What happened

Hawaiian Holdings (NASDAQ:HA), parent company of Hawaiian Airlines, has been on a roll of late, with investors excited about the passenger carrier's prospects heading into the summer travel season. But the rally stalled on Thursday. Shares were down by 12% at 3:23 p.m. EDT as traders came to the view that most of the potential upside was already priced into the stock.

So what

Airlines endured a miserable 2020, and Hawaiian had it far worse than most. Its home state put strict quarantine restrictions on incoming travelers, and bans on international travel deprived it of the revenue streams it generated from flying Asian visitors to the islands.

A Hawaiian plane flies over Honolulu.

Image source: Hawaiian Holdings.

The rapid rollout of COVID-19 vaccines has been a boon to those airlines though, and Hawaiian Holdings stock jumped earlier this week on news that the Centers for Disease Control and Prevention was easing its guidelines regarding international travel. The airline's share price was up 15% for the week, and back to pre-pandemic levels, as of midday Wednesday on the premise that travel demand will surge in the months to come.

However, with the stock up more than 50% year to date, some on Wall Street are growing more cautious. On Wednesday evening, MKM Partners analyst Conor Cunningham initiated coverage of Hawaiian Holdings with a neutral rating and a $27 price target. Cunningham said that while demand for air travel has improved, he remains cautious on the stock until airline capacity to Hawaii stabilizes.

Now what

Hawaiian Holdings is headed in the right direction, but Cunningham's caution seems justified. We are still in a period of recovery, where relatively few U.S. vacationers are traveling overseas, and airlines as a result have flooded Hawaii with flights. That's going to make it hard to generate good margins on flights for at least this summer.

A reopening of travel to and from Asia would help, as Hawaiian has traditionally leaned on its western-facing routes to offset competition on flights to the U.S. mainland. But that is going to take time to normalize. Until we do see a return to the pre-pandemic flight patterns, there will likely be a ceiling on how high Hawaiian Holdings shares can fly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.