American Airlines Group Inc. (NASDAQ: AAL) plummeted 9.62% to close at $11.46 on Thursday, as management's cautious Q3 outlook overshadowed the carrier's robust second-quarter performance.

American's steep decline occurred against modest gains in broader markets, with the S&P 500 rising 0.07% and the Nasdaq Composite advancing 0.18%, underscoring that industry-specific worries rather than systemic pressures drove the sell-off. Airline peers also retreated but to a lesser extent, with Delta Air Lines falling 2.27% to $54.71 amid similar soft travel demand concerns, while United Airlines dropped just 0.77% to $89.73, exhibiting greater resilience due to stronger premium revenue and superior balance sheet positioning.

Trading volume surged to approximately 119.4 million shares, indicating aggressive institutional repositioning as traders exited positions ahead of weaker near-term forecasts. The stock opened at $11.79 and traded within a range of $11.33 to $11.84, with the elevated volume combined with the substantial price decline signaling deliberate investor response to forward guidance concerns despite the company's solid quarterly execution.

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The U.S. government has announced plans to spend "tens of billions" to upgrade the air traffic control system, advancements that will hopefully help alleviate concerns about flying following a series of high-profile incidents.

The airlines are trading higher on the news, with Delta Air Lines (NYSE: DAL) and United Airlines Holdings (NASDAQ: UAL) each up 7% as of 1:30 p.m. ET and American Airlines Group (NASDAQ: AAL) up 5%.

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Image source: Getty Images.

Bringing order to in-air chaos

The nation's air traffic control system is in desperate need of an upgrade, and incidents this year including a fatal mid-air collision over the Potomac River in Washington, D.C. and a recent outage at Newark Liberty International Airport have some questioning whether it is safe to fly.

United Airlines has been forced to slash its busy summer schedule due to disruptions at Newark.

On Thursday, Transportation Secretary Sean Duffy outlined his proposal to fix the system during a Congressional appearance that also included several airline CEOs. The administration is urging Congress to approve billions in funding to replace aging radar and other equipment and overhaul the tech infrastructure.

Speaking elsewhere on Thursday, President Donald Trump said the government is "now in the market to buy a gorgeous brand new system" to handle air traffic control.

Though the changes cannot be implemented overnight, a change in the narrative away from focusing on the issues and toward fixing them could help boost demand for air travel.

Is now the time to buy airline stocks?

Unfortunately for the industry, airline investors have a lot more to worry about than just air traffic control modernization. This is a highly cyclical industry that is tied closely to the health of the consumer. When times are tough, households and businesses are more likely to cut back on travel than on paying for basic essentials.

On earnings calls this quarter, execs largely said that demand is holding up for now but could come under pressure if tariffs and inflation sustain into the summer. With that in mind, the stocks are also likely moving on progress on the trade war front.

Those considering buying in now should pay close attention to demand trends in the weeks and months to come. For investors willing to accept the potential for turbulence, Delta and United have industry-leading balance sheets and the scale necessary to take advantage of an uptick in interest in flying from here.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

Airlines are among the most discretionary sectors out there, tied closely to the health of the consumer. So, perhaps it is no surprise that the stocks are seeing an oversize reaction to reports suggesting key parties are moving to de-escalate the trade war gripping the U.S. economy.

Shares of JetBlue Airways (NASDAQ: JBLU) traded up 10% as of 10 a.m. ET, and shares of United Airlines Holdings (NASDAQ: UAL), Delta Air Lines (NYSE: DAL), American Airlines Group (NASDAQ: AAL), and Southwest Airlines (NYSE: LUV) were all up more than 5%.

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Clear skies up ahead?

We are only halfway through airline earnings season, but the message from the companies that have reported is clear: The industry is not seeing a dramatic fall-off from near-record demand, but executives are anticipating declines in demand should tariffs eat into the economy and cut consumer purchasing power.

Historically, airlines have been a bad sector to invest in during a recession. Households struggling to pay bills and afford groceries are unlikely to book vacations.

On Wednesday, investors were buying in hopes a worst-case scenario could be avoided. The market is up big on reports that the White House is mulling cuts to steep tariffs on Chinese imports, a move that could lessen the blow on consumers and lower the odds the U.S. falls into a recession in the second half of 2025.

Is now the time to buy airline stocks?

Investors should proceed with caution from here. The market has been volatile of late, trading up and down based on the latest tariff headlines. It is dangerous to try to get ahead of rumors, and until there are actual moves to de-escalate, it is possible these gains could evaporate just as quickly as they materialized.

For those willing to accept the turbulence and look past whatever near-term noise might be on the horizon, Delta and United are the safest investment choices from this group. JetBlue and American have relatively high debt burdens and questions about their revenue models, and Southwest is in the process of eliminating consumer-friendly policies and could see a backlash in the quarters to come.

United execs sounded an optimistic tone about the quarters to come even with the headwinds the airline is currently facing. If those headwinds recede, the airline looks best-positioned to gain altitude from here.

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Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $561,046!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $606,106!*

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.