What happened

Latin America is slowly reopening for business after lockdowns due to the COVID-19 pandemic, with popular tourist destination Rio de Janeiro in Brazil allowing nonessential businesses including restaurants and shops to return to normal operations.

As markets reopen, South American airline stocks that had lost more than half of their value due to the pandemic are feeling rejuvenated as well. Brazilian airlines Azul (NYSE:AZUL) and Gol Linhas Aereas Inteligentes (NYSE:GOL) each traded up more than 16% on Wednesday morning, and Chile's Latam Airlines Group (NYSE: LTM) soared 28% higher.

So what

Airlines around the globe have been hit hard by the pandemic, and Latin American airlines in particular have suffered due to bans on international travel. Latam and Colombia's Avianca Holdings have both filed for bankruptcy, and investors have been worried that other carriers, including Azul and Gol, would suffer the same fate.

A ground worker directs a plane to the terminal.

Image source: Getty Images.

The outlook for the sector, however, is improving as governments take initial steps to restart their economies. Rio de Janeiro is reopening tourist attractions and related businesses as a first step toward ending pandemic-related shutdowns. If all goes well, expect other major markets to follow.

Although Latam is up the most on Wednesday, it is also the stock with the most risk attached to it. The company filed for bankruptcy protection in New York and is now attempting to reorganize and eliminate some of its debt. Those debt holders are in front of equity holders in a bankruptcy, and it is likely that current shareholders will eventually be wiped out if and when the airline eventually emerges from bankruptcy protection.

Now what

There's plenty of reason to be skeptical about this rally. First, Brazil is taking steps to reopen even though COVID-19 cases are still on the rise. Hopefully, there will not be a second wave of the pandemic, but if there is one, whatever progress is being made today in reopening the economy is likely to quickly reverse.

And while the most important thing for the airlines is to get travelers flying again and revenue coming through the door, the Latam bankruptcy has complicated efforts by Brazil to provide financial assistance to other airlines. Reuters reports that a potential airline bailout bill is delayed until at least July due to the filing, which would affect not just Latam Brasil but also aid for Gol and Azul.

Long-term-focused investors should at best only take small, speculative positions in Gol and Azul, and should avoid Latam altogether. A recovery may be at hand, but it still looks like a turbulent ride ahead for these airline stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.