The past three years weren't kind to Hawaiian Holdings (HA -0.35%). Plummeting demand followed by increased competition, soaring fuel prices, and disruptive international travel restrictions have caused the Hawaiian Airlines parent to lose money quarter after quarter.

Hawaiian Airlines hopes to change that narrative soon, though. And last week, it announced an intriguing deal to diversify its business by operating 10 freighters for (AMZN 0.83%) starting in late 2023.

An Amazon shocker

Amazon and Hawaiian Airlines have signed an eight-year deal for Hawaiian to operate and maintain 10 Airbus A330-300 converted freighters for the e-commerce giant's Amazon Air unit. The agreement includes options to extend and/or expand the relationship. Amazon will own the planes, but they will be registered under Hawaiian's FAA operating certificate.

This isn't the first time that a passenger airline has agreed to operate dedicated freighters for Amazon. In late 2019, budget airline Sun Country Airlines struck a similar deal to operate Boeing 737 freighters for Amazon Air. The Hawaiian Airlines-Amazon deal was particularly surprising, though, because Hawaiian's entire route network consists of flights to, from, and within Hawaii. By contrast, Amazon is hiring the carrier primarily for flights within the continental U.S.

Hawaiian Airlines says that it will begin cargo flights for Amazon in late 2023, with all 10 aircraft entering service by the end of 2024. To support this new line of business, Hawaiian plans to open a new pilot base in the continental U.S. The airline hasn't decided where to locate that base yet, but Cincinnati -- home to Amazon Air's main hub -- is a top contender.

As part of the deal, Amazon will receive warrants to acquire up to 15% of Hawaiian Holdings (approximately 9.4 million shares) over the next nine years. Most of the warrants will have an exercise price of $14.71 per share, roughly in line with Hawaiian Holdings stock's recent price.

A different kind of revenue stream

For Hawaiian, the Amazon freighter deal opens up a new avenue for top-line growth. Even more importantly, it will diversify the company's revenue and earnings base.

Hawaiian Airlines' traditional passenger airline business has been extremely lucrative at times over the past decade, but it has also endured many lean years. Changes in demand, competitors' capacity decisions, and fuel prices can each dramatically impact profitability.

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

Image source: Hawaiian Airlines.

Those risks won't affect Hawaiian's new business hauling cargo for Amazon. Hawaiian Airlines will earn a monthly fee for each aircraft under the agreement, plus payments based on the number of departures and flight hours it operates. Furthermore, many major expenses like fuel and heavy maintenance will be passed through to Amazon. As a result, macroeconomic factors that could hurt the airline's passenger business largely won't impact the profitability of the new freighter segment.

Operational risk is the key

While hauling cargo for Amazon won't expose Hawaiian Airlines to the same risks it faces in its passenger business, this new revenue stream isn't risk-free.

First, since pricing is essentially locked in ahead of time, Hawaiian will have to carefully manage the costs that aren't getting passed through to Amazon, especially labor. Pilot pay has been soaring, and Hawaiian Airlines needs to pay enough to recruit an adequate supply of new pilots without crushing its profitability.

Second, management has a lot on its plate for next year. The airline is now set to induct a new aircraft type into its fleet (Boeing's 787 Dreamliner), open its first mainland U.S. pilot base, train and retrain hundreds of pilots, and start up a new freight business in 2023.

Third, Amazon will control scheduling for this new venture. While it has various incentives to help Hawaiian be successful, in the future Amazon could change its strategy for deploying the A330-300 freighters in ways that make the business less profitable than Hawaiian Airlines expects.

Hawaiian's management appears to have a fairly good handle on these risks, and the company's pilot union strongly supports the Amazon deal. That bodes well for the Amazon cargo business becoming a positive contributor to Hawaiian Holdings' revenue and earnings over the next few years. Still, while the company's prospects are brightening, Hawaiian Holdings stock remains a very risky investment.