The Good, Bad and the Ugly of Airlines

Now that some resolution in Iraq is no longer an uncertainty, investors are hunting for hot places to put their money. But those who belly up to airline stocks are playing a high-stakes game of boom or bust.

The Air Transport Association, an industry trade group, said any terrorist attack combined with a second Gulf War, could cause the entire industry to go belly up. According to the ATA, losses will be staggering and some, such as AMR (AMR), parent of the nation's largest carrier, American Airlines, could be forced into bankruptcy as travel demand falls off a cliff.

"I've been talking to some very experienced travelers who aren't afraid to fly and they're just afraid of getting caught flying in a war," said Allan Miller, associate professor of travel marketing at Towson University. "Until this is resolved, things will be very, very bad."

With ticket prices at 20-year lows, the industry is unable to lower prices any further, burdened by taxation from the government that's on par with cigarettes, gasoline and booze. Most airlines have terrible balance sheets, as three years of using cash to cover expenses have pushed debt-to-cap ratios sky high. Costs are soaring, especially when it comes to fuel, and by the end of the year, some carriers face huge pension issues.

After losing nearly $20 billion in 2001 and 2002, the industry is expected to lose close to $7 billion in 2003 -- and that's a best-case scenario. But this isn't to say there's no silver lining, perhaps. "Once the war is straightened out, the airlines will start up again, especially because of the pent-up demand for both business and leisure travel alike," said Miller.

Indeed, some Wall Street analysts have lightened up -- just a bit -- when it comes to investing in airlines. On Wednesday, J.P. Morgan's Jamie Baker advised clients to buy depressed airline stocks 24 hours before the bullets start flying in the Gulf. "A relief rally, exacerbated by declining oil prices and potential transatlantic recovery, could potentially drive 100% to 150% upside from current levels," he wrote.