What happened

Airline shares were under pressure again on Wednesday following comments from Federal Reserve Chairman Jerome Powell forecasting a long post-COVID-19 recovery that could "leave behind lasting damage" to the economy. The airlines need a quick economic rebound to avoid financial distress, and Powell's comments provided new reason for investors to worry about the viability of airline shares.

As of 12:30 p.m. EDT, shares of Spirit Airlines (NYSE:SAVE) were down 14%, shares of United Airlines Holdings (NASDAQ:UAL) were off 9.8%, and shares of Delta Air Lines (NYSE:DAL), American Airlines Group (NASDAQ:AAL), and Southwest Airlines (NYSE:LUV) were all down more than 5% apiece.

So what

The airlines are in crisis mode, slashing flights, grounding planes, and cutting costs in hopes of weathering a pandemic-induced travel slump that has seen travel demand down 90% or more year over year. The companies have raised billions in fresh liquidity thanks to a U.S. government bailout package as well as debt and equity sales, but no amount of cash will be enough if revenue does not rebound eventually.

An airplane flying over the clouds.

Image source: Getty Images.

After losing half of their value or more as the pandemic initially spread, airline stocks have stabilized somewhat, and now tend to trade along with broader market sentiment about how long the pandemic will last and what the economy will look like once it is over. Powell's comments spoke to the worst fears among airline investors, suggesting that travel demand will be slow to materialize once the stay-at-home orders are lifted.

We know it is going to take time to see airlines fully recover. I believe it could take three years or more before traffic returns to pre-pandemic levels. But airlines can likely stumble along if some weakened version of a more normal travel environment emerges in the months to come. What airlines and their investors hope to avoid is "lasting damage" to the economy.

The stocks are down today despite a well-known portfolio manager coming to the industry's defense. Bill Miller, the one-time chief investment officer of Legg Mason who now runs his own firm, told CNBC on Tuesday, "If you don't own the airlines, then you're making a bet against the vaccine." Miller's argument is that consumers love travel and people will resume flying as soon as it is safe.

Now what

Worth noting there is another side to Miller's argument: If you do not own airlines, you could just be betting that the companies will run out of money before a vaccine is available.

That's really where we are with these airline stocks today. If travel recovers before the cash runs out, the stocks are almost certainly undervalued. But if the cash runs out first, the consequences will be dire, and some equity holders will see their investments wiped out.

I am hopeful the industry can avoid bankruptcies, but until the pandemic is contained and we can actually see how the economy responds, it is impossible to say how things will play out. For now, investors who are willing to brave the unknown should stick to top operators like Delta and Southwest, and hope for the best.