Airlines Face More Uncertainty

Instead, expect to see asset sales and even some liquidations, should carriers operating under bankruptcy protection fail to restructure into viable businesses, said Becker and other industry watchers.

A liquidation from a carrier such as US Airways might help the industry's capacity problem, as its flight schedule disappears. But the beneficial effect would be very short-lived.

Much of the capacity freed up by the airline would be filled immediately by competitors seeking to grow by filling the vacuum, said William Swelbar, president and managing partner of Eclat Consulting in Reston, Va. "There will be sufficient capacity going back into the market where there's current demand," he said, adding that the losers in such a liquidation might be residents of smaller communities in upstate New York and Pennsylvania, where other airlines don't fill the gap. Still, the majority of the lost US Airways capacity would be quickly replaced.

Low-cost darling Southwest Airlines (LUV Quote - Cramer on LUV - Stock Picks), which posted a rare profit during the third quarter, might step in and scoop up planes at fire-sale prices, which would help it grow and further lower its costs.

But such a move would likely not help the overall industry, where capacity needs to come out of the system, said Cordle, who estimates capacity will grow 8% in 2004, well above a 2.8% average annual rate for the past two decades. "What's rational at the individual airline level in terms of growth is completely irrational at the industry level," he said. "By growing above its long-term growth rate, the industry is destroying its pricing power."

As excessive capacity erodes yields and expensive jet fuel burns cash, network carriers are struggling to lower labor costs to put them on a better competitive footing vs. low-cost rivals.

As an example of asset sales, ATA announced last week that it had reached agreement with AirTran Holdings (AAI Quote - Cramer on AAI - Stock Picks) whereby AirTran will assume ATA's gate leases at Chicago's Midway Airport and takeoff and landing slots at New York's LaGuardia Airport and Washington, D.C.'s, Ronald Reagan National Airport in exchange for $87.5 million.