Hawaiian Air on Goldman Sachs' radar

The local carrier is now being tracked by three mainland securities firms

Hawaiian Airlines' parent company has attracted the attention of Goldman Sachs, which yesterday became the third and by far most prominent securities firm to begin analyst coverage of the carrier.

Analyst Robert Barry initiated coverage yesterday of Hawaiian Holdings Inc. with a "neutral" rating and a 12-month price target of $5.50. Barry included Hawaiian as he initiated coverage of seven other airlines to fill the void left by aviation analyst Glenn Engel, who left Goldman last summer after 20 years at the company.

"We think Hawaiian's market capitalization and low trade volume make the hurdles for investment -- on the long or short side -- greater than average," Barry wrote in an investment report.

For the other airlines in which he initiated coverage, Barry gave "buys" to AMR Corp., parent of American Airlines; and UAL Corp., parent of United Airlines. Besides Hawaiian, Barry assigned "neutral" ratings to Alaska Air Group Inc., Continental Airlines Inc., JetBlue Airways Corp. and US Airways Group Inc. He started off Southwest Airlines Co. with a "sell."

Barry said the three key fundamental risks that likely will limit near- to medium-term upside for Hawaiian Holdings' stock are pressure from interisland revenue from Mesa Air Group's go!, next year's risk in the upward repricing of seven Boeing 767s that Hawaiian leases from Ansett Worldwide, and the macroeconomic risk related to a weakening consumer market because of the airline's predominantly leisure clientele.

Hawaiian Airlines, which renegotiated its leases with Ansett in May 2003 during the carrier's bankruptcy, had a clause in its leases that allowed Ansett to terminate the leases beginning in March 2007 after Ansett gave 180 days notice.

"The market prices for these aircraft have gone up since the lease terms were originally priced, suggesting (Ansett) will elect to pull the planes or renegotiate lease terms," Barry wrote.

Ansett can terminate the leases of two of the 767s from March 21, 2007 to Sept. 20, 2007; three of the aircraft from Sept. 21, 2007, to March 20, 2008; and two of the planes from March 21, 2008 to Sept. 20, 2009. Ansett also can elect to terminate the leases on all seven of the aircraft starting on Sept. 21, 2009.

Keoni Wagner, spokesman for Hawaiian, said negotiations with Ansett are ongoing.

Hawaiian has helped protect itself against the loss of its aircraft with the purchase of four additional 767s that are being used for expanded service to and from the West Coast. All of the planes are expected to be on hand by early next year to bring the number of 767s in Hawaiian's fleet to 18. One of the 767s will be used as a spare.

"With some of the highest load factors (percentage of seats filled) in the industry and demand for travel to Hawaii generally growing, we think conditions support bringing this capacity (the additional 767s) to the market," Barry wrote. "That said, the downside is something more akin to the status quo should Hawaiian decide to return most of the 767s to (Ansett) and effectively swap them with the aircraft it recently acquired."

Barry also referred to Mesa's go! in the report as "a thorn in Hawaiian's side" and that $150 million of Hawaiian's interisland revenue is at risk because of go! luring away passengers amid the fare war that has seen one-way prices drop to the $19 to $39 range from the $79 range.

Still, Barry wrote that Hawaiian is better positioned than Aloha Airlines to withstand Mesa's onslaught.

"Aloha is probably more susceptible to the Mesa threat, flying larger, older, less fuel-efficient airplanes," Barry wrote. "That said, we would not count on Aloha sitting still and watching Mesa erode its share because the company is controlled by deep-pocketed hedge fund, Yucaipa."

Shares of Hawaiian have soared this year as the price of jet fuel has come down and the carrier has expanded its trans-Pacific service. Hawaiian Holdings' stock, which closed yesterday at $4.98, is up nearly 25 percent in 2006. It is the best-performing stock this year in the Bloomberg Honolulu Star-Bulletin index.

Wagner described the startup of coverage by Goldman as "terrific news."

"We instituted investor calls back in the first quarter, we're a public company, and we've been more active having come out of bankruptcy (in June 2005) in getting our information out there to the investment community," Wagner said. "Goldman carries a certain weight, so we're really happy to see them begin coverage."

The two other analysts who cover the company both have "buy" ratings on the stock. San Francisco-based Jason Kremer of Caris & Co. has been following Hawaiian since May 2006. He also follows two other companies that have a strong presence in Hawaii, Alexander & Baldwin Co. and Horizon Lines Inc. He has no target price on Hawaiian.

Nick Capuano of Beverly Hills-based Imperial Capital LLC has tracked Hawaiian since November 2005 and has a $6 target price on the stock. Imperial Capital conducted financing and investment consultation during Hawaiian's bankruptcy.