What happened

Airline shares soared higher at the open on Thursday, propelled by a move by American Airlines Group (NASDAQ:AAL) to aggressively boost its flight schedule for July in response to growing demand for travel.

Shares of American were up 11% as of 10 a.m. EDT, while shares of Spirit Airlines (NYSE:SAVE) were 13% higher. The rally extended to the entire industry, with Delta Air Lines (NYSE:DAL), United Airlines Holdings (NASDAQ:UAL), Southwest Airlines (NYSE:LUV), Alaska Air Group (NYSE:ALK), JetBlue Airways (NASDAQ:JBLU), Hawaiian Holdings (NASDAQ:HA), and Allegiant Travel (NASDAQ:ALGT) all up 3% or more.

So what

Airline stocks have been hit hard by COVID-19, with global travel demand for a time falling 95% year over year due to the pandemic. All of the stocks lost half their value or more during the early days of the pandemic on fears that bankruptcies were inevitable.

The industry is stable for now, thanks to private fundraising efforts and cash provided as part of the CARES Act stimulus plan. But the added liquidity only buys the companies time. For the industry to truly recover, we're going to have to see demand, and with it revenue, return.

In recent weeks the stocks have been climbing on growing evidence suggesting the industry has bounced off the lows in demand.

An American Airlines plane exiting a hanger.

Image source: American Airlines Group.

American provided a fresh boost of confidence on Thursday, saying this July it will fly more than 55% of its domestic capacity from a year ago. That's up from 20% of its schedule in May and 25% in June. International travel is also slowly returning, with American planning to fly about 20% of its July 2019 international schedule next month.

We're still in recovery mode. On peak days American will fly 4,000 flights in July, compared to 6,800 daily flights prior to the COVID-19 crisis. But the July totals are double the airline's daily average for May. American carried about 110,000 passengers per day in the last week of May, up 71% from 32,000 average daily passengers in April.

"We're seeing a slow but steady rise in domestic demand. After a careful review of data, we've built a July schedule to match," American's senior vice president, Vasu Raja, said in a statement. "Our July schedule includes the smallest year-over-year capacity reduction since March. We'll continue to look for prudent opportunities to restore service so our customers can travel whenever and wherever they are ready."

Now what

The industry is heading in the right direction, but be warned it still has a long way to go. As American shows, even with growing demand the companies are still operating at a small percentage of their capacity prior to the pandemic. Even in the best-case scenario, demand will likely take years to fully recover.

There is still a real risk of a second wave to the pandemic, or that a sluggish economy will keep lucrative corporate travelers away. American's schedule expansion is fresh evidence suggesting it's safe to buy airlines, but investors should stick to top performers and not take on unneeded risk until it's clear the pandemic is behind us.

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