BUY SHORT

Price: $5.68 Price:$6.04

Target: $8.00 Target: $4.20

valuehuntr@gmail.com
Overview

― Highest ranked carrier in performance and quality

― Best safety record (never had a fatal accident in 80 years of operation)
― High customer loyalty
― Aggressively expanding capacity (Japan, South Korea)
― Lowest valuation in industry
― Efficient aircraft fleet

― One of worst operational records in industry (recent FAA fine)

― Highest industry costs
― Oldest aircraft fleet in industry, including inefficient MD-80s
― Over-diversified fleet
― Significantly underfunded pension plan
― Highest valuation in industry

Regional carriers are better positioned for value creation than US legacy airlines

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Load Factors

86%

81%
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% Total Arrivals on Time

94%

81%
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Lost Baggage per 1,000 Passengers

1.9

4.3
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% Monthly Flights Cancelled

0.2

1.3
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Competitive Landscape – Hawaiian Airlines

• Aloha Airlines: filed for Ch 11 bankruptcy in 2006, ceased operations in

2008
• ATA Airlines: ceased operations in 2008.
• Hawaii Superferry: filed Ch 11 bankruptcy, ceased operations in 2009
• Mesa Airlines: filed for bankruptcy in early 2010. Currently undergoing
restructuring (still operating inter-island service under Go! Brand)
• Inter-island transportation share: 85%
• Fleet commonality
less inventory, less maintenance, less training

Key geographic advantage

no inter-island driving,
no ferries, no rail)

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Competitive Landscape – American Airlines

• Never filed for bankruptcy
has therefore racked up $10 billion in losses
for past 10 years
• Competing directly with newly-restructured companies (Delta/Northwest
and United/Continental
AA at competitive disadvantage
• Labor cost disadvantage at $600M vs. Delta and Continental
• One of oldest and most diversified fleets in industry
• MD-80 fleet poses significant safety and operational risks

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Aircraft Fleet Commonality

10

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Aircraft Fleet Age

MD-80s are 44% of AA’s total seating capacity

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 Pension Accounting

• Pension Expenses unrealistically low: Pension expense

increases as the expected rate of return on plan assets
decreases

• HA: Lowering the expected long-term rate of return on

plan assets by 1% would increase the estimated 2010
pension and other postretirement benefit expense by $2.0
million

• AA: Lowering the expected long-term rate of return on

plan assets by 1% would increase estimated 2010 pension
expense by approximately $70 million

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HA Fuel Sensitivity – Case Scenarios

Worst Case 2011 EPS: $0.44

Earnings Yield ~ 9%

Base Case 2011 EPS: $0.64

Earnings Yield ~ 13%

Best Case 2011 EPS: $0.78

Earnings Yield ~ 16%

Consensus EPS: $0.68

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Fuel Prices (Worst Case)

American Airlines
is more exposed
to fuel price
fluctuations than
Hawaiian Airlines

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Valuation

American Airlines is
more than 2X more
expensive than
Hawaiian Airlines

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Risk/Reward Profiles (Best/Worst Case Scenarios)

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Key Catalysts

• Addition of Honolulu-Seoul route (Jan 2011)

• Addition of Honolulu-Tokyo route (expected to be profitable within 3
months of opening vs. 18-24 months for comparable routes)
• Increased leisure traffic to Hawaii as economy improves
• $10 million stock buy-back (4% of shares)
“Our shares are trading well, well, well below the implicit value of our
equity and we think it is the best use of the Company's cash at this time“
(Mark Dunkerley, CEO)

• Excessive capital expenditures due to MD-80 replacements

• Increased safety concerns due to aging MD-80 fleet (FAA $20 million fine)
• Transport Workers Union recently rejected labor deal. Vote also
authorized a strike and release from the mediation board. If release is
granted, workers could call for a strike (see appendix)

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 APPENDIX

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 Why Is HA so cheap? (Key Risks)

• Price War: prices have been crushed by Go! Mukulele inter-islands routes. This is possible because
Republic Airways (90% owner) is subsidizing the low-fares for Go! Mokulele, which means HA has a
competitor that can price below market for the “indefinite” future.

Counter Arguments: - Prices have stabilized

- Capacity expansion to Korea and Japan will drive future growth (Japan
is Hawaii’s largest source of international visitors and capacity is down 25% due
to JAL restructuring)
- HA has more a more competitive schedule (departs California 8am vs. mid-day
and departs Hawaii 1:30pm vs. night for competitors)
- With equally low prices at both airlines, customer service and quality becomes
more important
key HA advantage (aircraft noise, food, OTA, etc.)

• New Entrants: Alaska Airlines and Allegiant entering Hawaii will further drive down prices

Counter Arguments: - Capacity expansion to Korea and Japan may offset loses due to potentially
escalating price war
- May not be able to compete as prices are so low already (per ATA, Mesa)

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 Why Is AMR so expensive? (Key Risks)

• Pension worries: not built into stock price

• Merger Speculation: hope due to possible merger with US Airways

Counter Argument: - Merger synergies would not be enough to compete with Delta/Northwest and
United/Continental, which would still be better capitalized and have much
larger networks
- Unlikely US Airways shareholders would approve a merger with worst airline in
industry

• More Fuel Efficient Planes: replacing MD-80s with 737 will lead to lower fuel costs

Counter Argument: - Even after accounting for fuel savings, AA would not be profitable. On a relative
basis, Hawaiian Airlines’ would still be less sensitive to fuel prices.
- By replacing its fleet of MD-80s now, it may miss out on a new generation of
fuel-efficient airplanes coming down the line

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Hawaiian Routes

Interisland
Transpacific

International

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ROIC

Value
Creation

Value
Destruction

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 Comparative Valuation

Source: Imperial Capital Report (8/5/10)

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Street Estimates

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 Hawaii Traffic Projections

Source: Hawaii Tourism Authority

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