Like most of its peers in the U.S. airline industry, Hawaiian Holdings (HA -1.80%) rang up another sizable loss last quarter. While the Hawaiian Airlines parent reported a 22% sequential increase in revenue to $182 million, its adjusted net loss increased by about 10% compared to the fourth quarter of 2020, reaching $191 million. Nevertheless, the airline's results and outlook finally point to the beginning of a sustainable recovery.

A step change in demand

Like other airlines, Hawaiian Airlines experienced a big uptick in demand in February as the U.S. COVID-19 vaccine rollout gave people more confidence to book travel. However, the effect was even more dramatic for Hawaiian than for mainland-based airlines that had been able to redeploy capacity to regions with higher demand (such as Florida and the Rockies) earlier in the pandemic.

Indeed, Hawaiian Airlines' load factor -- the percentage of seats filled with paying customers -- roughly doubled on North America-Hawaii routes between January and March. Furthermore, whereas ticket sales were very weak in January, bookings have exceeded pre-pandemic levels by more than 10% since March. That has put the carrier on track to post higher load factors and average fares with each passing month. Management is cautiously optimistic that load factors could reach normal levels (around 90%) by the summer.

Despite this rapid improvement in the demand environment, Hawaiian Airlines expects revenue to be 45% to 50% lower than 2019 levels in the second quarter. As a result, adjusted earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) will remain negative. Still, the midpoint of management's forecast for adjusted EBITDAR between -$20 million and -$70 million would represent an improvement of over $100 million from the first quarter.

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

Image source: Hawaiian Airlines.

Waiting for the interisland and international markets to return

There's a simple reason why Hawaiian Airlines continues to face severe pressure on its revenue and earnings. Prior to the pandemic, interisland flights and international routes generated close to half of the company's revenue -- and those markets remain essentially closed.

The interisland market relies on local business travel, people visiting friends and relatives, or even just travel to access services not available on Hawaii's less-populated islands. Testing and quarantine requirements have decimated those market segments, by dramatically increasing the expense of an interisland trip. Similarly, testing and quarantine requirements for international travelers returning to their home countries are keeping a lid on international demand.

However, as of May 11, fully vaccinated Hawaii residents will be able to travel between the islands with no restrictions. That should quickly unlock a lot of incremental interisland demand. It will take longer to remove barriers to international travel, but management is optimistic that Hawaiian Airlines will benefit from strong pent-up demand whenever that happens.

Tapping new markets

With international demand likely to remain artificially depressed for a while, Hawaiian Airlines is doubling down on the mainland-Hawaii market. By the summer, it will have restored all of the mainland routes it operated prior to the pandemic.

Meanwhile, Hawaiian has launched four new routes over the past two months, connecting Austin, Orlando, and Ontario, California to Honolulu and Long Beach, California to Maui. A new seasonal route between Phoenix and Maui starts later this month. As a result, the airline plans to operate slightly more capacity in the mainland-Hawaii market this summer than it did in 2019.

A Hawaiian Airlines plane on the ground, with air stairs attached

Hawaiian Airlines is expanding its North American route network in 2021. Image source: Hawaiian Airlines.

Some of these new routes were close to being launched before the pandemic hit. Others are markets that Hawaiian Airlines had been interested in for a while but hadn't quite made the cut previously. By freeing up aircraft, the pandemic gave Hawaiian the flexibility to move more aggressively into markets that could become solid performers for the company in the long run.

This, too, shall pass

While Hawaiian Airlines' first-quarter results were objectively quite poor and the company will post another big loss in the second quarter, there's finally a light at the end of the tunnel. The company is poised to produce much better financial results over the summer. Hawaiian's domestic routes could fully recover by 2022, thanks to the rapid recovery in leisure demand.

As other countries catch up to the U.S. on vaccinations, international demand should make a strong recovery, too. Indeed, Hawaii's low COVID-19 case counts and status as an "outdoor" destination should make it especially desirable to leisure travelers in the near term.

Despite its losses over the past year, Hawaiian Holdings has nearly as much cash on hand as debt. As a result, investors can rest assured that it will emerge from the pandemic with a solid balance sheet -- ready to capture whatever opportunities become available in the fast-changing air travel market.