U.S. leisure travel demand has come roaring back in recent months, helping airlines start to recover from the COVID-19 pandemic. Travelers have particularly flocked to outdoor-focused destinations like beaches, mountains, and national parks.

However, despite its focus on leisure travel to the ultimate beach destination -- Hawaii -- Hawaiian Holdings (HA -0.16%) hasn't recovered as quickly as most of its rivals. Hawaii's stringent pandemic-related travel protocols have weighed heavily on the company. Fortunately, Hawaii is steadily moving toward normalizing its travel rules, which is great news for Hawaiian Airlines and its parent company.

Demand was recovering even with ongoing restrictions

At the peak of the crisis last spring, Hawaiian Holdings' revenue plunged 92% year over year -- with passenger revenue down more than 95% -- as travel to and from Hawaii ground to a virtual halt. Even in the first quarter of 2021, revenue plummeted 67% on top of a 15% decline in the prior-year period.

Fortunately, rising vaccination rates and falling COVID-19 case numbers have stimulated a big demand surge in recent months. Last month, Hawaiian Airlines raised its second-quarter revenue guidance. It now expects revenue to decline 42% to 46% compared to the second quarter of 2019. That would represent a huge sequential improvement compared to the first quarter.

Two people sleeping in flat-bed seats on an airplane.

Image source: Hawaiian Airlines.

Demand has mostly recovered on routes between the mainland U.S. and Hawaii. However, international travel remains sharply limited, mainly due to pandemic-related travel restrictions in Hawaiian Airlines' two biggest international markets: Japan and Australia.

Interisland travel demand has also been recovering very slowly. The state of Hawaii still requires many travelers to quarantine for 10 days if they travel to one of the outlying islands (excluding O'ahu), unless they complete a pre-travel COVID-19 test shortly before departure. Those rules are starting to change, though, paving the way for an accelerated pace of recovery this summer.

Relaxing restrictions

On May 11, Hawaii took the first step toward relaxing its interisland travel rules. People who were fully vaccinated in the state of Hawaii may now travel between the islands with no pre-testing or quarantine requirement. This move unlocked a big chunk of interisland demand by making it much easier for most Hawaii residents to visit friends and family -- or even just go shopping -- on other islands.

Still, under the current rules, it's difficult for tourists to visit multiple islands. That limitation and the sharp drop in international arrivals have combined to keep interisland demand low by historical standards.

Last week, Gov. David Ige announced that the state could soon lift more restrictions. Most notably, once 60% of Hawaii residents are fully vaccinated, anyone who was fully vaccinated in the U.S. will be able to travel to and within Hawaii with no quarantine or testing requirements. (At present, people who were fully vaccinated outside of Hawaii must follow the same rules as unvaccinated travelers.) The state will lift all restrictions once 70% of the state population is fully vaccinated.

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

Image source: Hawaiian Airlines.

As of last Friday, 52% of Hawaii residents were fully vaccinated and 59% had received at least one dose. This suggests that within a month or so, anyone who was fully vaccinated in the U.S. will be able to travel freely throughout Hawaii.

Paving the way for the next leg of recovery

Even with the current pre-travel testing requirement, U.S. airlines are already seeing strong demand for mainland-Hawaii travel. Pent-up demand could drive traffic beyond 2019 levels once Hawaii hits a 60% vaccination rate , so that travelers can skip the hassle and expense of getting a negative test before flying to Hawaii.

Hawaiian Airlines is well positioned to capitalize on a robust domestic demand recovery. It has lots of extra aircraft available that it would normally be using for its international routes. And the carrier has launched five new mainland-Hawaii routes since March. The upcoming change in travel rules should also drive further recovery in the interisland market as more visitors plan multi-island itineraries.

While Hawaiian hasn't provided any guidance for the third quarter, it is poised for another big sequential improvement in its profitability and has a shot at breaking even. Given that Hawaiian Airlines generated over a quarter of its revenue on international routes before the pandemic and international travel probably won't return in a major way until 2022, that's welcome news indeed.