When looking at airline stocks right now, it is really a question of whether you view the glass as half full or half empty.

Second-quarter earnings, as expected, were woeful. But they could have been a lot worse. Travel volumes have risen dramatically from April lows, but are still just a fraction of more-normal levels. U.S. carriers have avoided bankruptcy so far, but their futures are in no way secured.

It's a dangerous time to be an airline investor, but with stocks trading at below 0.5 times more normalized sales, there is the opportunity for substantial returns if the industry is able to eventually fly through this rough patch. Here are four thoughts coming out of earnings season about what's ahead for the industry.

Airplanes parked at gates at an airport.

Image source: Getty Images.

We will shrink, not grow, from here...

Investors rallied into airline shares in early summer as the companies began to restore flights, hopeful that the worst was over and conditions were returning to normal. That optimism ended up being premature.

Passenger volumes bottomed out on April 14, a day when the Transportation Security Administration screened just 87,000 travelers. That number has grown in the months since to more than 700,000 on many days in late July, though that is still well below the 2.7 million travelers going through U.S. airports daily a year ago.

Airlines were adding flights in early summer in part because there was limited downside. A provision of the CARES Act stimulus legislation provided the industry with $25 billion to help meet payroll, conditioned on the airlines avoiding layoffs and involuntary furloughs.

That means airlines were paying their employees whether they were flying or not. The payroll subsidies, coupled with cheap fuel prices and a desperate need for whatever revenue could be had, led the airlines to fly flights that might not have made economic sense in more typical times.

Those conditions will unravel in the months to come. The payroll protections, and layoff restrictions, end on Sept. 30. The end of summer also means a decline in leisure demand, which was responsible for most of the resurgence. Expect airline workforces and schedules to shrink in the months to come, with a full recovery to pre-pandemic levels not likely before 2022 at the earliest.

...unless the government wants to play ball

The wild card right now is Congress, and specifically whether lawmakers are receptive to calls that they extend the payroll protections for another six months.

Airline unions are lobbying for added protections to be included in a second round of stimulus, and airlines are increasingly rallying behind the cause as well. Still, additional financial aid for the industry seems like a long shot at this point.

The initial round of airline assistance was not without controversy, and with an election just months away, it figures to be even more difficult this time around. And while the airlines are supportive of the union effort, it is unclear whether the industry will be willing to make the same concessions that secured the last round of aid.

A passenger on a plane wearing a mask.

Image source: Getty Images.

The airlines traded stock warrants for some of the payroll protection last time around, but it is hard to imagine the industry easily agreeing to a similar arrangement this time around. If the recovery does take years, then at some point the airlines will need layoffs, and it might not make financial sense for the companies to give up too much just to prolong the inevitable.

Given the uncertainty about when demand will return, the airlines might like the flexibility afforded by having workers on standby. But then again, given the global nature of the pandemic, laid-off workers don't have the option of going overseas to find work, as pilots often do when times are tough in the U.S.

All eyes are on the balance sheets

The industry has been able to avoid bankruptcies in large part because the airlines have had success in raising new funds in the middle of a crisis. That's an impressive feat in and of itself, but it hasn't come cheap.

U.S. airlines have raised more than $50 billion in private funds to go along with a similar amount of government cash largely by selling new shares and adding new debt. The good news is that shareholders so far have avoided being wiped out in bankruptcy. The bad news is that the new shares dilute ownership, and the new debt will haunt corporate balance sheets for years.

Much of the debt has been backed by aircraft and other equipment, and is long-term in nature, so airlines have time to wait out a recovery before needing to repay what has been borrowed. But even assuming the airlines survive the downturn, the debt will limit share repurchases, dividends, and expansion plans perhaps through the rest of the decade.

Not all airlines are created equal

We've seen subtle differences in the way the airlines have approached this crisis. Investors should watch closely as those differences play out in the months to come, and choose stocks carefully based on what they have seen.

Broadly speaking, American Airlines Group (AAL 1.12%) and United Airlines Holdings (UAL 0.43%) have been more aggressive in adding flights, while Southwest Airlines (LUV 0.26%) kept a fairly broad schedule open for booking throughout the worst of the crisis in order to better gauge demand.

Southwest and Delta Air Lines (DAL 0.56%) have also been more conservative when it comes to safety policies, forgoing middle-seat revenue in hopes of reassuring passengers it is safe to fly.

Southwest has the best balance sheet, while Delta has done well moving toward cash flow breakeven. American has the most debt and came into the crisis the most vulnerable of the major airlines, but has done good work managing costs and raising cash. It should be able to weather a multiyear storm.

Four months into this crisis, I remain optimistic the U.S. airlines can avoid bankruptcy. But I also remain convinced there will be no quick turnaround. For investors with the stomach to handle the turbulence, I'd advise sticking to stocks like Southwest and Delta that should have the financial strength to survive whatever is ahead. And buckle up.