What happened

Airline stocks continued their plunge at the open on Tuesday before coming back somewhat on hopes that U.S. lawmakers would follow through on pledges to provide the industry with some sort of financial relief.

Shares of Hawaiian Holdings (HA 2.91%) were down more than 13%, while shares of Delta Air Lines (DAL 1.25%) and United Airlines Holdings (UAL -0.06%) were both down single-digits. Shares of American Airlines Group (AAL 0.14%) have been up 16% and down 7% on a volatile day.

So what

The airline sector has been hit hard by the COVID-19 coronavirus outbreak, with global travel demand evaporating overnight. The airlines have reacted by freezing hiring, cutting schedules, and grounding aircraft, but there is a growing fear that government action is needed to avoid a flood of bankruptcy filings.

An airline passenger with a respiratory mask on.

Image source: Getty Images.

White House officials have expressed support for some sort of an industry backstop, with talk of upward of $50 billion in grants and loan guarantees. But the industry has also received significant pushback from lawmakers who see it as a bailout for companies ill prepared for bad times. And some union leaders have pushed Congress to assist workers directly instead of giving money to corporations.

The uncertainty has prevented airline stocks from rallying on the assistance talk, and has investors continuing to try to pick winners and losers in the sector. American remains on close watch because the company has the most debt among U.S. airlines. Hawaiian, meanwhile, is a niche carrier highly dependent on vacation travel to its home state and can ill afford a prolonged downturn that eats into consumer spending.

Now what

It is important to note that the airlines all have some runway ahead of them, and I still believe the industry can weather the storm without bankruptcies. The argument for an assistance package now is that you don't want to wait until it is needed, and that makes sense. But we are not on the verge of collapse, and investors should not treat the stocks as if they are.

If nothing else, a show of government support should help reassure airline suppliers, creditors, and counterparties that the companies can make it through the downturn, which should help the airlines negotiate extensions, raise new debt, and take other actions to get through the crisis.

Still, nothing short of headlines that the pandemic has been contained and the economy is recovering will truly reassure investors, and that is likely still a long way off. Expect continued volatility in the days and weeks to come.