Fitch Upgrades Hawaiian Airlines to 'B+'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded Hawaiian Airlines, Inc. (HA) and its parent company Hawaiian Holdings, Inc. to 'B+' from 'B'. The Rating Outlook is Stable.

The rating upgrade is supported by material improvement in HA's credit profile over the past two years as lower capital spending, maturing international routes, and low fuel prices have led to improved operating margins and allowed the company to pay down debt. For 2016, Fitch expects further credit improvement driven by low fuel, a more moderate competitive environment in HA's domestic markets, and sustained demand for tourism to the islands of Hawaii. Another year of solid financial performance in 2016 should allow the company to pay down incremental debt and build its base of unencumbered assets, putting HA in a better position to weather future downturns.

Fitch's primary concerns revolve around potential cost pressures looming in the next couple of years, particularly related to labor, as the majority of HA's unionized workers are currently working under amendable contracts. The ratings also remain constrained by Hawaiian's geographic concentration, and its reliance on demand for travel to Hawaii from a relatively small number of markets. The company's small size compared to its much larger U.S. peers also remains a limiting factor.

KEY RATING DRIVERS

Strong Credit Metrics for the Rating:

The combined effects of a low fuel environment, decreased capital spending, and a healthy U.S. aviation market in 2015 allowed HA the flexibility to pay down debt while maintaining a strong cash balance. Fitch calculates Hawaiian's adjusted debt/EBITDAR at roughly 2.8x as of March 31, 2016, which is down from as high as 5.5x at the end of 2013. Fitch's base case forecast anticipates that adjusted debt/EBITDAR may improve incrementally going forward, and remain below 3x through the end of our forecast period. Hawaiian's total balance of debt and capital leases dropped sharply over the past year to $683 million from just over $1 billion at year-end 2014. Debt reduction in 2015 was partially due to the repayment of $71 million in convertible notes, the prepayment of $124 million in debt from bank facilities secured by Hawaiian's A330s and 767s. In the quarter ended March 31, 2016, Hawaiian prepaid an additional $52 million in bank debt secured by A330s. Fixed charge coverage is expected to remain around 3x, up from approximately 2x, where it hovered between 2012-2014.

Along with lower debt balances, credit metrics are benefiting from improved profitability. EBIT margins were up by nearly eight percentage points in 2015 primarily due to lower fuel prices. For 2016, Fitch expects margins to remain flat or improve incrementally as the benefits of cheap fuel are at least partially offset by non-fuel cost pressures.

Few Deliveries to Support Solid Free Cash Flow (FCF) in the Near term:

Fitch expects HA to generate FCF in the $300 million-$400 million range in 2016, compared to $357 million in 2015. Significant positive FCF generation represents a sharp change from the 2010-2014 time period when HA was going through its widebody refleeting process. HA produced a negative cumulative FCF of -$323 million for period from 2011 through 2014. Fitch's forecast anticipates that FCF remains positive in the mid-single digits as a percentage of revenue through at least 2017. Capital spending will step up again towards the end of this decade as the company receives more A321 NEOs, (only three are scheduled for delivery in 2017, stepping up to six deliveries in each of 2018 and 2019 and one delivery in 2020). However, Fitch believes that HA will be in a better position to go through its next round of heavier capital spending without adding a significant amount of leverage to the balance sheet as it did in 2013-2014.

Unit Revenue Pressures to Ease:

Fitch expects the unit revenue pressures that Hawaiian experienced in 2015 to ease as 2016 progresses. Revenue per available seat mile was down by 3.6% in 2015 driven by heavy competitive capacity growth in certain West Coast markets and by the impacts of foreign exchange rates and fuel surcharges in key international markets. Since November of 2014, both the Yen and Australian dollar (HA's two most important foreign currencies) have weakened considerably against the U.S. dollar, although some of that has reversed in recent months. Since the sharpest currency movements happened in late 2014, easing f/x pressures should create a minor tailwind for the company in 2016. Fitch also expects the rate of capacity growth into the Hawaiian markets to slow in 2016 after two years of fairly intense growth from Hawaiian's competitors. A more moderate addition of seats should allow unit revenue pressures to ease in the near term.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Continued moderate expansion of tourism to the Hawaiian islands over the near term;

--Moderately increasing fuel prices through the forecast period - brent crude rising to around $65/barrel by 2018. Note that this is a conservative estimate compared to the forecast published in Fitch's most recent oil & gas price deck;

--Capacity growth in the low-single digits through the next two years.

RATING SENSITIVITIES

Future actions that may individually or collectively cause Fitch to take a positive rating action include:

--Sustained adjusted debt/EBITDAR around or below 3.5x;

--Expectations for sustained positive FCF generation over the longer term;

--EBITDAR margins sustained at or above the 17%-20% range.

Although HA's credit metrics are currently in-line with those outlined above, future positive rating actions may be driven by expectations for metrics to be sustained amidst a more difficult operating environment (i.e. higher fuel prices or a notable drop in demand).

Future actions that may individually or collectively cause Fitch to take a negative rating action include:

--Capacity additions into the Hawaiian market which cause sustained weakness in yields;

--Leverage rising and remaining at or above 5x;

--A notable drop in tourism to Hawaii caused by a natural disaster or economic downturn;

--EBITDAR margins falling and remaining below 15%.

LIQUIDITY

Fitch considers Hawaiian's financial flexibility to be solid for the rating. As of March 31, 2016, the company had a balance of cash and equivalents and short-term investments totalling $669 million and full availability under its $175 million revolver. In Fitch's base forecast, Hawaiian's internal sources of liquidity (cash, revolver availability, and expected cash from operations) exceed projected capital expenditures and debt maturities through 2016 by more than 2x. Total liquidity was equal to 36% of latest 12 months (LTM) revenue, which is at the high end of Hawaiian's North American peer group. Fitch considers the company's upcoming debt maturities to be manageable. Maturities total $67 million for 2016 and $65 million in 2017.

Hawaiian's financial flexibility is also supported by newly unencumbered aircraft. As the company has paid down debt, it has freed up some previously encumbered collateral. Fitch views high quality unencumbered assets to be a supporting credit factor, as those planes could be financed if the company were in need of liquidity. Although several of Hawaiian's unencumbered planes are relatively undesirable 767-300s, it also has late vintage A330-200s and ATR turboprops, which would be readily financeable assets. Unencumbered planes also give HA additional fleet flexibility as they can more easily be parked in the case of a serious downturn in demand.

2013-1 EETC:

Fitch has affirmed the senior tranche rating at 'A-'. Senior EETC tranche ratings are primarily based on a top-down analysis of the level of overcollateralization featured in the transaction. The ratings also incorporate the structural benefits of section 1110 of the bankruptcy code, and the presence of an 18-month liquidity facility.

Fitch's stress case utilizes a top-down approach assuming a rejection of the entire pool of aircraft in a severe global aviation downturn. The stress scenario incorporates a full draw on the liquidity facility, an assumed 5% repossession/remarketing cost, and a 30% stress to the value of the aircraft collateral. The 30% value haircut corresponds to the high end of Fitch's 20%-30% 'A' category stress level for Tier 1 aircraft.

The collateral pool in this transaction consists of six 2013 and 2014 vintage A330-200s. Fitch views the A330-200 as a borderline Tier 1/Tier 2 aircraft.

Fitch notes that according to data provided by a third party appraiser, values for the A330 family continue to experience some softness in anticipation of the launch of the A330 NEO and from the introduction of the A350. The A330-200 also suffers from competition with the 787, as the 787-8 and 787-9 bracket the A330-200 in terms of seating capacity, while the 787 is a more efficient aircraft. Within the aircraft family, the A330-200 has lost favor with many users to the larger A330-300.

Value declines over the past year have exceeded the depreciation assumptions included in Fitch's forecast model. The class A certificates still pass Fitch's 'A' level stress test, but with less headroom. Fitch's current forecast anticipates that LTVs in this transaction will slowly improve as the debt amortizes. However, further declines in A330 values could prompt a downgrade to 'BBB+'.

Subordinated tranche ratings are linked to Hawaiian's Issuer Default Rating (IDR), and therefore the B tranche ratings have been upgraded to 'BB+', which represents a three-notch uplift from Hawaiian's IDR of 'B'.

Subordinated tranche ratings are adjusted from Hawaiian's IDR based on three primary considerations: 1) affirmation factor, 2) presence of a liquidity facility, and 3) recovery prospects. Fitch considers the affirmation factor for this collateral pool to be moderate to high resulting in a +2 notch adjustment (maximum is 3). The B tranche also features an 18-month liquidity facility, providing a further +1 notch adjustment. No adjustment has been made for recovery, resulting in a rating of 'BB+'.

EETC RATING SENSITIVITIES

Senior tranche ratings could be considered for a negative action if declines in base value for the A330-200 continue to outpace Fitch's expectations. A positive rating action is not expected at this time.

The subordinate tranche ratings are directly linked to Hawaiian's IDR. However, Fitch's EETC criteria prescribes some compression of the notching allowed for the affirmation factor as the airline moves up the rating scale. Therefore, if HA were upgraded to 'BB-', the B tranche may be affirmed at 'BB+'. If HA were to be downgraded, the B tranche would likely be downgraded commensurately.

Fitch has taken the following rating actions:

Hawaiian Holdings, Inc.

--IDR upgraded to 'B+' from 'B'.

Hawaiian Airlines, Inc.

--IDR upgraded to 'B+' from 'B'.

The Rating Outlook is Stable.

Hawaiian Airlines 2013-1 Pass-Through Trust

--Series 2013-1 class A certificates affirmed at 'A-';

--Series 2013-1 class B certificates upgraded to 'BB+' from 'BB'.

Additional information is available on www.fitchratings.com.

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Rating Aircraft Enhanced Equipment Trust Certificates (pub. 13 Oct 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871079

Additional Disclosures

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003140

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Contacts

Fitch Ratings
Primary Analyst
Joe Rohlena, CFA
Director
+1-312-368-3112
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Joe Rohlena, CFA
Director
+1-312-368-3112
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com