What happened

American Airlines Group (AAL 3.42%) expects its second quarter to land within the middle of its previous guidance, meaning the higher fuel and labor costs and network disruptions that have made headlines are not expected to weigh on results. The airline sector is flying high as a result, with American shares up as much as 10% and shares of Delta Air Lines (DAL 1.79%), United Airlines Holdings (UAL 12.80%), Southwest Airlines (LUV 2.26%), Alaska Air Group (ALK 2.56%), and JetBlue Airways (JBLU 1.00%) all up 5% or more.

So what

It is fair to say airline investors are on edge heading into earnings season. The much-hoped-for rebound in vacation travel demand has materialized this summer, but unexpectedly high fuel costs and a shortage of pilots have eaten into growth plans. Recent talk of inflation, and speculation that the Federal Reserve's effort to fight inflation would lead to a recession, has investors wondering what will happen to demand in the months to come.

On Monday, shares of American lost more than 5% based on analysis that it is not as well positioned as some of its rivals to fly through a downturn.

On Tuesday, American, which is scheduled to release earnings on July 21, went a long way toward easing those concerns by releasing updated guidance on the recently completed quarter. American said it expects revenue, non-fuel unit costs, and pre-tax margin to come in around the midpoint of prior guidance, with capacity down slightly compared to prior expectations.

American expects total revenue to be up 12% compared to the second quarter of 2019, prior to the pandemic, which is the midpoint of the 11% to 13% guidance issued in early June. Pre-tax margin is expected at about 5%, compared to previous guidance for 4% to 6%.

The airline is guiding for total revenue of about $13.4 billion, which compares favorably to the current Wall Street consensus estimate of $13.3 billion.

The bottom line is that strong demand, and the pricing power it brings, is doing enough to offset higher costs. If that's true at American, investors are betting it is also true at other carriers and sending the whole sector up in Tuesday trading.

Now what

Airline earnings season officially kicks off tomorrow, July 13, when Delta is expected to report. Delta has been viewed as a top operator for years and investors will be eager to hear what management has to say about the rest of the year, and specifically whether the company has seen inflation and recession fears eat into travel demand.

Investors have every reason to be relieved, but they need to remember that this remains a challenging, and uncertain, environment. Airlines had hoped to use the higher revenue from this summer to help pay down debt taken on during the pandemic, but with costs rising that added revenue is now just offsetting higher costs instead of dropping to the bottom line.

We're still a year or more away from the industry recovering from the pandemic, and a lot can go wrong in the meantime. For those interested in buying in and riding out the potential turbulence up ahead, Delta looks like a strong candidate to recover ahead of the pack and Wednesday's earnings call should be of particular interest.

For now, expect these airlines stocks to remain rangebound, trading up and down with broader sentiment about the economy and any updates on the pandemic.