Hawaiian Airlines: A Value Play in Emerging Markets

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With rapidly growing middle classes and a pace of economic growth that is solidly outpacing U.S. based economic growth, emerging markets offer an investment opportunity for those looking to benefit from the development of these emerging economies. The challenge though is not overpaying for a company now and having to wait potentially decades for the current price to become the true value of the stock. Fortunately, there is a company ready to enter the Chinese market that is already expanding in the Asia Pacific region and trading at a bargain basement price.

Taking off with Emerging Markets

When most people think of an emerging markets airline, they probably bring up names like China Southern Airlines and China Eastern Airlines. Both these airlines offer an opportunity to capitalize on China's growing middle class and trade at about 13x and 10x earnings, respectively. But beyond mainland China based airlines, Hawaiian Holdings (NASDAQ: HA) could provide a play into the Chinese market as well.

Hawaiian Airlines, owned by parent company Hawaiian Holdings, may be best known as a niche airline operating flights for American tourists. But due to Hawaii's location compared with mainland Asia, these islands are attracting a growing amount of business from developing economies as well and Hawaiian Airlines is looking at getting in on the action.

The airline seems to be examining its possibilities in China as it gears up to potentially open up new routes. In Travel Weekly, Hawaiian CEO and President Mark Dunkerley addressed the Chinese market saying: “China is a market we would love to participate in, and we have started making investments in doing so.” He went on to say “Our strategy is to try and learn the things we don’t know about how to sell in China and how to be effective before we have to invest in putting a new route in.” From these words and actions taken which include hiring additional Mandarin speakers and launching a Chinese website, we can reasonably expect Hawaiian to enter the Chinese market once they have decided on their optimal routes and worked out other logistical issues.

Until Hawaiian makes a major play into the Chinese market, the airline will continue to enjoy an expanding American presence as well. With all of this expected growth, Hawaiian's valuation of less than six times earnings seems unreasonably low. Legacy carriers like Delta Air Lines (NYSE: DAL), which has also been doing an impressive turnaround job, trade well above this level with Delta currently around twelve times earnings. While Delta's 2013 earnings are expected to increase, so are Hawaiian's meaning Delta is not simply outgrowing Hawaiian over time. As the most valuable of the legacy carriers, Delta has already completed its merger with Northwest while United Continental continues the integration to form the world's largest airline.

Additonally, vertical integration through the oil refinery purchase and horizontal integration through the equity purchase in Virgin Airways show how Delta is seizing opportunities as they arrive. For these reasons, I am bullish on Delta shares as well.

Even Alaska Airlines (NYSE: ALK), which is now competing for the Hawaii market as well, trades at a far greater eleven times earnings. While Alaska does have the benefit of a more diverse and expanded network, Alaska is not about to face the same levels of potential growth in the growing Asian economies. While I still like Alaska Airlines, their valuation shows how cheap Hawaiian actually is when compared to rival airlines. However, Alaska does have the advantage of size over Hawaiian. Alaska Airlines has a stronger North American network established partly through its own routes and partly through code shares. But as Hawaiian continues to expand its North American presence of the next several years, the extent of this advantage should dissipate. While this should help Hawaiian Airlines, Alaska is more diversified across mltiple markets and should not be dramatically impacted by this change.

Say Aloha to Hawaiian

Compared with American based companies, those in emerging markets often trade at a premium to compensate for expectations for future growth. By contrast, Hawaiian Holdings trades at a discount to peers yet has strong emerging markets potential based on the airline's location and future growth plans. As travel demand increases in the Chinese market, it may ironically be an American airline that could be the winner. And with that could come some rich rewards for Hawaiian Holdings shareholders.


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