The COVID-19 pandemic hurt Hawaiian Holdings (HA 2.91%) even more than the average U.S. airline. Most of its industry rivals were able to tap into pockets of domestic leisure demand to generate revenue beginning around Memorial Day. Hawaiian Airlines wasn't so lucky: Strict quarantine requirements for visitors arriving in Hawaii sapped demand in the airline's markets.

However, Hawaii began to reopen for tourism last October, enabling Hawaiian to start selling more tickets. While the near-term outlook remains bleak, Hawaiian Holdings could become one of the better-performing airlines as the air travel demand recovery accelerates over the next year or two.

Sequential improvement last quarter

Quarantine requirements kept a lid on Hawaiian Airlines' business in the third quarter, which is traditionally the peak season. Revenue plunged 90% year over year to $76 million, and the company logged an adjusted net loss of $173 million ($3.76 per share).

However, on Oct. 15, Hawaii began allowing visitors arriving in the state to bypass the mandatory 14-day quarantine by showing a negative COVID-19 test result from within the past 72 hours. This made it easier to travel to Hawaii, especially for tourists, enabling a modest demand recovery.

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

Image source: Hawaiian Airlines.

Hawaiian Airlines' revenue reached $150 million last quarter, down 79% year over year but up 97% sequentially. The revenue increase had a negligible impact on profitability for the fourth quarter, as Hawaiian had to incur incremental costs to increase its capacity relative to the third quarter. The company again reported an adjusted net loss of $173 million, or $3.71 per share. That said, cash burn slowed to an average of $1.7 million per day last quarter, compared to $2.6 million per day in the third quarter.

Traffic should return in 2021

Hawaii travel demand will likely remain quite modest this quarter. The first quarter tends to be the weakest part of the year for air travel. Additionally, U.S. COVID-19 case counts remain elevated, while restrictions on international travel have sharply limited travel from overseas. Fortunately, Hawaiian will receive at least $147 million of grants under the federal government's new payroll support program this quarter, offsetting most of its expected cash burn.

Looking a little further ahead, though, Hawaiian Airlines executives expect a strong recovery. Leisure travel accounts for the vast majority of Hawaiian's business, and most airline industry experts expect leisure travel demand to recover quickly once the pandemic abates. A Hawaii vacation might sound very appealing to well-to-do consumers who weren't able to travel in 2020 and increased their savings last year.

As a result, Hawaiian Airlines expects to operate 75% to 85% of its 2019 capacity by the third quarter of 2021. In the mainland Hawaii market, it may even restore capacity all the way to pre-pandemic levels. Of course, it's possible that demand won't recover as quickly as management expects, especially if the vaccine rollout hits additional snafus. However, the biggest risk may be that strong demand for Hawaii travel leads airlines to deploy too much capacity in the market in the second half of this year.

Shoring up the balance sheet

Hawaiian Airlines' results could remain volatile until supply and demand return to equilibrium. The airline is preparing to handle that volatility by strengthening its balance sheet.

First, the airline has raised $41 million by selling 2.1 million shares, with plans to sell up to 2.9 million more shares this year. Second, Hawaiian Holdings is issuing $1.2 billion of new debt backed by its brand and loyalty program. That will give it over $2 billion of liquidity to cover its capital spending and debt maturities for the next few years, with plenty of cash to spare.

Thanks to these moves, investors can be confident that Hawaiian Holdings will emerge from the COVID-19 pandemic with plenty of financial flexibility. That should allow it to recover fully from the current crisis within a few years.