Airline Stocks Are Falling. What Next?

With the opening of the markets Monday morning, the expected plunge in airline stocks has begun. By midday, shares of the major airlines such as AMR (AMR Quote), parent of American Airlines, United Airlines (UAL Quote) and US Airways (U Quote) are down more than 40% from where they closed last Monday.

Travel-related stocks are also taking a hit, as shares of Travelocity (TVLY Quote) are now trading down 33% and shares of Expedia (EXPE Quote) are down by 30%.

Shares in Continental Airlines (CAL Quote), which over the weekend announced schedule cutbacks and employee furloughs, are trading down 51% from their previous close.

Will this selloff continue? I expect the stocks to rebound slightly before the closing bell. Why? Because I believe the government will agree to bail out the industry financially in some fashion this week. In addition, we've already seen a bit of stabilization from the early rock-bottom lows the stocks posted as they first began to trade.

Let's look at the economic factors affecting particular airlines.

First, remember that American Airlines and United Airlines have a bigger economic threat to contend with than the rest of the companies in the sector. Both airlines also face the question of liability in regard to the crashes that occurred last week in conjunction with the terrorist attacks against the U.S.

The two airlines are lobbying for legislation that would protect them from additional liability associated with the crashes -- other than to their own passengers. The carriers say they were not negligent, and that such potential liability would certainly bankrupt both airlines.

Let's face it: Without this legislation, both airlines could be held potentially liable not only for the deaths of passengers, but for the deaths of those killed in the Pentagon and the World Trade Center buildings as well.

As of Monday morning, no Congressional relief had been determined for the carriers.

One other important note: The government is being very tight-lipped about when, or if, it will reopen Reagan National Airport in Washington, D.C. The closure affects many airlines, especially US Airways, which uses Reagan as a hub.

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The larger question for investors is whether Congress will OK some type of financial bailout for the industry. Or whether a number of major airlines could be filing for bankruptcy in the next two months.

With four major airlines announcing cuts of 20%, the revenue picture the airlines is facing is pretty clear.

The industry is estimated to have lost at least $300 million a day over the weekend. Even Monday morning, airlines were still not up and running at 100%.

As for future passenger revenue, a great number of people are simply afraid to fly now. The entire world watched in horror Tuesday as terrorists succeeded in turning four commercial airliners into bombs. As a result, airlines -- which had already seen high-yield business traffic virtually disappear over the past few months -- can expect to soon be flying with unprecedented low levels of passenger loads.

Going into last week, the airline industry was already on track to lose at least $2.1 billion this year, with many analysts, including myself, anticipating much higher losses before the end of the year.

So beginning Tuesday, airline executives will be meeting in Washington in an attempt to get financial help from the government.

What could the government do? It could immediately waive the payment of numerous aviation taxes the airlines are required to pay. The government could eventually agree to take over responsibility for airport security, and it could also reimburse carriers a flat amount as a result of losses incurred last week.

Two things are certain: The airlines will get some relief. What happened last week in terms of a shutdown was not their fault, and the Defense Department relies heavily upon the airlines as part of its Civil Reserve Air Fleet program. The government does not want to see the bulk of its major airlines in bankruptcy protection.

But the government also has to be careful not to penalize healthy airlines by doling out money to those that didn't have healthy balance sheets going into last week. As one reader said to me over the weekend, "I agree that they need help, but I sure don't want my tax dollars helping to pay Stephen Wolf's [US Airways] $75 million bonus."

Finally, there is another factor that could be a big positive for long-term airline investors. With the actions of last week, airlines are now free to break union contracts in terms of furloughing employees. Language within all industry contracts allows this to occur when an airline is faced with a situation "beyond its control."

As a result, if the airlines can get through this rough spot -- and surely, it is a rough one -- think of the long-term possibility. The horrible situation the industry now finds itself in could actually allow airlines to become much leaner and financially productive entities.

Just a thought.