Something's got to give for U.S. airline companies.

A slew of factors have battered the industry. If external shocks such as the 9/11 attacks and the SARS outbreak were not enough, the industry has its own deadly dynamics -- tough price competition from low-cost upstarts and industry overcapacity -- which make it tough for any single airline to raise prices. Add to that sky-high fuel costs, and you have a recipe for disaster.

U.S. airlines likely will lose at least $6 billion in 2004, following a total of $23.21 billion in losses over the three previous years, according to the Air Transport Association of America.

Even if crude oil falls $5 a barrel from its current level of about $50, losses for 13 of the nation's biggest airlines will come in around $3 billion next year, assuming current cost structures, said Vaughn Cordle, chief analyst and founder of Airlineforecasts LLC.

"This is unsustainable," said Cordle, who also works as a senior 777 captain at United Airlines.

Two network carriers, United parent

UAL

(UALAQ)

and

US Airways

( UAIRQ), are operating under Chapter 11 bankruptcy protection, and low-cost

ATA Holdings

( ATAHQ) filed for Chapter 11 bankruptcy protection last week. Hawaiian Airlines' parent

Hawaiian Holdings

(HA) - Get Report

is also operating under bankruptcy protection.

In such an environment, an industry shakeout seems sensible, even inevitable, much like what happened to the steel industry. But consolidation is unlikely; the difficulty of integrating employees, particularly pilots, who have been working under different pay and seniority scales, makes mergers largely out of the question.

"It doesn't make sense for airlines to merge and push themselves together because of the seniority schedule, and the way that's set up," said Helane Becker, airline analyst at The Benchmark Company, a New York-based brokerage. "Merging two airlines, especially two unprofitable ones, just doesn't make any sense."

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) - Get Report

, 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) 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.

In the current environment, ATA's bankruptcy filing may just be the tip of the iceberg. Cordle of Airlineforecasts has predicted that if fuel stays above $45 a barrel,

Delta Air Lines

(DAL) - Get Report

and Independence Air parent

FLYi

( FLYI) could follow by the end of this year. Bankruptcy filers next year might include

America West Holdings

( AWA) and

Continental

(CAL) - Get Report

, he added.

Airlines could secure further concessions from labor under bankruptcy court protection. Last month, a federal judge ordered 21% pay cuts for all of US Airways' union employees who had not yet reached deals with the airline. The order may have been a key factor in the company's pilots' vote to approve a tentative agreement for 18% cuts.

A key variable for the entire industry is what happens at United, according to analysts. If the company is successful at terminating its pension plans and can achieve further reductions in labor costs in bankruptcy court, it could emerge a lean network carrier without the financial burdens of its network rivals.

"That holds the key for what happens to the rest of the network industry," said Swelbar of Eclat Consulting. If United can get significant savings, that would put tremendous pressure on Delta, American, a unit of

AMR

(AMR)

, and even Continental and

Northwest

( NWAC) to cut costs further to remain competitive.

Such a scenario would be no picnic for the low-cost carriers, as the gap between their costs and those of the network companies diminishes.

"If the networks do get costs in place, there won't be six or seven low-cost carriers anymore either," Swelbar said.

Still, no matter how the shakeout plays out, it will be rough, experts said. "The next 18 to 24 months are going to make the last three years look very easy," Swelbar said. "The low-hanging fruit has been picked. In this pricing environment, we haven't gone low enough. The next phase is going to be very difficult, very painful and will disenfranchise a lot of employees. It's disheartening from a people perspective, but it's probably where we have to go."