirmed the Hawaiian Brand Intellectual Property, Ltd's, and Hawaiian Miles Loyalty, Ltd's senior secured debt at 'B+'/'RR2'.

The Negative Outlook is driven by Fitch's expectation for weaker coverage and liquidity levels in the near to intermediate term. This is due to a delayed recovery in profitability driven by continued heavy competition that has been exacerbated by recent maintenance issues with Pratt and Whitney's geared turbo fan (GTF) engines.

Fitch forecasts EBITDAR fixed charge coverage to run around 1x in near to immediate term, absent material improvement in profitability, which Fitch considers weak for the 'B-' rating. Support for the rating includes Hawaiian's current sizable liquidity balance that stands at $1.3 billion as of June 30, 2023. Hawaiian is expected to receive additional liquidity through compensation from RTX and cash flow related to flying air cargo for Amazon. However, visibility on these cash flows are limited.

Fitch expects to resolve the Outlook within 12 to 18 months. Should Hawaiian exhibit an ability to manage profitability and improve its coverage ratio toward 1.25x, the Outlook may be revised to Stable, whereas continued underperformance may drive a downgrade.

Fitch has also affirmed the rating for Hawaiian Airlines 2013-1 class A certificates at 'BB-'. The affirmation reflects no changes in Fitch's assessment of affirmation factor of the notes. The rating is achieved through a bottom up approach where Fitch assigns three notch uplift to the class A certificates from Hawaiian's 'B-' IDR.


KEY RATING DRIVERS
Adequate But Weakening Financial Flexibility: Fitch expects Hawaiian's EBITDAR Fixed Charge Coverage ratio to be under 1x through 2024, which is weak for the 'B-' rating. Fitch expects coverage to improve thereafter, but remain constrained, rising toward 1.4x in 2025. Fitch believes Hawaiian's weak coverage metrics are partly offset by its sizable liquidity balance. The company had $1.3 billion as of June 2023, consisting of cash, short-term investments and full revolver availability. Nevertheless, margin headwinds combined with sizable capex of about $550 million annually from 2024 to 2025 will likely sap the liquidity cushion unless alternative funding is secured.

Fitch expects cash drain to be supplemented by compensation from RTX, as the engine manufacturer compensates airlines for the GTF engine issues. However, timing and magnitude of compensation remain uncertain. Hawaiian can also generate additional cash flow as the company starts flying 10 A330-300Fs for Amazon in late 2023 and 2024; although Fitch currently does not incorporate contribution from the Amazon contract in the agency's forecast, due to limited visibility on scheduling and potential size of the operations. Fitch recognizes Hawaiian also has some unencumbered assets after paying down the 2020-1 EETCs and purchasing recently delivered aircraft with cash.

Prolonged Profitability Improvement: Fitch forecasts EBITDA margins to remain depressed at least through 2024, driven by challenges in raising unit revenues sufficiently to catch up with cost inflation. In its base case, Fitch projects Hawaiian will generate EBITDA margins in the negative single digits in 2023 and positive low single digits in 2024. Fitch believes the competitive market in Hawaii, increasing capacity from the addition of 787-9s in international markets, and Fitch's expected weaker economic environment will present headwinds to unit revenues. Rising costs related to wages, fuel, landing fees and maintenance also add pressure to profitability. Despite an increase in CASM of 17% in Q2 2023 relative to 2019, RASM has only increased 2%, driving weaker margins.

Operating Environment Slows Recovery: Fitch expects maintenance issues with Hawaiian's GTF engines and recent wildfires in Maui to slow the recovery in traffic in the islands of Hawaii. Fitch currently assumes Hawaiian's traffic will not fully recover to the 2019 level until 2025, reflecting a moderate impact on capacity from grounded A321neos due to GTF engine inspections, impact of the Maui wildfire on travellers' plans into the beginning of 2024, and a weaker economic environment that weighs on domestic traffic.

All of Hawaiian's 18 A321neos' engines were within the period impacted by Pratt & Whitney's production issues, although the final number and timing of inspections remain evolving as Pratt goes through individual engines. Arrival to Hawaii remained in decline at 4% yoy in the first week October 2023, with diversion of travels to other islands and the return of international visitors partially alleviating Maui traffic loss.

Offsetting the challenges are a continued return of Japanese traffic, which has gained traction through 2023 and is currently at roughly 60% relative to pre-pandemic levels. Fitch expects returning Japanese traffic to provide a tailwind, though the weak Japanese Yen will likely limit the pace of recovery. Tourism from Japan represented 16% of Hawaiian arrivals prior to the pandemic. Hawaiian is also scheduled to take delivery of its 787-9s starting in 2024 that will add efficient capacity to international routes and to offset with a weaker domestic traffic. However, seat additions will likely keep yields weak.

Maturity Wall in 2026: The majority of Hawaiian's debt, including the $1.2 billion loyalty notes and its 2013-1 EETCs, comes due in January 2026. Fitch currently expects Hawaiian to refinance the debt or settle a portion of the upcoming maturities in cash as profitability and credit metrics recover over the next two years. However, if the operating environment is more challenging than expected, weak credit metrics and declining cash balances could raise refinancing risks or put refinanced debt in unfavorable terms. The loyalty notes are currently trading around 12.5% YTM as of Oct 11, 2023.

Market Concentration: Hawaiian's ratings have always been constrained by its reliance on tourist travel to the Hawaiian Islands. Unlike more diverse competitors, Hawaiian has greater exposure to risks such as natural disasters that could adversely affect its home market. Additionally, the Hawaiian market is competitive with the presence of other major national and international airlines. Market concentration risk for Hawaiian is partly offset by the relative resilience of leisure travel to the islands, which are perennially viewed as a top-tier vacation destination.

EETC Rating

Aircraft Tier and Stress Update: Collateral for the Hawaiian 2013-1 transaction consists of 2013 and 2014 vintage A330-200s. Fitch reclassified the A330-200 to Tier 3 from Tier 2 following its previous review of this transaction as part of a regular review of aircraft tier classifications. The tier revision was driven by sharp declines in A330 values through the pandemic, competition from newer generation technology, and a large percentage of the operating fleet in storage or retired.

In connection with the tier revision, Fitch has raised its 'A' stress level for the aircraft to 45% from 40% and for the 'BBB' stress level to 40% from 35%. The transaction fails to pass Fitch's 'A' or 'BBB' level stress test with LTV remaining well above 100%. In such cases, Fitch's EETC criteria states that the rating achieved through the bottom-up approach can act as a rating floor.

HA 2013-1 Class A Certificates Affirmation: The class A certificates' 'BB-' rating is achieved via Fitch's bottom-up approach and incorporates an unchanged three-notch uplift from Hawaiian's 'B-' IDR. The transaction benefits from two notches of uplift for a medium/high affirmation factor and one notch for the presence of a liquidity facility. The affirmation factor for the collateral aircraft is maintained at medium/high. Fitch believes the combination of a large number of leased A330s (50%) and older A330s in Hawaiian's fleet makes the A330s in the collateral pool less likely to be rejected in a bankruptcy scenario. The EETC debt also has a low coupon rate, supporting the affirmation of the collateral. The affirmation factor is negatively affected by Hawaii's plan to bring in 12 Boeing 787-9s with purchase rights for an additional 8 aircraft with scheduled deliveries between 2024 to 2027. These fuel-efficient, long-range aircraft with more available premium seats are strong substitutes to existing A330-200 aircraft.


DERIVATION SUMMARY
Fitch compares Hawaiian with Spirit Airlines (B+/ Negative). While both airlines are dealing with the GTF engine challenges, Hawaiian also faces headwinds related to increased inter-island competition, still recovering Japanese traffic, and the Maui wildfire that will slow recovery to pre pandemic level. Relative to Spirit, Hawaiian has a weaker financial profile, including credit and profitability metrics.

EETC:

The 'BB-' rating on the HA 2013-1 class A certificates is multiple notches below the rating on various comparable class A certificates issued by other airlines. The notching differential is driven by the concentration and depressed values of the A330-200s in the transaction and Hawaii's low corporate credit rating relative to other airlines.


KEY ASSUMPTIONS
--ASMs grow mid-single digits in 2024, driven by continued international traffic recovery and addition of 4 787-9s, partially offset by grounded A321s for engine inspections and Maui wildfire impact. Capacity beyond 2024 continues to increase upper single digits to low teens as more 787-9s are delivered and grounded aircraft come back from inspections.

--RPMs recover to 2019 level by 2025 and load factor in the 83%-85% range from 2024 and 2026

--EBITDA margin improves slowly to low single digit percentage in 2024 and upper mid-single digit in 2025, due to limited RASM growth while wage increases from the new pilot contract, high fuel cost and other cost inflation (maintenance, airport landing fees) keep pressure on profitability.

--CAPEX elevated at $550 million to $650 million through 2024 and 2025 as the company takes deliveries of the 787-9s. Fitch expects aircraft to be 75% financed by debt in a case of prolonged profitability recovery.

Recovery Analysis for the Loyalty Program:

Fitch's recovery analysis assumes that Hawaiian would be reorganized as a going concern in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim and assumes a bankruptcy scenario is driven by a combination of structural competition in the islands of Hawaii, prolonged economic downturn or elevated fuel prices.

Fitch's estimate for the value available to the loyalty program-backed creditors is based on an internally generated discounted cash flow (DCF) analysis and assumes conservative future cash flows reflecting a materially shrinking customer base and a slow recovery post-bankruptcy. This analysis results in secured creditors receiving strong recovery in the 'RR2' band.

EETC:

--Key assumptions within the rating case for the issuer include a harsh downside scenario in which Hawaiian declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed in the midst of a severe slump in aircraft values. Hawaiian's bankruptcy is hypothetical, and is not Fitch's current expectation;

--Fitch's analysis incorporates a 8% annual depreciation rate for Tier 3 aircraft.

--Fitch's recovery analyses utilize Fitch's 'BB' level stress tests and include a full draw on liquidity facilities and assumptions for repossessions and remarketing costs.

Aircraft Value Stresses

--A330-200: A level stress at 45%, BBB level stress at 40%, and BB level stress at 35%.


RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a Stabilization of the Outlook:

--EBITDAR Fixed Charge Coverage towards 1.25x or higher;

--Alleviation of liquidity and refinance risks demonstrated by improving profitability level and an ability to finance aircraft to maintain liquidity above $750 million.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Expectations for total EBITDAR leverage to fall below 5x;

--EBITDAR Fixed Charge Coverage moving toward 2x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Heightened liquidity and refinance risks, including total liquidity falling below $500 million;

--EBITDAR Fixed Charge Coverage sustained at or below 1x.

EETC:

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Positive rating actions are unlikely at this time due to the negative outlook on Hawaiian's IDR and depressed values for the A330-200 aircraft.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Due to the sharp decline in appraised values for aircraft in the HA 2013-1 transaction, the rating for the class A certificates are achieved via a bottom-up approach that acts as a rating floor. Should Fitch downgrades Hawaiian's IDR or change in assessment factor, the notes will be downgraded accordingly


LIQUIDITY AND DEBT STRUCTURE
Liquidity: As of June 30, 2023, Hawaiian held $1.3 billion liquidity consisting of $227 million cash on hand, $1.0 billion short-term investments and a full availability on its $235 million revolver. The level of total liquidity is equivalent to roughly 50% of 2019 revenues.

Debt Maturities: Hawaiian's debt structure primarily consists of secured borrowings and aircraft-backed debt. The company's revolver matures in December 2025 and the majority of its debt including the $1.2 billion loyalty notes and $185 million EETC debt matures next in January 2026. The rest of Hawaiian's borrowing primarily consists of aircraft loan agreements secured by Boeing 717s, Japanese Yen denominated aircraft loans, capital leases on aircraft and loans under the PSP programs.


ISSUER PROFILE
Hawaiian Holdings, Inc. (NYSE: HA) is the parent company of Hawaiian Airlines, Inc., Hawaii's largest airline. The company is solely dedicated to serving customers coming to and from Hawaii and those traveling between the islands of Hawaii.


REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.