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On Monday, JP Morgan’s airline team engaged in a bit of Meredith Whitney-esque headline-grabbing. Not only would the airline industry lose $7.2bn this year, they said, but there would also be blood - and bankruptcies:

Yes, we said “bankruptcy.” Current fuel prices pose an earnings challenge to the industry that actually exceeds the economic impact of 9/11 in our view.
And they named names: US Airways, Northwest and United topped the investment bank’s list of airlines likely to file for Chapter 11 unless market conditions improved dramatically, followed by American, JetBlue, Continental and AirTran.

As of Monday, spot prices for jet fuel in New York had risen 43 per cent since the start of the year, data from the Energy Information Administration show.

Then, on Tuesday, an annual survey released by the University of Michigan showed customers giving airlines the worst grades since 2001. United and US Airways - which are in talks to potentially combine into a single carrier - finished next to last and last, respectively. Delta and Northwest, which have already agreed to merge, also came in at the bottom in terms of consumer satisfaction.

On Wednesday, American Airlines declared that rising fuel costs would force it to eliminate flights, cut thousands of jobs and charge most passengers $15 to check a single piece of luggage. Quoth AMR chief exec Gerard Arpey:

The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak US economy…Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.

American is the only legacy US carrier that has managed to avoid seeking protection from creditors. At midday in New York, AMR was trading just above $6 - compared with a 52-week high of almost $30 - with a market cap of just 7 per cent of annual revenue.

Just prior to American’s cry for help, Lehman Brothers slashed its earnings outlook for nearly all major US carriers, and Soleil Securities cut its rating on AMR stock to “sell”. Soleil also downgraded Continental Airlines to “hold” and United parent UAL to “sell”. The Amex Airline Index collapsed, sliding 12 per cent to the lowest since at least 1992.

By Thursday, S&P decided it was time to revise its outlook for the industry and said it may downgrade its ratings on nine airlines and review one more, citing the “potential severe financial damage from unprecedented high jet fuel prices”:

The dramatic increase in jet fuel prices has increased airline costs significantly over the past two months, and if sustained, could threaten their liquidity and financial profiles…Although airlines will seek to recover the higher costs through additional fare hikes and higher fees, we believe that this will prove increasingly difficult in a weak US economy

As for Friday? The bumpy ride continued as UBS, not to be left out, cut its price target on seven US carriers in a note titled “Revising for Fuel Again - Guess Which Way.”

Meanwhile, United Airlines said it would raise most domestic fares by as much as $60 roundtrip to offset the cost of fuel, and said it was “seriously considering” following AMR’s lead in charging passengers to check their first piece of luggage.

At which point, Rick Seaney, chief executive of airfare research site FareCompare.com, declared:

Will the other legacy airlines match? To that I respond: Do they really have a choice? I would be surprised if we don’t see wide spread matching over the long weekend

What’s next? Well, Howard Lindzon - hedge and venture fund manager at Knight’s Bridge Capital Partners - thinks a US Airways blow-up is on the cards.

Said Mr Lindzon, who is short US Air, on Twitter this afternoon:

glad to see us air down 20 more percent today (short). Turn their hangar into condos.
tues am expecta major bailout/merger or bankruptcy

Better buckle up.

Related links:

Are cheap flights ending? - The Economist’s Gulliver blog

US Airline Baggage - Lex