(FORTUNE Magazine) – In a room strewn with hamburger wrappers, union officials lay on the floor in silent, stunned exhaustion. John Darrah, president of the pilots' union at American Airlines, was still at work. It was 4:30 P.M. on March 31, and he had hardly left the place for days. A half-hour before, in a heated confrontation in the hallway, American negotiators had scolded Darrah that the union had royally screwed up by failing to make a deal. It was over, they told Darrah. The world's biggest airline was filing for bankruptcy, and it was his fault.

But it wasn't over. Darrah and his crew learned that the filing had been delayed. The new deadline: five o'clock. In desperation, Darrah called the union board for the vote of a lifetime. "We don't even know what we're voting on," groused a director over the speakerphone. "Let's kill this deal and take our chances in bankruptcy!" yelled another.

At exactly the same time, less than a mile away at American's headquarters in Fort Worth, CEO Donald Carty was on the phone with his board, getting the final orders to file for Chapter 11. At 4:50 the union directors voted 12 to six to accept the contract, and Darrah called Carty with the news. The CEO "was jubilant," Darrah recalls.

That phone call was a milestone for the U.S. airline industry. It marked a breach in what had been, from the mid-1990s onward, an immutable law governing the major network carriers: Labor costs will always rise. Over the past two years revenues for the six majors plummeted as businesspeople shunned last-minute travel and Americans stayed home. But labor costs--the industry's bete noire, typically representing almost half of all expenses for the majors--remained stubbornly, ruinously high. Result: a massive squeeze that has saddled the industry with a record loss of $10 billion in 2002.

The proposed deal at American came on the same day US Airways emerged from bankruptcy, reborn as a lean carrier emphasizing northeast routes. United has also clinched deals with its unions. American sought, and got, 20% cuts in labor costs; United and US Airways got closer to 30%. (Only US Airways is a done deal, though; the unions at American and United still must vote on the contracts.) It's a sure bet that the three other majors--Continental, Delta, and Northwest--are watching closely. For aviation workers used to the good old days of high pay and famously restrictive work rules, all this is painful (though better than unemployment). For the airlines, it's a stunning reprieve from possible extinction.

The rub is that these new deals are not enough to guarantee the airlines' longevity. "This isn't really a structural change," comments David Neeleman, CEO of JetBlue, the successful budget carrier. "It just allows the majors to lose less money than before in bad times, and to make more in good times."

Well, the majors might scoff, a low-cost guy like Neeleman would say that, wouldn't he? But they need to take his point seriously.

Here's why. Assuming no terrorist catastrophe, the likely outlook is that as the economy strengthens, air travel--and therefore industry revenues--will gradually recover. In this scenario the lower costs that American, United, and US Airways have negotiated should allow them to prosper again.

In the past, however, such comebacks have always been temporary. Since deregulation in 1978, the majors have typically lurched from boom to bust, squandering their gains in good times by granting huge pay increases to the unions, which pushes them into losses when the economic cycle turns down (as it always does).

Let's say that this time the majors don't throw their futures away on inflated pay packages. In fact, they may not, now that both labor and management have stared into the abyss. Even so, the majors are looking at a diminished future. With discounters pushing down fares, the most likely scenario is deja vu all over again: The majors will thrive for a couple of years; then nosedive into steep losses in the next recession; then plead with the unions for more cuts (and with the government for a bailout).

That's because the new deals don't really solve the problem. Important as they are, they basically turn very high-cost carriers into high-cost carriers (see chart). American will reduce its cost per available seat-mile (the industry standard) to a little over 8 cents. United and US Airways will be in the same league. Now the trio will be comparable to Delta and Northwest, though still trailing Continental, among the majors. But in this brave new era it's not good enough. Low-cost carriers like Southwest, JetBlue, and America West average 6 cents a mile to transport passengers.

The big airlines concede the world has changed. "The rise of low-cost carriers, plus shopping for fares on the Internet, has lowered prices and changed the business forever," says Dan Garton, the marketing chief at American. Since American pioneered the use of computers with its Sabre reservation system in 1962, the industry has controlled information to keep power over pricing. Today, through the Internet, consumers have their own source of information--and are using it to drive down prices.

We can deal with that, say the majors, and compete even though our costs are still relatively high. Their flight plan is simple. Before the most recent round of savings, American's costs were 70% higher than Southwest's, and it could not charge enough to cover its costs on routes with cut-rate competition. Under the new labor deal, says American, the difference will shrink to 30%--and it can get that price.

The majors believe they hold advantages on two kinds of routes that will let them keep pace with the JetBlues or America Wests without becoming like them. First, on big-city flights--New York to L.A., say, or Baltimore to Atlanta--where the network carriers increasingly compete head-to-head with the discounters, the majors offer stronger frequent-flier programs, more frequent departures, international connections, and amenities such as extra legroom on American. The majors believe that customers, especially business travelers, will pay a premium for those goodies rather than take a no-frills, pack-'em-in flight on Southwest or AirTran.

Second, the majors link hundreds of small cities that the discounters ignore. The beauty of the hub-and-spoke networks is that they gather hordes of travelers from hundreds of small cities like Spokane or Burlington, Vt., then fly them to Fresno or Tyler, Texas, in a massive display of collection and distribution. The majors are investing heavily in these secondary markets by replacing turboprops with gleaming new 50-and 70-seat regional jets. "There's no question that small-city pairs will remain the province of the majors," says Kevin Mitchell of the Business Travel Coalition, a group that represents corporate travel managers. Connecting small cities especially benefits business travelers, the majors argue, and the fact that they have a monopoly in many cities means that they can charge higher fares.

They are right. But so what? Small cities are a niche market, responsible for perhaps 15% of the majors' revenue. Sure, they can charge higher prices on these flights, but that won't get them to an overall premium of 30%. And the monopoly premium is eroding all the time as low-cost carriers invade the fortress hubs.

The strategy of charging significantly more than discounters on big-city routes also looks flawed. Low-cost carriers are not the shoestring operations of five years ago: Southwest offers a strong frequent-flier program; AirTran provides business class; JetBlue has seatback TVs. The quality gap that the majors want to exploit is narrowing to a crack. "I'm thrilled that they'll charge more than us," says Neeleman of JetBlue. "Our customers would rather fly us, even at the same price."

The strongest evidence that the revenue premium won't hold up is that it's folding right now. The majors typically offer relatively few leisure fares and hold back a large number of seats on each flight; the idea is to sell these to business travelers who reserve late and pay more. This is how the majors raked in record profits in the late 1990s, when the tech boom sent people rushing around without a thought of how much a ticket cost. Airfares were just part of a startup's "burn rate."

These days, though, executives are shunning business class and taking more and more leisure fares. The proof is that while planes are around 70% full, the revenue per plane, or yield, has dropped steeply for the majors as business travelers search for bargain fares. "Now 90% of our employees reserve on our web-based self-booking system," says Tom McCabe, travel manager at tech giant PerkinElmer. "They're shopping for the lowest fares, booked as far in advance as possible. That's driven a far larger share of our business to Southwest." On routes like Dallas to Phoenix (up to $867 for a last-minute Internet fare), American scores some premium fares--but it is still losing market share to Southwest.

All across America, the strategy of deluxe pricing has shrunk the majors and swelled the discounters. Since 2000, Southwest, JetBlue, and AirTran have seen annual revenue grow by more than $500 million, while the majors' revenue has dropped by around $20 billion. "I wouldn't pay more than an extra 5%," for an airline seat, says McCabe, the travel manager. "Corporate America has made a decision that air travel is a commodity business. The low-cost producer will get the business."

After the most significant and widespread labor concessions in history, the fact remains that the majors--even Delta, the strongest--are extremely fragile. Since 1999 they've been plugging losses with heavy borrowing. Total debt has grown 60% to almost $100 billion. "Even in the best of times," notes J.P. Morgan's Jamie Baker in a recent report, "we consider all airlines whose names start with something other than 'Southwest' to be bankruptcy candidates." The most recent cuts will postpone the day of reckoning. But the airlines' failure to face facts and grasp this rare opportunity to demand far deeper cuts will eventually come back to haunt them. Like high-cost producers faced with quality competition in other industries--network TV, say, or Big Steel--their role is certain to shrink.

In five years the best bet is that the low-cost carriers will be far bigger players. "They will have 40% of the market [vs. about 20% now], and that's conservative," says Peter Buchheit, travel manager at Black & Decker. The discounters are swarming all over the high-priced markets, driving down prices--and consumers don't seem to mind that they get few perks for their aviation dollar. Expect more new airlines to take flight; a surplus of inexpensive, used aircraft sitting in deserts is cutting the price of entry.

As for the majors, in the next five years their ranks will shrink by a carrier or two. That could give a new lease on life to the survivors, but even that kind of reprieve will prove temporary. In the U.S., the majors will cede much of the big-city point-to-point market to discounters and concentrate on linking passengers in small cities. They will also continue to dominate international routes from the U.S., where low-cost competition is far less common.

This is almost certainly not the future the jubilant Carty had in mind when he got off the phone with Darrah. But the slowly fading role of America's major airlines is no tragedy. Lower-cost carriers hauling less of the baggage of the past will happily absorb the traffic when the majors take seats off the market. And that is the new deal that really matters--the one where consumers win.