What happened

The International Air Transport Association (IATA) now expects even fewer people to fly in 2020 than previous estimates, a stark reminder of how hard the COVID-19 pandemic is hitting aviation. Those numbers, coupled with continued uncertainty about whether U.S. lawmakers will come through with another round of stimulus and new negative headlines about the pandemic, has airline shares under pressure on Tuesday.

JetBlue Airways (JBLU 1.06%) is leading the downward push on the day, down as much as 5.6% midday, while shares of American Airlines Group (AAL -0.36%) fell as much as 5.1% and shares of United Airlines Holdings (UAL -1.47%) were down 4.7%.

So what

The airline industry is in a state of crisis due to the pandemic, which has caused revenue to fall by as much as 80% year over year. Passenger volumes are not expected to return to pre-pandemic levels until 2022 at the earliest, leaving airlines scrambling to cut costs to weather a prolonged downturn.

The situation would be far worse if not for the CARES Act stimulus package, which provided the industry with up to $50 billion in government funds in exchange for conditions including a temporary prohibition on layoffs. Those limits expire Sept. 30, and the airlines are now waiting to see whether Congress acts to extend the payroll protections and provide more funding.

An empty airport interior.

Image source: Getty Images.

The stocks were up on Monday thanks to comments by both Democrats and Republicans expressing interest in a new stimulus effort, but are losing some of that momentum a day later as the reality of how hard it is for Washington to pass anything this close to an election sinks in. Absent new stimulus the airlines are expected to cut payrolls significantly, leaving tens of thousands of workers without jobs.

The issue for airlines is there is simply not enough revenue coming in to support their pre-pandemic networks. The IATA said Tuesday it now expects global traffic to be down 66% for the year, worse than its previous estimate for a 63% decline. The group cited a "dismal" end to the summer travel season in the Northern Hemisphere for the revision.

"August's disastrous traffic performance puts a cap on the industry's worst-ever summer season," IATA director Alexandre de Juniac said in a statement. "A few months ago, we thought that a full-year fall in demand of -63% compared to 2019 was as bad as it could get. With the dismal peak summer travel period behind us, we have revised our expectations downward."

There are a lot of headlines on Tuesday reminding airline investors the pandemic is far from over. German Chancellor Angela Merkel warned her country could be entering a "second wave" of the pandemic, while in the U.S., the NFL is closing some facilities after positive tests.

JetBlue is under particular pressure because that airline is planning an expansion into the fall to try to soak up whatever revenue is out there, adding risk. American has the highest debt load in the industry and is seen as among the most vulnerable carriers in the event of an extended downturn. The company has aggressively tapped the Treasury Department for what funding is available, and has said it could seek more.

United has a deal in place to avoid pilot furloughs, removing a key uncertainty, but the company still is likely to furlough thousands of non-pilot workers in the months to come absent a new stimulus package.

Now what

The airlines for months now have been moving in lockstep based on investor sentiment about the pandemic and the prospects of a recovery. Monday's jump, and Tuesday's pullback, continue that trend.

It's going to be hard for these stocks to really break out until the pandemic is behind us and travel patterns begin to normalize, which appears unlikely to happen in 2020. Investors should be prepared for continued turbulence in the quarters to come.

For long-term holders able to block out the noise, I believe it is safe to hold airlines as a small part of a well-diversified portfolio. But it is best to stick to top-performing airlines with the best odds of recovering faster than the industry as a whole.