Could the nation's second-largest airline be the next to go bankrupt?

On Wednesday morning, investors reeled from a suggestion that

AMR

(AMR)

, parent of American Airlines, could possibly follow

US Airways

into bankruptcy. In a note to investors, Jim Higgins, airline analyst at Credit Suisse First Boston, warned investors that AMR has a 25% chance of filing Chapter 11 because its cash position moving into 2003 is so weak.

For the second day this week, AMR shares got pounded. After sliding 13% on Monday, AMR was off 8.9% at $3.57 in midday trading. If shares were to close there, it would mark the lowest close in more than 15 years.

"Our current estimates, which do not include the impact from an Iraqi war, suggest a 71% drop in AMR's cash level to $739 million by the end of 2003 -- a level we believe is on the brink of the minimum cash balance needed to maintain operations," Higgins wrote.

In response, AMR stressed that it is focused on improving the operating performance of the airline. "We plan to stay focused on performance," said Tara Baten, AMR spokesperson. "The company as well as the management team is not working towards putting this company into bankruptcy. We feel we are a competitor. We are the largest carrier. And we plan to see this thing through."

With America teetering on the brink of war with Iraq, the situation for AMR could be even more precarious, in Higgins' view, because it means raising capital could become an issue. Even AMR's $6 billion in unencumbered assets such as planes and buildings wouldn't necessarily help it raise any money during a crisis, simply because few deep-pocketed buyers would be interested.

"In the event of further cash flow pressure on the airline industry," he wrote, "we are unsure of the speed and extent to which those assets could be mortgaged."

As a result, Higgins dropped his rating on the company to neutral from outperform, telling investors that the federal government needs to ensure liquidity during an Iraq offensive in order for his outlook to improve.

"Given the rising lack of visibility on that front, however, we believe a move to the sidelines on AMR shares, even at this level, is the best course of action," said Higgins.

The latest news from AMR is yet another signal that airlines face the most serious challenge in the history of commercial aviation. Losses this year will run close to $7 billion and will challenge last year's record. And in August, the industry showed no signs of improvement, despite heavy discounting and service cuts.

Indeed, travel was down 8.2% on the year at the major airlines during August, despite the fact that ticket prices were 9.4% cheaper, according to the Air Transportation Association. To ward off more problems, the airlines have implored the federal government to cut them a break on taxes and security.

AMR is now the latest big carrier that has been painted with the bankruptcy brush.

Speculation lingers that

UAL

(UAL) - Get Report

, parent of United Airlines, the largest U.S. carrier based on revenue passenger miles, will soon need to file if it can't present the Air Transportation Stabilization Board with a proper cost-cutting plan to secure a government-backed loan. Without the $1.8 billion it seeks, UAL will have trouble servicing the $900 million in debt that will come due in the fourth quarter.

Wednesday's news from AMR comes just two days after the

company announced it would be taking a $900 million charge related to the goodwill of its acquisitions over the past couple years.