Market Overview

Fitch Revises Outlook for Hawaiian Airlines to Positive; Rating Affirmed at 'B'

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings for Hawaiian Airlines, Inc. (HA) and its parent company Hawaiian Holdings, Inc. at 'B'. The Rating Outlook has been revised to Positive from Stable. Hawaiian's unsecured convertible notes were upgraded to 'B/RR4' from 'B-/RR5'. Fitch has also affirmed the ratings on Hawaiian's 2013-1 series of EETCs as detailed at the end of this release.

The Outlook revision is supported by operating margins and financial leverage that have improved over the past year, and have room to improve further in 2015 as the company benefits from lower jet fuel costs. The Positive Outlook is also supported by Fitch's expectations that Hawaiian's free cash flow (FCF) will turn sharply positive in 2015 and 2016 as capital spending decreases following several years of heavy investment in aircraft. The Outlook incorporates the continuing maturation of HA's Pacific route network, which structure should contribute to better operating margins in the near term, and the company's modest growth plans for the next two years.

Ratings concerns include increased competitive capacity in the U.S. mainland-to-Hawaii market and the potential impact of a strong U.S. dollar on the company's international operations. 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:

Better than Expected Financial Performance: Declining fuel costs and solid unit revenue gains caused HA's financial performance to outpace Fitch's original expectations for 2014 and the first quarter of 2015. Fitch expects 2015 to be a year of further improvement, as sharply lower fuel costs provide a sizeable tailwind. Fitch's base forecast anticipates that HA's total fuel outlay for the year could decline by more than $150 million. The forecast is based on a conservative all-in price of around $2.20/gallon, above current spot prices, leaving room for actual results to outpace expectations. Fuel savings combined with a stable demand for travel to the state of Hawaii and the effects of debt repayments that occurred during the first quarter could push HA's adjusted debt/EBITDAR well below 4x by year-end 2015 from around 4x as of March 31, 2015. Fitch also anticipates that funds from operations (FFO) fixed-charge coverage will improve incrementally over the intermediate term from around 2x where it has hovered for several years.

Hawaiian's EBITDAR margin expanded by 580 basis points (bps) in the LTM period ended March 31, 2015 to 24.3% causing adjusted debt/EBITDAR to fall to 4x. Fitch's previous forecast (which incorporated higher fuel prices and a weaker revenue environment) did not anticipate that leverage would fall below 5x before year-end 2015. In addition, FCF turned slightly positive in the LTM period, driven by better operating profits and lower capital spending. While FCF was negative in calendar 2014, it was better than expected. FCF for 2014 was -$142 million compared to expectations that FCF could be -$200 million or lower.

Improving FCF: Fitch expects FCF to turn sharply positive in 2015, driven by reduced aircraft spending and lower fuel prices. Deliveries of Hawaiian's new A330-200 will go from five in 2014 to three in 2015, with the 2015 deliveries to be financed via sale-leaseback, leading to a notable reduction in capital spending. As a result, Fitch expects HA to produce positive FCF in excess of $250 million for the year. FCF should remain positive in 2016 when there will be a pause in new aircraft deliveries before HA begins to receive A321 NEOs in late 2017. Positive FCF generation over the next two years would represent a notable improvement from performance in recent years when aircraft spending was at its highest. HA produced a negative cumulative FCF of $323 million for the period from 2011 through 2014.

Foreign exchange risk: Hawaiian is somewhat unique among North American carriers in that a high proportion of its international seats are sold in local currencies rather than in U.S. dollars. Since November 2014, the two currencies to which HA is the most exposed, the Yen and Australian dollar, have weakened considerably against the U.S. dollar; both currencies are down by roughly 15% from a year ago. Hawaiian reported that the strengthening of the U.S. dollar represented a $5 million headwind in the 4Q net of hedges. The strong dollar is likely to be a bigger negative in 2015, since the sharpest movements against the Yen and the Australian dollar happened towards the end of 2014. Hawaiian reports that it has hedged roughly 50% of its exposure to both the Yen and the Australian dollar for 2015. Fitch estimates that a 15% weakening of both currencies for the full year (compared to average 2014 levels) could have roughly a $40 million impact on revenue net of Hawaiian's hedge benefits. However, Fitch notes that the effects of the weak dollar are being more than offset by lower fuel prices.

Unit Revenue Pressures: After experiencing limited capacity growth in the first half of 2014, the domestic U.S.-to-Hawaii market added a significant amount of seats in the second half of the year. Hawaiian expects capacity in the market to be at 'record levels' in the first half of 2015. As a result of higher capacity Fitch expects PRASM in Hawaiian's domestic segment to be down in the low- to mid-single digits in the first half. Unit revenues in international markets are also likely to experience some pressure from foreign exchange headwinds and from lower fuel surcharges.

Fitch has incorporated a modest amount of unit revenue weakness into its forecast, and although it represents a concern, revenue pressures are expected to be offset by lower fuel prices and moderate non-fuel cost growth.

Solid financial flexibility: Fitch considers Hawaiian's financial flexibility to be solid for the rating. As of March 31, 2015 the company had a cash balance of $226 million, $262 million in short-term investments and full availability under its $175 million revolver. In Fitch's base case forecast, Hawaiian's 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 28.5% of LTM revenue, which is at the high end of Hawaiian's N.A. peer group. Fitch considers the company's upcoming debt maturities to be manageable. Maturities total $62.3 million for the remainder of 2015 and $82.9 million in 2016. The company repurchased $63.1 million of its convertible notes in the first quarter, satisfying a meaningful portion of its 2015 maturities.

Recovery Ratings:

Fitch's upgrade of HA's convertible notes is based on Fitch's recovery analysis, which reflects recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. Fitch's recovery analysis incorporates a 'going concern' scenario, reflecting the likelihood that the company would restructure rather than liquidate in a potential future bankruptcy. The upgrade reflects a revised estimate for HA's enterprise value reflecting its growing revenues and better profitability over the past year. Note that all but $7.8 million of the notes were surrendered in the first quarter of 2015.

KEY ASSUMPTIONS

-- A stable demand environment for air travel to Hawaii from the mainland U.S.

--Moderate unit revenue weakness driven by increased competitive capacity in domestic markets and currency fluctuations in international markets.

--An all-in fuel cost of $2.20 for the year, increasing thereafter.

--CASM ex-fuel growth in the low single digits through the forecast period.

RATING SENSITIVITIES:

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

--Sustained adjusted debt/EBITDAR below 4.5x;

--A return to positive FCF generation;

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

--Evidence that increased domestic competitive capacity and foreign exchange headwinds are not materially impacting HA's profitability.

These positive rating sensitivities are unchanged from Fitch's previous review. Although Hawaiian's current credit metrics are consistent with those laid out above, Fitch will likely watch for metrics to be sustained or improved over the next 12-18 months prior to taking a positive rating action.

Future actions that may individually or collectively lead 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 6x;

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

--EBITDAR margins falling and remaining below 15%

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 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 are experiencing 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 significantly 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 IDR, and therefore the B tranche ratings have been affirmed at '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. Therefore, if Fitch were to take a rating action on Hawaiian, the B tranche rating would change commensurately.

Fitch has upgraded the following ratings:

Hawaiian Holdings, Inc.

--Senior unsecured convertible notes to 'B/RR4' from 'B-/RR5'.

Fitch has affirmed the following ratings:

Hawaiian Holdings, Inc.

--IDR at 'B'.

Hawaiian Airlines, Inc.

--IDR at 'B'.

Hawaiian Airlines 2013-1 pass-through trust

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

--Series 2013-1 class B certificates at 'BB'.

The Rating Outlook is Positive.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 18, 2014);

--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 12, 2013).

Applicable Criteria and Related Research:

Rating Aircraft Enhanced Equipment Trust Certificates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717763

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813588

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983995

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Joe Rohlena, CFA, +1-312-368-3112
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Eric Ause, +1-312-606-2302
Senior Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540 (New York)
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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