What happened

Airline shares soared higher on Monday after a prominent Wall Street analyst came out with a bullish report on the sector. It's a "risk on" day on Wall Street, with broader markets brushing off spikes in COVID-19 cases and focusing on economic data. Airline shares are going along for the ride.

Shares of Southwest Airlines (NYSE:LUV) are leading the sector higher, up 10% as of 2:30 p.m. EST, while shares of American Airlines Group (NASDAQ:AAL) and Spirit Airlines (NYSE:SAVE) are both up 8% apiece. United Airlines Holdings (NASDAQ:UAL), Delta Air Lines (NYSE:DAL), JetBlue Airways (NASDAQ:JBLU), Alaska Air Group (NYSE:ALK), and Hawaiian Holdings (NASDAQ:HA) are all up more than 6%.

So what

Airlines have been hit hard by the pandemic. The industry expecting second-quarter revenue to fall 90% year over year. We've seen the early signs of a recovery in travel demand, but the industry is still vulnerable as new cases soar in Florida, Texas, California, and other key tourist destinations.

But Goldman Sachs analyst Catherine O'Brien is feeling more confident the airlines can survive the downturn, issuing a double upgrade of Southwest and raising her price target on a number of other airlines. O'Brien in a note wrote that passenger volumes are rising off of April lows, and there appears to be pent-up demand for air travel.

An airplane taking off.

Image source: Getty Images.

Traffic volumes remain well off last year's levels, but O'Brien notes airlines have made steady progress bringing down cash burn rates to better survive the downturn. The analyst raised her price target on Alaska Air to $63 from $51, Delta to $38 from $33, United to $61 from $40, Spirit to $20 from $15, and JetBlue to $17 from $12.

There wasn't much good news concerning new COVID-19 cases over the weekend, with the numbers continuing to spike in a number of states. But Monday did bring positive economic data that provided markets reason for hope. Pending home sales climbed much faster than expected, a hopeful sign that the pandemic has not brought the economy to a grinding halt.

Boeing also got a lift as its grounded 737 Max took flight Monday for a recertification flight. While airlines remain in survival mode and aren't clamoring for new deliveries, a number of the largest U.S. airlines have 737 Max planes on order. Getting the plane back in service is important to the long-term future of the industry.

Now what

Back in March, when the pandemic battered markets, the fear among investors was that the crisis would force a number of airlines into bankruptcy. Thanks to the airlines' success in raising both private funds and government assistance, that fear has diminished, but the airlines still face a rough patch up ahead.

Even in the best-case scenario, it's going to take years for schedules to fully recover to pre-pandemic levels. The airlines are prohibited from doing layoffs through Sept. 30 as a condition for receiving government assistance but appear likely to reduce headcount this fall. This will be a smaller industry for the foreseeable future.

If the pandemic does force another round of closures around the U.S., that timeline could be stretched out even further. For those with a long time horizon and a tolerance for risk, I think it's safe to buy into airline stocks, but keep the sector as a small part of a large, diverse portfolio and focus on top names with the strongest businesses.

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.