The global COVID-19 pandemic is spreading at a rapid rate, threatening to overwhelm many regions' healthcare systems. As of Monday evening, there were more than 40,000 confirmed cases in the United States, up from a few thousand just a week earlier.
Hawaii occupies an unusual position in the context of this pandemic. As an island state, it is uniquely well positioned to contain an infectious disease outbreak like COVID-19. On the other hand, as a tourist mecca, it is extremely vulnerable to imported cases, as tourists who seem healthy can unknowingly carry the disease into the state and spread it widely while visiting crowded places.
With this in mind, Hawaii is implementing severe restrictions on tourists and residents in the hope of stamping out COVID-19 in the state before it's too late. That includes a recent order mandating a 14-day quarantine for anyone entering the state, starting on Thursday. This will accelerate the plunge in air travel to and from Hawaii, adding to airlines' woes -- especially Hawaiian Holdings (HA -1.96%).
A new quarantine order will virtually eliminate tourism to Hawaii for at least two months. Image source: Hawaiian Airlines.
Hawaii tries to get ahead of COVID-19
There are fewer than 100 reported cases of COVID-19 in Hawaii right now, making it one of the less affected states. So far, there has been limited community spread of the novel coronavirus in the island state; most of the cases relate to people who had traveled out of state.
Recently, Gov. David Ige has come under increasing pressure to take strong actions to stop the pandemic before it gets out of hand in Hawaii. The quarantine order issued on Saturday was the first big step in that direction. It applies to both tourists and Hawaii residents, and there are stiff penalties for violation of the quarantine. The explicit goal is to halt all tourism, and it seems to be working, as a growing number of hotels have decided to close temporarily. The quarantine requirement will continue through May 20 unless it is revoked before then.
Local leaders in many parts of the state are going even further, issuing "stay-at-home" orders that will last at least through the end of April. These orders bar people from leaving their homes except for a limited set of activities considered essential. Similarly, all non-essential businesses must close.
It remains to be seen whether these measures will quell Hawaii's COVID-19 outbreak. Some politicians are urging even bolder action. However, it's clear that the existing restrictions will decimate Hawaii's air travel market.
Air travel demand will evaporate
There is likely to be a flurry of air travel to and from Hawaii in the first few days of this week, as tourists try to get home and Hawaii residents who are away from the state try to return before the 14-day quarantine order goes into effect. But as of Thursday, demand is set to plummet to barely more than zero.
This will affect most major U.S. airlines. All three legacy carriers, as well as Hawaiian Airlines, Alaska Air (ALK 4.03%), and -- increasingly -- Southwest Airlines (LUV 0.97%) have a significant presence in Hawaii. Still, Hawaii represents less than 10% of capacity for most of these carriers. Given the extreme number of flights being canceled already, suspending all service to Hawaii would be a fairly small step for the three legacy carriers and Southwest Airlines.
Hawaiian Airlines gets most of its revenue from flights to and from Hawaii. Image source: Hawaiian Airlines.
By contrast, Hawaiian Airlines gets about 75% of its revenue from people traveling to and from Hawaii. Normally, it operates more than three dozen daily round trips to 13 cities on the U.S. mainland and a dozen destinations around the Pacific Rim. Virtually all of this service is set to disappear because of the new 14-day quarantine restrictions.
Hawaiian Airlines says it is committed to maintaining at least one daily flight to Los Angeles to enable people to travel between Hawaii and the mainland, as well as one daily flight to American Samoa. (It is the only airline to provide long-haul service to American Samoa.) The rest of its long-haul schedule will be suspended, with the possible exception of a few flights to carry cargo from Asia.
Hawaiian will continue flying most of its interisland routes -- the other 25% of its business -- on a reduced schedule to serve critical travel needs. The one piece of good news there is that Southwest Airlines will probably be forced to suspend all interisland service, since it relies on having staff come from the mainland to operate those flights, leaving Hawaiian with a virtual monopoly temporarily.
Among other airlines, Alaska Airlines is the other carrier that will be hurt most by Hawaii's quarantine order. As of last week, Alaska was still planning fairly modest total capacity cuts of 10% in April and 15% in May. Flights to Hawaii represent about 14% of its capacity, so temporarily suspending those flights would represent a significant expansion of Alaska's cutbacks.
Government support needed
With the new quarantine order going into effect in a few days, Hawaiian Airlines will be the U.S. airline most affected by the COVID-19 pandemic. While it will be able to continue operating a reduced schedule of interisland flights and a handful of long-haul flights, revenue could plunge something like 80% to 90% year over year in the second quarter.
Hawaiian Holdings did begin the year in a strong financial position, with $619 million of cash and short-term investments. It recently drew $235 million from its credit line to maximize its near-term financial flexibility. Nevertheless, with revenue virtually drying up, it is on track to burn hundreds of millions of dollars per quarter as long as the status quo continues.
Even before the quarantine plan was announced, Hawaiian Airlines told employees that furloughs would probably be unavoidable if business conditions continued to deteriorate. That unfortunate option now seems inevitable unless the federal government steps in to provide cash grants to airlines in return for maintaining their payrolls.
Alaska Airlines has a stronger balance sheet and probably hasn't seen quite as much of its revenue evaporate. Southwest Airlines is stronger still. That might enable them to forgo furloughs longer. But if air travel remains at a virtual standstill for more than a couple of months, no airline will be able to maintain its full payroll indefinitely with balance sheet cash.
The best-case scenario for airlines, especially Hawaiian Holdings, is that the U.S. government offers significant grants in the short term to prevent furloughs and that measures to stop the COVID-19 pandemic are effective, enabling a gradual demand rebound beginning this summer. Unfortunately, they can't count on either government support or a quick end to the pandemic. As a result, airlines like Hawaiian Holdings need to be prepared to take extreme measures to preserve cash so that they can live to fight another day.
