What happened

Airline stocks have been hit hard by the COVID-19 coronavirus pandemic, which has caused travel demand to plummet and has led to concerns about the industry's ability to navigate through the crisis. Shares of United Airlines Holdings (NYSE:UAL) lost 48.8% in March, according to data provided by S&P Global Market Intelligence, and shares of Delta Air Lines (NYSE:DAL) and American Airlines Group (NASDAQ:AAL) were down 38.2% and 36%, respectively.

It could have been worse: The stocks were down significantly more mid-month prior to the federal government passing a stimulus plan that contained relief for the beleaguered sector.

UAL Chart

Airline data by YCharts.

So what

Airlines big and small have been crippled by the pandemic and have seen revenue evaporate overnight. Delta, for example, expects second-quarter revenue to fall 80% year over year and said it is losing upwards of $350 million per week.

The carriers have cut a significant portion of their schedules, grounded planes, and frozen hiring, but no amount of cuts can make up for revenue not coming through the door. In years past, weaker airlines typically went bankrupt during run-of-the-mill recessions, and by mid-month the markets were beginning to price in the potential of airline failures.

An air traveler at the airport with a mask on.

Image source: Getty Images.

The government came through with $50 billion to support the industry in late March, temporarily giving lift to the shares. But as United made clear in a memo to employees after the assistance package was finalized, the cash will only prolong the inevitable if traffic does not return.

"If the recovery is as slow as we fear, it means our airline and our workforce will have to be smaller than it is today," management told employees.

Now what

April began as March ended, with United down 18%, Delta 16%, and American 12% on the first day of the month. The stocks fell after the White House issued a grim prognosis of how long the pandemic might last and how severe it might be.

It's nearly impossible to evaluate the airline stocks based on fundamentals today. All three of these companies are trading at less than 3.2 times earnings and less than 0.3 times sales.

If the pandemic is contained in the months to come and traffic begins to return by mid-summer, all of the stocks are almost certainly undervalued. If the pandemic is not quelled soon or the U.S. falls into a deep recession that lasts well into 2021, it is possible there will be no amount of government assistance that can keep the airlines solvent.

My best guess is that travel is likely to return to at least more normal recessionary levels by the fall, and that the airlines have the wherewithal to survive until then. Investors able to handle turbulence in the months to come might want to take a small position in the industry and hope for the best, but for now I'd recommend focusing on the top operators who should be able to withstand the slowdown longer.