What happened

Airline stocks were under pressure on Monday after weekend reports indicating the U.S. Treasury Department is playing hardball in negotiations over bailout funds. Investors turned optimistic after the $2 trillion economic stimulus plan cleared Congress in late March, but it now appears clear the airlines will not have easy access to the funds.

Shares of United Airlines Holdings (NYSE:UAL) led the rout, down more than 9% as of 11 a.m. EDT, with shares of American Airlines Group (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), Spirit Airlines (NYSE:SAVE), Southwest Airlines (NYSE:LUV), Hawaiian Holdings (NASDAQ:HA), Alaska Air Group (NYSE:ALK), and JetBlue Airways (NASDAQ:JBLU) all down 7% or more.

So what

Airlines have been hit hard by the COVID-19 pandemic, which has caused travel demand to dry up overnight. As companies expect revenue to fall by upward of 90% year over year, they have cut flights, grounded planes, and sought other ways to reduce expenses.

Those cuts include offering voluntary retirements or leave to employees, but so far no layoffs. Airlines have resisted layoffs in part because they expected $25 billion in grants as part of the stimulus bill earmarked to help them meet payroll.

Airplanes parked at an airport.

Image source: Getty Images.

Reuters reported over the weekend that Treasury Secretary Steven Mnuchin and staffers have told airlines the government will require the companies to repay 30% of the grants in low-cost loans over 10 years, while also seeking warrants equal to 10% of the loan amount. Airlines, according to the report, have balked at that demand, noting that the $25 billion in total funding doesn't even cover the full amount of payroll costs submitted.

The standoff between Treasury and airlines is a risky proposition for both sides. The airlines need cash if they are to survive the pandemic-caused downturn and a potential slow recovery in travel once the outbreak is contained. The alternative is likely massive layoffs or at least furloughs, putting more strain on unemployment resources at a time when jobless claims are skyrocketing.

Treasury's insistence on repayment has united labor and management, a rarity in the airline industry. David Weaver, communications director for the Air Line Pilots Association, a major pilot union, in a Sunday-night tweet warned Treasury is "threatening the jobs" of pilots and other aviation workers by treating grants like loans.

And Sara Nelson, president of the Association of Flight Attendants, wrote that Treasury is "stealing from the money Congress allocated directly to workers" and warned if the terms do not change, "job cuts will happen now AND longer term cuts will come in October."

Now what

There was a lot of backlash to the airlines receiving funding from the government, and it does make sense for Treasury to do its best to make sure that it is made whole for extending funds to the industry. Congress authorized Mnuchin to demand compensation for grants and gave him wide leeway to determine whether to seek compensation and how to do it.

We warned during the post-bailout euphoria that the airline industry is far from saved and that further turbulence was likely on the horizon. With the bailout money, I believe the industry is well positioned to weather a travel slump lasting into the fall. Without it, other actions will be necessary, and conditions could get far more precarious for weaker carriers.

I still believe it's safe for investors to take small, speculative positions in the airlines in hopes the industry finds a way to navigate through this mess. But given the risk, and the continued uncertainty, I'd recommend sticking to top operators with the most runway like Delta and Southwest.