It's white-knuckle time in the U.S. airlines industry as many companies scramble for last-minute financing or struggle with labor-related chaos. When risk runs this high, you can be sure hedge funds are sniffing around.

At

Delta

(DAL) - Get Report

, which recently sold its Atlantic Southeast unit to

SkyWest Airlines

(SKYW) - Get Report

in a frantic bid to raise cash, Steven Cohen's SAC Capital Advisors has surfaced as a shareholder, with 8.8 million shares, or about 6% of the equity.

Cohen's $6.5 billion fund is also an owner of

Northwest

(NWAC)

, which faces upheaval of its own now that its mechanics union has made good on a threat to walk off the job.

Cohen's SAC Capital is making straight stock bets, not elaborate turnaround plays that could survive a bankruptcy filing. If Delta goes bankrupt, Cohen's exit strategies would be extremely limited. An SAC spokesman did not return calls seeking comment.

"Those guys are looking for a quick turnaround and are willing to take the relatively high risk that goes along with it," says Robert Mann, an airline consultant at R.W. Mann.

Betting that Delta will avoid bankruptcy, SAC owns what amounts to a $1.50 call option that someone will pony up enough money to keep the airline flying. Roger King, an airlines analyst at CreditSights, says the airline needs a "miraculous infusion of cash."

Based on current cash, Mann believes, Delta can't avoid bankruptcy even if it sells its Comair unit. That leaves equity holders, which might ordinarily be able to press a turnaround program on management, with few options.

"You can't be an activist because Delta will be worthless pretty soon," says King of CreditSights, a leading independent research firm.

Things can, of course, change. Back in 2003,

AMR's

(AMR)

American Airlines

received a financing package from

General Electric

(GE) - Get Report

; its stock doubled during that year.

Maybe the biggest hedge fund presence in the sky involves the financing for the

US Airways

(UAIRQ)

and

America West

(AWA)

merger.

Three hedge funds, including the $11 billion Tudor Investment, will participate in the financing in exchange for new equity in the merged entity. Tudor pledged $65 million and will receive 3.9 million shares of the new stock. The restructuring story has a good chance of success, although it is far from being a done deal.

"I like the combination of a West Coast carrier with a heavy East Coast presence," says Jim Corridore, an airlines analyst at Standard & Poor's. However, this merger was designed to be profitable with oil prices at $50 or under, not $67, he notes.

Calls to Peninsula Investment Partners and airlines investor Boston-based PAR Investment Partners, the two other hedge funds pledging cash, were not returned. A Tudor spokeswoman declined to comment.

Thin Air

Hedge funds are betting on the sector, but should they? Airlines are being challenged by the burden of their own debt, the unions, a tougher bankruptcy legislation that takes effect in October and the surging price of oil.

"I think they're out of their minds, quite frankly," says Rob Balon, CEO of the Benchmark Company, a market research firm.

Says another fund manager: "There are not many successful stories in airlines. In fact, there are more horror stories than success stories." Icahn's hostile takeover of TWA in 1985 was not one of his most profitable deals, although his ticket resale agreement with the airline, known as Karibu, ended up being a good transaction. Legendary Tiger Management founder Julian Robertson was stuck with a majority position in US Airways after the merger with United Airlines fell through. He finally sold his shares after Sept 11.

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What few success stories exist have been big ones. Private-equity firm Texas Pacific had good luck with

Continental

(CAL) - Get Report

in the early 1990s and America West, restructuring both companies out of bankruptcy and yielding substantial amount of money especially with Continental. And Icahn's TWA deal increased his already powerful notoriety.

Are current-day managers being sentimental? Or maybe they're thinking of Eddie Lampert, whose ultra-profitable campaign at Kmart and

Sears

began in a bankruptcy court. Analysts say the Sears example has little application to airline investing, where multiple layers of debt financing make equity investing a far riskier proposition.

Debt -- bonds, loans and convertible securities -- are where most hedge funds continue to work in the airline industry. "Airlines are a very active sector for the hedge fund community," says King. "Funds can play around and arbitrage between the different types of paper. And oil gets in the picture too."

So with hedge funds and private equity firms being the new bankers of the industry and with the possibility to trade the paper all across the capital structure, from distressed debt to equity, all bets are open, leaving managers with tremendous opportunities, as either turnaround artists or simply activists or stock pickers.

"In the sense that hedge funds are the ultimate traders, airlines are the perfect fit, but it doesn't mean that every transaction is going to be successful," says Mann. "It's the ultimate trade, but it's also the ultimate level of risk."

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