What happened

Has sentiment finally turned in favor of airline stocks? The sector enjoyed another day in the green on Friday, buoyed by improving optimism as states begin to reopen. And carriers got through earnings reporting season without any major disasters.

Shares of Allegiant Travel (NASDAQ:ALGT), United Airlines Holdings (NASDAQ:UAL) and JetBlue Airways (NASDAQ:JBLU) closed up more than 11%, with Hawaiian Holdings (NASDAQ:HA) up more than 9%. Shares of Southwest Airlines (NYSE:LUV), American Airlines Group (NASDAQ:AAL), Alaska Air Group (NYSE:ALK), and Delta Air Lines (NYSE:DAL) were each up about 5% or more.

So what

Airlines have been hit hard by the COVID-19 pandemic, with all of the stocks mentioned above down between 50% and 71% year to date. The pandemic has brought global travel demand to a halt, leaving the companies scrambling to survive.

A plane taking off.

Image source: Getty Images.

The crisis has caused many shareholders, including one of the world's most famous investors, to abandon them. And for weeks there has been a feeling of inevitable bankruptcies lingering over the sector.

First-quarter earnings season seems to have done a lot to change the sentiment surrounding the carriers. The airlines lost billions, and warned they are going to lose even more in the second quarter. But every one of the companies also detailed extensive cost-cutting campaigns that will bring down cash burn by the end of the quarter. And thanks in part to the CARES Act stimulus, which provided carriers with up to $50 billion in liquidity, the industry seems to have sufficient cash to last at least into the summer.

Now what

There is still a lot that can go wrong for the airlines from here. While the industry has ample liquidity for now, no business can survive indefinitely with hardly any revenue coming in. Even if states begin to reopen and the economy gets back up and running, we are likely to have a recession, and airlines historically have performed poorly during downturns.

Until we have a clearer picture of whether the pandemic is actually contained, and what economic activity will look like post-pandemic, it is going to be difficult for the airlines to make up all the ground they have lost this year. But the positive overall market sentiment has seemingly finally spread to the airlines, and the stocks could continue to drift higher along with the broader markets.

Given the risks, I'd advise sticking to top operators like Southwest and Delta. American Airlines has the industry's highest debt load, and had perhaps the industry's worst earnings call and could still run into trouble. Hawaiian and JetBlue have models that don't lend themselves to outperformance during a recession.

I believe the airlines can survive, but the recovery is going to take time. Investors buying in right now should expect a long wait.