What happened

Airline shares were under pressure on Wednesday as a number of carriers updated their outlook for the third quarter, highlighting the slow pace of the industry's recovery. Concerns that the U.S. government will not be offering any further assistance also weighed on the shares.

Shares of American Airlines Group (NASDAQ:AAL) led the way down, off by as much as 6.1% at one point, while shares of Spirit Airlines (NYSE:SAVE) were off by nearly 6% and Southwest Airlines (NYSE:LUV) shares were down nearly 5% on a highly volatile trading day for the sector. Every U.S. airline stock is down as of 2:30 EDT, even as the S&P 500 is up more than 2.3%.

So what

The airlines have been hit hard by the COVID-19 pandemic, which has limited air travel for much of the year and depressed industry revenue. The carriers are not expecting traffic to return until after there is a widely distributed vaccine, but the stocks in recent months have tended to trade up and down on any guidance that would suggest a quicker, or slower, recovery.

Airplanes parked at an airport.

Image source: Getty Images.

The stocks got a lift on Tuesday after a relatively busy Labor Day holiday weekend, but airline management teams threw cold water on that optimism on Wednesday. In a series of regulatory filings and presentations at a Wall Street conference, industry leaders said to expect a slow, choppy recovery.

United Airlines Holdings cut third-quarter guidance and said it does not expect the recovery "to follow a linear path." American, meanwhile, said it was in discussions with Boeing about deferring the delivery of 18 737 MAX jets and said it is considering applying for more U.S. Treasury loans as it looks to boost its total liquidity.

Fears that airlines will be excluded from any new stimulus plan passed in Washington were also weighing on the stocks. The industry received $50 billion as part of the CARES Act, including $25 billion conditioned on the airlines doing no layoffs prior to Sept. 30. Union leaders are in Washington this week lobbying for an extension of that funding, and the layoff prohibition, but airlines are not part of draft legislation floated by Senate leadership.

Absent an assist from Washington, look for the airlines to aggressively shrink their operations in October. American has said it could shed up to 40,000 jobs, while Spirit and Southwest, along with United, have deals in place to cut costs while avoiding pilot furloughs.

Now what

I said on Tuesday when the stocks were higher on the Labor Day travel numbers not to get too excited about one data point. I'd advise the same today as investors are selling off due to the planned cuts. The airlines are facing a multi-year recovery that is likely to be full of false starts and loaded with volatility.

The industry continues to burn through cash at an alarming rate, but fortunately even the weakest of the airlines, American included, have billions in liquidity to fall back on. The efforts to bring down costs will provide more time, and hopefully allow the industry to avoid bankruptcy filings.

For investors, it is best to focus on the long term. I believe it is safe to invest in airline stocks, but would advise limiting the industry to a small part of a diversified portfolio and sticking to shares of Southwest and other top airlines with the best odds to make it through the crisis.

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.