What happened

Airlines have taken investors on a turbulent ride this week, with the shares up on Monday but then down on Tuesday as confidence grew, then faded, over the prospects for a new round of stimulus for the industry.

On Wednesday a number of airlines received cash promised to them as part of the original CARES Act stimulus plan, and lawmakers again expressed hope that a new deal could be complete in the days to come.

That returned airline stocks to the green, with shares of American Airlines Group (NASDAQ:AAL) up as much as 5.4% on Wednesday morning, and shares of United Airlines Holdings (NASDAQ:UAL) and Spirit Airlines (NYSE:SAVE) each topping out up more than 5% as well.

So what

The COVID-19 pandemic has hit airlines hard, but for all the issues the industry faces, we've still had no layoffs and no U.S. airline bankruptcy filings. That's due in part to the CARES Act, which provided $50 billion in liquidity to U.S. airlines but also prohibited layoffs though Sept. 30.

The hope at the time was that by fall the worst of the pandemic would be behind us and life, including travel demand, would be returning to normal. That's not the case, and with the ban on layoffs soon to expire, the airlines are preparing to cut as many as 50,000 jobs in the months to come.

Exterior shot of an airport

Image source: Getty Images.

Lawmakers on both sides of the aisle have expressed support for a new round of funding designed to keep workers on the payroll, and the stocks are up on Wednesday on hopes that a deal could be near. Treasury Secretary Steven Mnuchin during an interview with CNBC on Wednesday said he's "hopeful" the White House and Congress can agree on a new stimulus plan.

In the meantime, the airlines continue to benefit from the original CARES Act support. The U.S. Treasury said Tuesday that seven airlines, including American and United, had finalized loans authorized by the stimulus legislation designed to give carriers the liquidity they need to survive the crisis.

Individual amounts were not disclosed, but American said last week it had finalized a $5.5 billion loan and could raise it to $7.5 billion if the money is not allocated elsewhere. 

American tends to trade with more volatility than other airlines due to the company's high debt load, which investors fear make it more vulnerable to a prolonged crisis and more in need of assistance. American could cut upward of 40,000 jobs in the coming weeks absent a new stimulus package, while United has a deal in place to avoid pilot furloughs but still plans on cutting more than 10,000 jobs unless lawmakers step in.

Spirit is a smaller airline and likely something of an afterthought as politicians look to save the nation's largest carriers. But assuming it can survive the crisis, Spirit is also one of the best-positioned carriers to thrive as demand slowly returns due to its industry-low cost structure and focus on leisure travel.

Now what

All eyes are on Washington right now, and airline stocks are likely to continue to move up and down based on whether investors believe lawmakers can hash out a deal to provide more funding.

It's worth noting that, thanks to the original CARES Act and private fundraising efforts by the airlines, all the U.S. carriers have ample liquidity to ride out the crisis for the next few quarters. The additional help would at least temporarily prevent layoffs and provide opportunities for airlines to quickly ramp up flying should demand return faster than expected, but there is no bankruptcy risk for now if the assistance doesn't materialize.

Long-term investors should try to block out the noise coming from Washington and focus on the bigger picture. The airlines are well positioned to survive, but stimulus or not, they will struggle through 2021 and perhaps beyond as they wait for travel demand to return to prepandemic levels.

Buy into the industry's best operators, keep airline exposure to a small portion of a well-diversified portfolio, and buckle up to ride out the turbulence.