What happened

Earnings reports from retailers out this week are raising new questions about the health of the U.S. consumer, with companies including Walmart and Target reporting that people are resilient but focusing more on necessities than on frills in the face of higher inflation.

If so, that's bad news for travel and leisure companies that tend to do best when people have money to spend on extras. Investors are reacting by exiting airline stocks, with shares of JetBlue Airways (JBLU 4.33%), United Airlines Holdings (UAL -1.56%), American Airlines Group (AAL -5.43%), and Delta Air Lines (DAL -1.40%) ending Wednesday down between 2.3% and 4.9%. 

So what

Airline investors are already dealing with the lingering effects of the pandemic, a pilot shortage, and higher costs. The last thing they need is for demand to fall off.

But that is exactly what has happened, historically, in times of economic distress. When times are tough, consumers and businesses continue to pay to keep the lights on but tend to defer big-ticket purchases like airline tickets.

The airlines had come into 2022 hoping pent-up demand would lead to a spike in revenue, allowing the industry to pay down some of the debt taken on during the earlier days of the pandemic. The revenue has arrived as expected, but a lack of personnel to fly the planes has limited their ability to take advantage of that demand. Airlines are ramping up staffing as quickly as they can, and can ill-afford a sudden U-turn in demand.

For JetBlue, the threat of a recession is particularly pronounced because the airline has a deal pending to acquire Spirit Airlines, whose stock was down less than 1% today. That deal is predicated on growth, and could turn into a near-term disaster if the economy hits a significant rough patch.

American, as the most indebted major airline, tends to move more than its peers on economic concerns. And United's network is built for corporate and international travel, meaning it could struggle if businesses pull back due to uncertainty.

Now what

It's worth noting that the airlines, along with the broader markets, got a lift midafternoon after the minutes from the latest Federal Reserve meeting were released. The minutes show a Fed that is still concerned about inflation, but seeing signs that some of the rate hikes were beginning to have an impact and that a recession might be avoided.

The so-called "soft landing" scenario, where the Fed can tame inflation without inducing a recession, is the best-case scenario both for airlines and the broader economy. Any sense that government officials have the situation under control is likely to ease investor anxiety, and prevent panic selling.

But no matter what happens from here, there is no quick-fix that will get airlines back to pre-pandemic conditions immediately. It will take time, patience, and the ability to navigate continued headwinds. The debate over airline stocks right now isn't bull vs. bear, but rather how bad things will be and for how long. In such an environment, it is no wonder that the stocks are caught up in a marketwide, inflation-related sell-off.