Updated from 7:35 a.m. EST

Bankruptcy ruins stockholders, puts employees out of work and depresses business at most of the companies that resort to it. But bankruptcy is increasingly proving a friend to the U.S. airline industry.

Over the past week, Chapter 11 of the U.S. Bankruptcy Code has been a boon to three airlines trying to slash gargantuan cost structures, especially the wages and benefits that unions are normally loath to give up. The tactic enabled

US Airways

(UAWGQ)

to emerge from bankruptcy protection Monday as a leaner airline with a much better chance at riding out the current economic storm.

"US Air came out of bankruptcy, which was part of their plan, and except for the fact that the timing is terrible

due to the war, it's great news," said Nicholas Owens, airline analyst at Morningstar. "It's an effective way for airlines to restructure their businesses. The thing about bankruptcy is that it's a better bet than going out of business, but it's still stressful and expensive. I wouldn't make a blanket pronouncement that everyone in the industry should try it."

Tough Medicine

US Air makes a good -- if sobering -- case for bankruptcy's effectiveness at a time when the war in Iraq has devastated the travel industry. After less than eight months in Chapter 11, the carrier emerged with $1.9 billion taken out of annual costs, and total debt of $8 billion, down from $10.65 billion. Since Sept. 11, the company has cut 36% of its workforce, 30% of its available seats and 26% of its flights.

Because of the wage concessions gained while under bankruptcy, US Air is much more attractive to the Air Transportation Stabilization Board, a government organization created after Sept. 11 to provide liquidity to struggling airlines.

On Monday, the ATSB officially gave US Air a $900 million loan guarantee, which the carrier will use to back $1 billion in private financing. Additionally, the Retirement Systems of Alabama will invest $240 million in the company in exchange for a 37% stake in the restructured entity.

Another bankrupt carrier,

UAL

(UAL) - Get Report

, the parent of United Airlines, has been using the courts to force labor unions into rewriting their labor agreements for fear a judge will be less sympathetic and simply cancel them.

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Last week, the Air Line Pilots Association, which represents UAL's pilots, agreed to $1.1 billion in wage and benefit cuts in exchange for an equity stake in the new company. That's pretty much what UAL management needed to meet its financial requirements and avoid total liquidation.

"We recognize the sacrifices this agreement represents and admire the pilots for taking these difficult actions," Glenn Tilton, UAL's president and CEO, said in a statement. "This is a huge step in enabling this airline to emerge from Chapter 11 as a stronger, more competitive company."

Reprieve

Bankruptcy has given UAL much-needed breathing room at a time when business fundamentals are falling apart because of the war. Tuesday, UAL had been expected to make payments on $1.7 billion in bonds at four airports, with the airports threatening eviction if the company defaulted. But because of UAL's bankruptcy, there is confusion about whether the airline must make payments on unsecured debt, so the airports have given the company a 15-day grace period and set a May 23 court date to hold a formal hearing on the matter.

Sometimes the threat of bankruptcy alone is enough to force needed cuts.

AMR

(AMR)

, the parent of American Airlines, appeared to have avoided an imminent filing Tuesday by securing tentative agreements with its three unions for wage and benefit cuts worth $1.8 billion.

"By taking these decisive actions, the union leadership and our employees have demonstrated an unwavering commitment to the future of the company, and have enabled us to avoid an immediate filing with the bankruptcy court," said CEO Donald Carty in a statement.

Concessions

"Clearly it is our hope, vision and plan that cost cuts will allow AMR to avoid bankruptcy, and we have been working hard for weeks with current management," said Capt. Steve Blankenship, spokesman for the Allied Pilots Association. "We have given $660 million in concessions, which is billions of dollars over the lifetime of the contract."

In AMR's case, the threat of bankruptcy and its consequences proved a compelling threat. "The unions would be foolish not to deal because they're so close. In bankruptcy, the cuts get deeper and they would probably lose their pension plan as well. US Air is a good example of that," said Ray Neidl, analyst at Blaylock & Partners.

At midday, the company's stock was up 35% to $2.84.

That said, just because the company got wage concessions doesn't mean it definitely will avoid bankruptcy. In fact, some analysts noted that wage concessions are often a requirement before lenders agree to debtor-in-possession financing. As Owens points out, "What we saw with United is that the people who were willing to finance the company in bankruptcy set performance targets."

Bankruptcy can help airlines under the most pressure cut costs, but it doesn't remove all the hardships they face. Last week, the Air Transport Association reported that after one week of war, advance bookings for domestic travel fell 20%, while international travel was down 40% in some places, issues that bankruptcy does nothing to change.

In this environment, where demand is down so much due to the war, a company could conceivably cut costs to meet current demand, only to have to cut deeper as demand continues to slide. If the war goes longer than three months, the ATA said that losses will increase, so much so that the entire industry could be pushed to the brink of insolvency.

"It's still a very mixed picture for the industry, with the war in Iraq. Avoiding bankruptcy would be a major step for AMR and very good for the industry, but there are still many questions out there -- like the war and when people get traveling again, especially in international markets," said Neidl, who notes that AMR has 30% exposure to international markets.

And while bankruptcy provides a measure of corporate salvation, it's hardly a savior if you work for or own stock in the company. In order to emerge from Chapter 11, a company generally sacks thousands of employees, and its shares almost always end up worthless. While the process can help keep planes flying and might end up producing profitable companies, it is accomplished through stiff medicine that for many proves fatal.