What happened

Airline shares are under pressure again on Friday as it continues to grow more apparent the United States is going to be dealing with the COVID-19 pandemic for a considerable amount of time. If so, the fragile beginnings of a travel recovery could be threatened, and the airlines are going to need to weather a prolonged downturn.

Spirit Airlines (NYSE:SAVE) led the sector lower with a 7.3% decline as of 11:45am EDT Friday. American Airlines Group (NASDAQ:AAL), which on Friday announced plans to lift capacity restrictions despite the growing number of cases, and United Airlines Holdings (NASDAQ:UAL) each traded down more than 5%.

The rest of the airlines were also under pressure, with Hawaiian Holdings (NASDAQ:HA) and Allegiant Travel (NASDAQ:ALGT) down 4% apiece and Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), JetBlue Airways (NASDAQ:JBLU), and Alaska Air Group (NYSE:ALK) each down more than 3%.

So what

The airline industry has been decimated by the pandemic, with second-quarter revenue expected to be down 90% year over year as demand for travel dropped to near zero in March and April. The shares have bounced off of April lows in recent weeks on signs that there is pent-up demand for travel and slow growth in ticket sales, but increasing COVID-19 cases in a number of tourism-focused states is putting that rally in jeopardy.

Texas is now rolling back some of its planned reopenings due to an increase in hospitalizations, with bars and taverns forced to suspend operations on Friday. Elsewhere, theme park plans to reopen are in jeopardy as case numbers jump in Florida, and throughout the Sunbelt states are grappling with new COVID-19 concerns.

A plane landing at night.

Image source: Getty Images.

Airlines have done a good job raising cash to try to ride out the crisis, by some estimates raising nearly $50 billion in debt and equity financing on top of a similar amount of government support. But with large airlines burning through $40 million or more per day, no amount of cash will sustain operations indefinitely. The increase in new cases suggests we are in for a long, slow recovery, putting pressure on airline stocks.

On Friday, American announced a move that highlights the difficult position the airlines are in. American said it would lift capacity restrictions and offer all seats for sale beginning on July 1, even as the number of new cases continues to grow. The move will give American the opportunity to generate more revenue from each flight, but could put the airline at a competitive disadvantage against rivals who are keeping capacity restrictions in place through the summer.

Now what

The good news is none of the airlines are an immediate bankruptcy risk even if case numbers continue to surge thanks to the liquidity the industry has raised in recent months. The bad news is that even in the best-case scenario where travel recovers faster than expected, these companies now have billions in new debt obligations that will weigh on balance sheets, and earnings, for years to come.

The airlines are going to face tough choices in the months to come. The industry is barred from cutting jobs through Sept. 30 as a condition of the government funds they received as part of the CARES Act, but given the slow trajectory of the recovery it seems likely employment levels will fall dramatically in the months to come.

Investors need to tread carefully. I believe the industry can avoid bankruptcy filings, but with so much uncertainty about the pandemic still clouding the outlook, there are no guarantees. For those bold enough to buy in, it is best to limit airline stocks to a small part of a diversified portfolio and focus on the top operators who are the most likely to survive whatever comes next.