What happened

On Wednesday, Wall Street was in panic mode due to the threat of the new COVID variant. But just 24 hours later, investors seem to be taking a much more sanguine approach to the threat posed by the omicron strain. Airline stocks are taking off as a result, with shares of Delta Air Lines (NYSE:DAL), American Airlines Group (NASDAQ:AAL), United Airlines Holdings (NASDAQ:UAL), Southwest Airlines (NYSE:LUV), Spirit Airlines (NYSE:SAVE), and JetBlue Airways (NASDAQ:JBLU) each up more than 5% at midday Thursday.

So what

Airline stocks were hit hard by the initial COVID wave, with travel demand all but evaporating as nations closed their borders and would-be travelers were told to stay at home to be safe. That led to massive losses for the industry in 2020, but the stocks have battled back in 2021 as vaccines have been introduced and demand begins to return.

A plane flies above a row of palm trees.

Image source: Getty Images.

We're off our lows, but the industry is still in a precarious position. So it is perhaps no surprise airline stocks fell more than the broader markets on Wednesday after the first U.S. confirmed case of the Omicron variant was announced.

That panic has largely subsided on Thursday, with markets seemingly taking comfort in reports that the Omicron variant might not be as lethal as previous iterations Analysts at JP Morgan seemed to sum up the mood of the market, calling the Omicron variant risk exaggerated and "highlighting worst-case scenarios."

For airlines, the important thing for investors to remember is that the U.S. industry was able to fly through the worst of the turbulence last year without any major bankruptcy filings. The industry's balance sheets are bruised but there are still levers that can be tapped in case demand slows down again. By and large, the airlines would only face potential liquidity issues in a worst-case scenario where the Omicron or some future variant leads to restrictions more severe than what we saw last year. Investors on Thursday appear to be growing in confidence that Omicron won't lead to that pessimistic outcome.

Now what

It's good news if the worst-case scenario can be avoided, but investors need to remember this recovery is still going to be a multi-year effort that will likely include plenty of volatility. The new variant has led to lockdowns and restrictions in other countries, and it will likely push back the time until lucrative international travel normalizes. Airlines in today's environment are generating enough revenue to keep the lights on and stay out of trouble, but the industry will not truly heal until we see a worldwide return to 2019 travel levels.

For those interested in investing in this industry's recovery, Delta and Southwest appear to be the safest picks. Delta was arguably the best-run airline in the industry prior to the pandemic, and has greater labor flexibility than most of its rivals. Southwest is the dominant U.S. domestic carrier, with costs that are lower than those of its largest rivals. 

But even with the top names, investors should buckle up and expect a long journey.

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.