What happened

Companies most impacted by the pandemic and that would benefit from a second round of stimulus were on the ascent on Monday on hopes lawmakers will act prior to the November election. Airline stocks were among the big beneficiaries of Wall Street's newfound optimism.

Shares of United Airlines Holdings (UAL -2.02%) and Delta Air Lines (DAL -3.04%) were both up 7% apiece as of 1:30 p.m. EDT, while shares of American Airlines Group (AAL -0.47%) and JetBlue Airways (JBLU 3.39%) were both up more than 6% and Southwest Airlines (LUV 2.08%) gained more than 5%.

It was a good day for the entire industry, with airlines including Hawaiian Holdings (HA -2.73%), Spirit Airlines (SAVE 3.57%), and Alaska Air Group (ALK 1.32%) all up more than 4%.

So what

Airlines have been hit hard by the pandemic, with second-quarter industry revenue down about 80% year over year as travel demand has all but evaporated. The U.S. industry has been able to avoid bankruptcies so far thanks in large part to $50 billion in government support provided as part of the CARES Act, but that money will soon run out.

The airlines accepted $25 billion in payroll support conditioned on them doing no involuntary separations through Sept. 30. With that date quickly approaching, airline investors and employees are bracing for drastic cuts this fall.

A second stimulus bill could change things. A new round of assistance for the airlines has the backing of elected officials from both parties and seems likely to be included in a new round of stimulus if one materializes, but with an election fast approaching there is no guarantee Washington will come together and pass an aid plan.

A traveler with a mask on walks through an airport.

Image source: Getty Images.

The stocks are up on Monday on renewed hope a deal could get done.

House Speaker Nancy Pelosi, appearing on CNN on Sunday, said the Democrats plan to unveil a new $2 trillion stimulus proposal that party leaders hope the White House will find more palatable than a previously floated $3 trillion plan. The White House had been seeking a smaller package, but Pelosi and Treasury Secretary Steven Mnuchin are expected to hold talks this week to try to work out a deal.

"When I have a conversation with the administration it is in good faith," Pelosi told CNN. "I trust Secretary Mnuchin to represent something that can reach a solution, and I believe we can come to an agreement."

United is leading the way higher on news its pilots had voted to approve a deal that would trade reduced flying hours for no pilot furloughs. The airline is still planning on cutting more than 13,000 jobs beginning in October absent a new stimulus deal, but keeping peace with its pilots is important if United is to recover post-pandemic.

Delta has not yet been able to negotiate a similar deal with its pilots, but that airline has agreed to delay a decision on furloughs until November to allow time for lawmakers to act.

American, meanwhile, provided investors with some reassuring news late Friday when it said it would tap the U.S. Treasury for $5.5 billion in loans. American is viewed as the most vulnerable among major U.S. airlines, and the added liquidity should help ensure that it can manage through the crisis without running out of cash.

Now what

The airlines are acting as if they believe a deal will get done and additional payroll protections will be forthcoming. That's good news, but investors need to be careful not to get ahead of themselves.

The pandemic-related travel slowdown is expected to last into 2022, if not longer, meaning at some point the industry is likely to run out of stimulus and have to shrink. Given it will likely take years for travel demand to return to pre-pandemic levels, it is going to be difficult for these stocks to really move higher in the quarters to come even if the government steps in with added help.

The stimulus, if nothing else, would help reassure that the worst-case scenario -- a bankruptcy -- can be avoided. That's good news and reason enough for me not to sell my airline shares. But for those looking to buy in now, it is best to focus on top-performing airlines with the best odds of recovering quicker and to keep the industry as only a small part of a well-diversified portfolio.