(FORTUNE Magazine) – FOR THREE BRUTAL YEARS THE TOP BRASS at America's old-guard airlines have been telling anyone who would listen, off the record of course, that a single watershed event is all they need to put their carriers back on a path to profits: the liquidation of United Air Lines. "It's the best thing that could happen to the industry," said one airline honcho recently. "You take United's 15% of flights out of the system, and we'd be able to raise prices again!" But on May 10 a bankruptcy judge in Chicago punctured the legacy carriers' fervent wish by ruling that United could dump a ball and chain that's locking the airline in bankruptcy: $6.6 billion of its unfunded pension liability. "Believe it or not," marvels Jon Ash of interVISTAS-ga2, a Washington, DC, airline consulting firm, "the big airlines are still rooting that a strike will bring United down."

The odds are against it--and instead of the cushy rescue they cherished, the airlines will face a recharged United, continued ferocious pressure on prices, and an absolute need to dump, or radically reform, their own ruinous pension plans. The United decision wasn't unexpected: Over the past two years a bankruptcy court ruled that US Airways could shed $3 billion of unfunded pensions. But the ruling in Chicago, reached over stiff opposition from the flight attendants' and machinists' unions, reinforced a crucial message: Bankrupt airlines (and any other failing old-line company for that matter) have pretty much a free hand to shed their pensions, the biggest single cloud over the carriers' future.

The United decision will cause a domino effect, and the consequences will be immense. The weakest airlines--Delta, for example--will be more tempted than ever to enter Chapter 11 and dump pension liabilities. Taxpayers could eventually pay for this reprieve. The Pension Benefit Guarantee Corp., the company-funded agency that insures old-line defined-benefit plans like United's, is already reeling under a deluge of defaults from steelmakers and auto parts manufacturers; the looming big dump from airlines will deepen the PBGC's deficit, forcing a federal bailout that could rival the S&L catastrophe of the early 1990s.

For United, the pension decision was a life-or-death affair. If the judge hadn't shifted the burden to the PBGC, United would have been forced to liquidate. Now, it's poised to stage a comeback. Earlier this year United reached a landmark agreement with its pilots. They agreed not to protest a PBGC takeover of its pension plan--many pilots will get less than half the pensions they expected--in exchange for a generous defined-contribution plan and equity in the airline, if and when it emerges from bankruptcy.

The wildcards are the flight attendants and the machinists. Both groups are justifiably steamed at management for promising time after time that each round of concessions was the final one, then demanding more givebacks when business headed south. Their unions are threatening a strike to force out the leadership they despise, and the flight attendants are even saber-rattling about activating a program called CHAOS, short for "Create Havoc Around Our System." Under CHAOS, the flight attendants refuse to board lots of flights, leaving passengers stranded and airlines bleeding cash. The campaign brought Midwest Express to its knees in 2002.

A strike could spell death for United, which is why the unions will probably reach a last-minute agreement with the airline. "The unions won't destroy the airline as the machinists did with Eastern in 1991," predicts Roger King of research firm CreditSights. And the removal of the huge pension liability opens the cockpit door for investors to put in money. "Before the decision, no one would invest the money needed to strengthen United's balance sheet and bring it out of bankruptcy," says Ash. "Now, private-equity investors are circling."

For the healthier legacy carriers, this decision provides a big stick in crucial negotiations with their unions. Northwest and Continental, for example, are working with the unions to preserve part of their defined pension plans in exchange for agreements to freeze their benefits at the current level and accept defined-contribution plans as a replacement. Bankruptcy invariably poisons labor relations and infuriates employees, so the carriers are wisely striving to reform their pensions without resorting to Chapter 11. As part of that effort they're lobbying hard in Congress for permission to pay off their pension shortfalls over as long as 20 years instead of four.

For customers, it's a good thing that United will keep its wings. But for United's competitors--and their rank-and-file workers--the turbulence is getting worse.

FEEDBACK stully@fortunemail.com

FEEDBACK first@fortunemail.com