The COVID-19 pandemic has crushed air travel demand this year. U.S. airlines have responded by slashing capacity dramatically. Yet counterintuitively, many airlines have also added new routes and new cities to their networks during 2020. With lots of spare aircraft and crews sitting idle, the cost of experimenting with new markets has been lower than ever.
Now, Hawaiian Holdings (HA +0.00%) is getting in on the action. On Tuesday, Hawaiian Airlines (its operating subsidiary) announced that it will launch service on four new domestic routes -- including three new cities -- next spring.
Slow capacity recovery
Among U.S. airlines, Hawaiian Airlines has been hit uniquely hard by the COVID-19 pandemic. For much of 2020, Hawaii required anyone entering the state to quarantine for 14 days after arrival. This all but eliminated tourist demand. Additional travel restrictions undercut interisland travel. As a result, for much of the year, Hawaiian operated a minimal schedule to support cargo demand and essential travel.
Image source: Hawaiian Airlines.
Starting Oct. 15, Hawaii finally began allowing travelers arriving in the state to skip the quarantine as long as they tested negative for COVID-19 within 72 hours of departure. This policy change unlocked some pent-up demand for travel to the island chain, giving Hawaiian the confidence to start rebuilding its route network.
A few days after the new pre-travel testing program took effect, Hawaiian Airlines said that it would resume service to New York, Boston, and Long Beach, California in December. That will give it nonstop service to all 13 mainland cities it served before the pandemic during the upcoming holiday season.
Even so, management estimated on Hawaiian's Q3 earnings call that the carrier would operate at just 41% of its pre-pandemic capacity in December. International markets are still mostly closed. Furthermore, Hawaiian Airlines is serving many domestic markets less frequently and operating fewer nonstop flights to destinations other than Honolulu. Worse, Hawaii has started tightening its travel restrictions again after the recent surge in U.S. COVID-19 case numbers. This is forcing Hawaiian to trim its schedules once more.
New routes on the horizon
As COVID-19 vaccines roll out next year, leisure travel demand is likely to rebound. Hawaii will eventually be able to loosen its travel restrictions as the pandemic eases. However, travel demand won't return all at once. International travel could be particularly slow to recover. That means Hawaiian Airlines has more aircraft than it will need to serve its current markets in 2021. It's launching four new routes in response.
On March 9, the airline will begin daily flights between Long Beach and Maui, complementing its existing service between Long Beach and Honolulu. Just two days later, Hawaiian Airlines will begin flying to Orlando for the first time, offering two weekly flights from Honolulu. On March 16, it will add Ontario, California, to its route network, with five flights per week to Honolulu. (Hawaiian briefly served that route years ago, but pulled out in early 2004 in favor of launching service to Sydney.) The springtime expansion will conclude in late April, when Hawaiian plans to launch two weekly flights between Honolulu and Austin, Texas.
None of these four routes has nonstop service at present. That's an important consideration in the current environment, as it means Hawaiian won't risk getting caught up in price wars in the markets it's entering. Moreover, they all have a meaningful amount of one-stop travel today. While this doesn't guarantee that there will be enough demand to support these new nonstop flights in the long run, all four markets have potential.
A treacherous path
Hawaiian Holdings stock has underperformed most of the U.S. airline industry over the past few years due to rising competition. Most notably, Southwest Airlines began flying to Hawaii and is quickly becoming a major player in the West Coast-Hawaii market. It also began interisland flights, breaking Hawaiian Airlines' virtual monopoly in that market.
The rollout of COVID-19 vaccines will probably drive a resurgence of demand for travel to Hawaii, but overcapacity in many West Coast-Hawaii markets could be a lingering problem. That's why it's so critical for Hawaiian Airlines to build up new markets. While the airline has shown that it can hold its own on competitive routes, it could potentially generate more stable profits on routes without nonstop competition. Thus, the success of its new routes could help determine whether Hawaiian Holdings stock stages a strong recovery in the years ahead.
