The second quarter was an extremely rough period for U.S. airlines, as the COVID-19 pandemic ravaged air travel demand. And one airline was hit particularly hard by the pandemic: Hawaiian Holdings (NASDAQ:HA).

In late March, the State of Hawaii began requiring a 14-day quarantine for anyone arriving there (both residents and visitors). Meanwhile, stay-at-home orders were imposed across the state. These measures to prevent the spread of COVID-19 virtually eliminated tourism, as well as local air travel. The effect on Hawaiian Airlines (which only operates to, from, and within Hawaii) was predictable.

A dreadful quarter

With most of its markets virtually closed last quarter, Hawaiian Airlines slashed its capacity 92.1% year over year. Revenue plunged 91.6%, including a 95.4% drop in passenger revenue and a 48.5% decline in cargo and other revenue.

Under generally accepted accounting principles (GAAP), Hawaiian reduced its operating expenses by 66.5% year over year, leading to a pre-tax loss of $153 million and a net loss of $107 million, or $2.33 per share.

Excluding CARES Act payroll support grants and other special items, the company's adjusted operating expenses decreased by 54%. As a result, Hawaiian's adjusted pre-tax loss and adjusted net loss were $230 million and $175 million, respectively -- greater than the comparable GAAP metrics.

A Hawaiian Airlines plane flying over the ocean, with mountains in the background

Image source: Hawaiian Airlines.

Hawaiian Holdings also reported negative free cash flow of approximately $90 million for the second quarter, and more than $300 million after adjusting for the CARES Act payroll support grants it received. The leisure-focused airline ended the quarter with $761 million in cash and investments.

Hawaiian Airlines needs demand to return

Hawaii lifted restrictions on inter-island travel in mid-June, sparking a modest demand recovery in that part of Hawaiian Airlines' business. And just a few weeks ago, Hawaiian began ramping up its long-haul schedule, after the state announced plans to discontinue the 14-day quarantine rule on Aug. 1 for people arriving in Hawaii who could provide documentation of a negative COVID-19 test result from the past 72 hours.

Unfortunately, surging COVID-19 case totals and growing testing delays in many parts of the U.S. during July undermined this reopening plan. On July 13, Governor David Ige postponed the implementation of the new policy until at least Sept. 1. This effectively canceled the rest of the Hawaii peak summer tourist season.

Hawaiian Airlines has worked hard to cut costs by eliminating all discretionary spending and cutting payroll expense through voluntary buyouts, early retirement, and short-term leaves. Nevertheless, it expects cash spending (including operating expenses, interest costs, and debt service, and excluding CARES Act support) to average $3.2 million a day in Q3, or nearly $300 million for the quarter as a whole.

Last quarter, cash refunds outpaced cash ticket sales at Hawaiian Airlines. The third quarter should be better in that respect, but until Hawaii is open for tourism again, cash ticket sales will remain minimal, which means that Hawaiian will burn hundreds of millions of dollars a quarter. That's a very substantial sum, considering the airline's size.

Marking time

Hawaiian Airlines recently raised $114 million from a pair of sale-leaseback transactions for Airbus A321neos. It will receive the last $29 million of payroll support funds at the end of July. Furthermore, the company plans to raise $262 million of aircraft debt backed by six A321neos and two A330s. It is also eligible for up to $364 million of subsidized secured loans under a different section of the CARES Act.

On a pro forma basis, pulling all of these levers would have boosted Hawaiian's cash and investments balance to more than $1.5 billion at the end of last quarter. The company is also in line for a substantial tax refund next year. (Hawaiian Holdings paid over $160 million of cash taxes between 2015 and 2017 that could potentially be refunded, depending on the size of its 2020 taxable loss.)

Thus, Hawaiian Airlines can absorb losses at recent levels for a few quarters if necessary. However, doing so would undo all of the progress it has made on its balance sheet in recent years. And the longer Hawaii travel demand remains near zero, the greater the risk to the company's survival.

The good news is that bookings recovered fairly rapidly when it appeared that Hawaii would reopen to tourists in August, even with the hassle of having to get a COVID-19 test to avoid a 14-day quarantine. That bodes well for a rebound in demand whenever the pandemic ends. Still, this means that -- more than any of its peers -- Hawaiian Holdings' prospects depend on a vaccine becoming available sooner rather than later.