What happened

There is growing anxiety that the so-called Delta coronavirus variant will crimp the global economy and lead to a fresh round of travel restrictions. Airline stocks were under pressure on Monday as a result, with Delta Air Lines (DAL -0.71%), American Airlines Group (AAL -0.72%), United Airlines Holdings (UAL 0.55%), Southwest Airlines (LUV -1.34%) JetBlue Airways (JBLU -1.99%), Allegiant Travel (ALGT -3.71%), Alaska Air Group (ALK -1.85%), Spirit Airlines (SAVE -0.46%), Hawaiian Holdings (HA 0.07%), Sun Country Airlines Holdings (SNCY -1.43%), and Frontier Group Holdings (ULCC -2.20%) all falling 5% or more at the open.

The sell-off was global, with Brazil's Azul (AZUL -2.77%) also off more than 5%.

So what

Airlines suffered through a miserable 2020 due to the pandemic, which all but wiped out demand for travel. Vaccines have brought a resurgence in demand and in stock prices, but there is growing reason for concern that the rally is not sustainable.

Airplanes parked at an airport terminal.

Image source: Getty Images.

The Dow Jones Industrial Average traded down more than 2% on Monday morning as a surge of coronavirus cases, including in highly vaccinated countries, raises concerns that the virus will be a long-term weight on the global economy. With a rise in new cases in U.S. domestic tourism hotbeds like Florida, it is possible that the summer travel surge will fall off, which would reverse some of the progress airlines have made since the beginning of the pandemic.

The resurgence is an issue for all airlines, regardless of their focus. Discounters including Southwest, JetBlue, Spirit, and Allegiant are focused on the U.S. domestic leisure traveler, and Spirit in particular was seen as a strong candidate to be the first airline to fully recover from the pandemic, assuming tourism demand doesn't fall back. Sun Country and Frontier are relatively new market entrants, with both airlines going public this year, and investors are worried they might not have the wherewithal to survive a repeat of 2020.

Delta, American, and United, meanwhile, have been focused on domestic flights of late but historically have generated better margins on international travel. The latest surge in new cases has likely pushed back the timetable on the return of international travel. And Azul has been a standout among Latin American airlines, but given Brazil's issues with the pandemic and the importance of international travel to the region's carriers, Azul is going to feel the strain of an uptick in new travel restrictions.

Now what

There have been enough twists and turns to this story over the past year-plus that I'd advise against too much panic or too much optimism. The airlines are once again trading on near-term sentiment, and not long-term fundamentals, because investors are not sure what to expect next from the pandemic.

With the sell-off, much of the U.S. domestic industry is down for the year. Back in March, I worried that the valuations had gotten ahead of themselves, but for long-term investors able to look past the turbulence, the stocks are beginning to look more reasonable. I'd focus on Southwest and Delta as long-term leaders with stable finances -- and avoid American, which entered the crisis behind its peers in terms of revamping its business and which continues to lag its rivals in terms of expectations.

The airlines as a group remain relatively healthy and should be able to weather whatever comes their way next. But those who own the stocks should fasten their seatbelts ahead of an uncertain ride.