Moody's Upgrades Hawaiian Holdings (HA) to 'B2'; Outlook Stable

Moody's Investors Service upgraded the debt ratings of Hawaiian Holdings (Nasdaq: HA) , including the Corporate Family to B2 from B3, Probability of Default to B2-PD from B3-PD and the Class A and Class B tranches of the company's Series 2013-1 Enhanced Equipment Trust Certificate (EETC) to Baa2 from Baa3 and to Ba3 from B1. Moody's also raised the Speculative Grade Liquidity Rating to SGL-2 from SGL-3. The outlook is stable. This action concludes the review for upgrade initiated on 16 June 2015 following the implementation of Moody's change to its approach for standard adjustments for operating leases.

RATINGS RATIONALE

The B2 rating balances credit metrics that are strong for the single B rating and free cash flow benefits of curtailed capital expenditures through 2016 against the company's small size, limited network and execution risk in the company's fleet plan. Lower fuel expense, the sharp decline in capital expenditures because of limited deliveries of new aircraft until 2017 and lower adjusted debt given the reduction in Moody's lease multiple for passenger airlines, to five times, strengthen current and forecasted credit metrics. Moody's anticipates that free cash flow will decline from 2017 and thereafter, as capital expenditures increase to fund the scheduled delivery of 22 new aircraft through 2022; 16 Airbus A321neos and six Airbus A330-800neos. The order book compares to the current long-haul fleet of 30 aircraft forecasted at 31 December 2015, reflecting significant growth in capacity even with expected retirements of some of the eight Boeing B767-300s currently in service.

The B2 rating also considers the competitive nature of the company's US and international networks. Although Hawaiian is the leader in seat share in the US West Coast to Hawaii market, the larger US airlines will remain significant competitors. Additionally, Moody's believes that Southwest Airlines could also enter the Hawaii market by 2018, when Hawaiian will be deploying the A321s on these routes. Hawaiian will begin receiving the A330-800neos from 2019 and will need to identify routes on which they may be profitably deployed. Moody's believes that adjusted debt will increase as the order book delivers since it does not foresee cash flow from operations growing meaningfully above Moody's forecast of about $350 million in 2015.

The upgrade of the Speculative Grade Liquidity rating to SGL-2 reflects the company's cash balance in excess of $500 million and the $100 million increase in the revolver with the facility the company arranged in November 2014.

The stable outlook reflects Moody's expectation that credit metrics will remain near current levels through 2016. Moody's expects passenger demand to remain about steady, limited upwards pressure on the cost of jet fuel and modest pressure on unit revenues as capacity in the Hawaii market, from the US West Coast and from the Pacific, expands.

There will be little upwards rating pressure until the company demonstrates the ability to maintain strong credit metrics while inducting the aircraft from the order book into the fleet. A positive rating action could follow if Hawaiian sustains EBITDA margin above 19%, EBIT to Interest above 2.0 times and Retained Cash Flow to Net Debt above 18% and should Debt to EBITDA approach 4.0 times. A downgrade of the ratings could follow if operating margins and cash flows deteriorate such that Debt to EBITDA is sustained above 5.5 times, EBIT to Interest approaches 1.5 times or Retained Cash Flow to Net Debt approaches 10%.

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