We believe shares of Hawaiian Holdings Inc. (“HA” or “Hawaiian”) are grossly undervalued, reflecting a deep misunderstanding of the company’s economics. In 2010, HA began investing heavily in growth, implementing a capex program to build additional capacity primarily in support of new international routes. Being that initiating services on routes involves start-up costs, and that from the time service is initiated they take 3 years to reach optimal profitability (i.e., to mature), HA’s GAAP margins were negatively impacted; put another way, from 2010 – 2013, when HA was expanding most aggressively, its GAAP financials both understated and obscured its economic potential. With the capex program approaching completion, HA is at an inflection point: As capex decelerates and new routes mature, we expect Hawaiian’s GAAP financials to begin reflecting its economic potential. We expect margins to rise in 2014 and free cash flow to turn positive in 2015, opening the door for capital returns to shareholders. In 2016 alone, we project the company will generate free cash flow equating to 35% of its current fully diluted market capitalization. Meanwhile, Wall Street analysts and investors appear to be missing the forest for the trees in assuming continued deterioration or the status quo into the future – that HA’s current financials represent its future – and use this as justification for valuing it at a depressed multiple. We believe Hawaiian stock has an intrinsic value today of $20 per share, >97% above current trading levels. The significant disconnect presented by HA’s valuation is sweetened by several near and intermediate-term catalysts we believe will drive share price toward intrinsic value.
