What happened

The headlines surrounding the COVID-19 pandemic continue to drag on markets, quashing any lingering hopes that the airline sector will enjoy a quick turnaround. The U.S. hit a grim milestone on Thursday as the number of confirmed cases passed the 3 million mark, leading airline shares to lose altitude.

Shares of United Airlines Holdings (NASDAQ:UAL) were down 6.7% as of 11:30 a.m. EDT, while shares of American Airlines Group (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), JetBlue Airways (NASDAQ:JBLU), Spirit Airlines (NYSE:SAVE), Hawaiian Holdings (NASDAQ:HA), and Allegiant Travel (NASDAQ:ALGT) were all down more than 5%.

Even the relative winners in the sector were underperforming the broader markets, with shares of Southwest Airlines (NYSE:LUV) and Alaska Air Group (NYSE:ALK) each down more than 3% apiece.

So what

Airlines have struggled due to the pandemic. Second-quarter revenue is expected to be down 90% year over year due to a fall-off in demand for travel. The sector was priced as if bankruptcies were inevitable in late March and early April, but has recovered somewhat as the U.S. economy began the slow process of reopening.

Travel demand has rebounded off the March lows, providing some reason for optimism. But in recent weeks we've seen the fragility of that rebound. On Thursday, the markets were fixated on headlines showing how dangerous the pandemic still is, with California reporting its largest one-day jump in new cases and Florida reporting a record 120 deaths over a one-day period.

A plane flies above the clouds.

Image source: Getty Images.

The rebound in travel demand has been fueled almost entirely by pent-up summer vacation demand to states such as Florida and California, which are now experiencing the highest jump in new cases.

Add it all up and there appears to be little chance there will be a quick rebound for the airlines. Rather, it appears increasingly likely there will be massive layoffs in the sector come fall.

American and United are also having troubles rebuilding their international schedules due to the pandemic. Both airlines suspended flights to Hong Kong on Thursday over concerns about a new coronavirus testing regime that could mean their crews would be subject to a 14-day quarantine.

Now what

The good news: The airlines have ample liquidity to survive a prolonged downturn, and no company in the sector is a near-term bankruptcy risk. The U.S. industry has raised nearly $50 billion in private debt and equity funding so far this year to go along with a similar amount of government funding.

The bad news: The pandemic and its aftereffects are likely to weigh on the industry well into 2021, and perhaps into 2022. A lot of sectors of the economy are going to recover before airlines.

For long-term holders who believe travel demand will eventually recover, there are likely good values among these stocks at these prices. But the momentum that was building in May and June is now gone, and the stocks are sinking as a result.