If recent stock performance is any indication, market participants believe

UAL

(UAL) - Get Report

, parent of United Airlines, will be able to avoid filing for Chapter 11 protection, thanks to wage-reductions from its labor unions and renegotiated lines of credit.

Over the past week, as UAL announced a revised labor agreement with its pilots union, speculators began snapping up shares in any other airline that seemed likely to avoid bankruptcy. Indeed, the American Stock Exchange Airline Index tacked on 27% in the three weeks since Oct. 18, with UAL's stock nearly doubling and

AMR

(AMR)

, parent of American Airlines, and

Continental

(CAL) - Get Report

posting better-than-50% gains.

On Monday, UAL's stock got another boost, gaining 28 cents, or 8.5%, to $3.56 after the company announced that it had reached a tentative wage-cutting agreement with its flight attendants union. The move nailed down another section of the $5.8 billion the company hopes to save over the next five-and-a-half years -- an important consideration if it wants to receive a $1.8 billion loan guarantee from the Air Transportation Stabilization Board.

Even some hard-core bears on the stock have begun lightening up on UAL, like Ray Neidl, airline analyst for Blaylock & Partners, who upgraded the company to hold from sell. "We believe that the probability that UAL will need to file for bankruptcy in the short term is sharply reduced," Neidl said.

But while the stock moves are for real, the optimists driving the moves could be building castles in the air. Over the past few days, analysts have begun warning that while the mood is brighter, few fundamental changes have occurred to warrant such a run-up in both UAL and the other airline stocks -- even Neidl admitted that bankruptcy was still possible.

The recent ascent has Wall Street veterans confused. "Could somebody please make up their mind?" asked Sam Buttrick, airline analyst for UBS Warburg, in a research note to investors. "The risks of an Iraqi conflict do not seem to have appreciably diminished, industry fundamentals have neither appreciably deteriorated nor recovered, and bankruptcy risks haven't changed in our mind. Yet the airline stocks lose half their value and then double."

A month ago, all the airline stocks looked like they had a date with zero because a war with Iraq would wreak havoc on the industry, hurting travel demand while raising fuel costs. Despite the fact that war is even more imminent after Republicans swept the midterm elections and even though fourth-quarter losses are expected to be heavier than expected, the stocks have rallied again.

With the recently released third-quarter earnings coming in lower than Wall Street expectations, there isn't a single person on Wall Street brave enough to call it an earnings bottom. In fact, analysts and industry execs are calling it a bottomless pit, with the industry now expected to rack up a record $8 billion in losses during 2002. This, coming after a 2001 that many claimed was as bad as it could possibly get because of Sept. 11.

Most carriers, especially the older network carriers, say they expect heavy losses to continue deep into 2003. But investors are exaggerating any good news about the industry in the same way that diamonds gleam against the blackness of the jewelers' cloth. And as a result, investors who buy into the good news should buckle up for a bumpy road ahead.

"This unsettling volatility for airline stocks will probably be with us for a while," wrote Buttrick, who recommended that investors buy carriers that will avoid bankruptcy, then wait a few years for the stocks to double, before concluding, "Trading airline stocks may be hazardous to your wealth."