What happened

Shares of American Airlines Group (NASDAQ:AAL) lost 10% at the open on Thursday after the company reported first-quarter results, and other airline stocks were also hit hard, with United Airlines Holdings (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) falling 9% and 5%, respectively.

The stocks recovered some of those losses as the morning went on, but investors were clearly disappointed by their first read of American's earnings report.

So what

Airline investors went into first-quarter earnings season bracing for the worst, knowing the COVID-19 pandemic has caused travel demand to evaporate and has led to airlines scrambling to cut costs. The real damage is expected in the second quarter, which will include the April U.S. shutdown, but there was plenty of disruption in March to be seen in the first-quarter results.

American's quarter was actually worse than expected, with the airline posting a loss of $2.65 per share on revenue of $8.52 billion, compared with analyst expectations for a loss of $2.33 per share on revenue of $8.9 billion.

An American Airlines tail lit up at night.

Image source: American Airlines.

"Never before has our airline, or our industry, faced such a significant challenge," CEO Doug Parker said in a statement. "We have a lot of difficult work ahead of us. And while there is still uncertainty in what's to come, we are confident that through the dedication of the American Airlines team and our swift actions, we will get through this for our team, our customers and our shareholders."

American ended the quarter with $6.8 billion in available liquidity and expects to burn through $70 million per day in the current quarter. But the airline does expect its cash balance to be up to $11 billion by June 30 and hopes to have its daily burn rate down to $50 million per day by then, thanks to U.S. government support funds and an aggressive internal cost-cutting effort.

The airline expects to reduce total operational and capital expenditures by $12 billion in 2020, including retiring four separate aircraft types. But with the post-pandemic recovery in travel demand expected to take years, it is likely that additional capital raises are up ahead.

United is the next airline to report, and investors were likely reading into the American report and worrying about what to expect from that carrier after markets close tonight. Delta reported its first-quarter results last week and actually lost less money than expected, but the entire industry still faces an uphill climb and could need to wait years until travel returns to pre-pandemic levels.

Now what

This is an odd earnings season for the airlines, as investors know the first quarter was bad and the second quarter will be worse. So, while headline numbers might spook investors, the markets are more likely to focus on management commentary about what they are seeing right now and what they expect in the quarters to come.

That might explain why the stocks recovered some of their initial losses. During the post-earnings call Thursday morning, Parker and his team said they see a slow recovery but continue to hope they will be able to avoid furloughs. American could emerge from this crisis smaller, but the airline has no plans to cut hubs or dramatically change its service footprint.

American still has an industry-high debt load, which means it has slightly fewer levers to pull when trying to find liquidity. But I believe all the major airlines have the wherewithal to survive the crisis and its aftermath without resorting to bankruptcies. Still, given the extent of the damage done and the slow recovery ahead, I'd advise sticking with top operators including Delta and Southwest Airlines instead of buying into American or United right now.