(MONEY Magazine) – Airlines are in rotten shape: Losses for the year, forecast at $2.2 billion before the Sept. 11 terrorist attacks, could now easily surpass $6.5 billion. A $15 billion federal bailout has kept planes in the sky, but America's travel habits may be permanently changed by the war against terrorism, and some major carriers will likely go bust in the near future.

Already-wary investors have fled, pushing the key airline stock index down 42% since Sept. 10. Even in good times, this is a tough business--with high fixed costs, huge debt loads, bitter labor relations and slim profit margins.

And yet. Things look grim now, but the industry has survived convulsions before, like the 1988 destruction of a jet over Lockerbie, Scotland and the 1991 Gulf War. Historically, the time to invest in airlines is when everyone hates them, and right now the hatred runs deep: the six largest carriers are valued at one-tenth their latest 12-month revenue and just 3.1 times their average annual earnings over the past five years.

For investors with a contrarian bent, those numbers make the leading airlines worth another look.

--AMY FELDMAN WITH ARAVIND ADIGA

Ready For Takeoff?

We argued in August that tough times can make some airline stocks a good buy. And though the world has changed dramatically since then, that analysis is still true. What's coming is a shake-out, not the end of an industry. The trick is to separate those carriers strong enough to survive from those in danger of going under. Here's a company-by-company guide to the current situation and future prospects of the country's seven largest airlines, in order of revenue.

AMR (AMR) Losses at American Airlines' parent are great--$525 million in the third quarter alone. But the nation's largest carrier (since its acquisition of TWA's assets), AMR has the advantages of size and relative financial strength. John Buckingham, manager of the Al Frank fund, is buying AMR (and Delta), thinking they are the best positioned for a turnaround. Insiders appear to agree. In late September, CEO Donald Carty bought 40,000 shares at $19.30.

Revenue: $20 billion Price: $18.99 52-week range: $15.90 to $43.94 2001 earnings: -287% Price/book: 0.4

UAL (UAL) The parent of United Airlines is in dire straits. With $1.9 billion in losses looming, its CEO in October, James Goodwin, warned that UAL would "perish" next year if it could not stanch losses. Within weeks, Goodwin was replaced. Among the majors, United ranks last for on-time arrivals and first in complaints. Any reason to give it a look? Perhaps as an asset play for bottom-feeders. UAL shares trade at an incredible 0.04 times its revenue.

Revenue: $18.8 billion Price: $13.66 52-week range: $13.66 to $45.50 2001 earnings: -2,626% Price/book: 0.2

DELTA (DAL) Among the Big Six, Delta has one of the best balance sheets--it easily completed a $1.25 billion bond deal within a week of the attacks. Still, Delta's geographic reach lags competitors', and it was leaking money long before Sept. 11, losing $223 million in the first half of 2001. Delta may benefit from a shake-out: It already transports more people than United (102 million last year) and could lock in the No. 2 spot should UAL's troubles continue.

Revenue: $16 billion Price: $22.75 52-week range: $20 to $52.94 2001 earnings: -227% Price/book: 0.6

NORTHWEST (NWAC) It dominates two lucrative hubs, Minneapolis-St. Paul and Detroit, and it's aggressively promoting Detroit as a connection alternative to Chicago. But Northwest has struggled with high costs--its operating margins have been among the lowest of the majors--and a high debt-to-capital ratio. Thanks to renewed cost cutting earlier this year, Northwest surprised Wall Street in the third quarter, losing $1.18 a share vs. a predicted $1.54.

Revenue: $10.7 billion Price: $12.87 52-week range: $9.04 to $33.10 2001 earnings: -307% Price/book: 27.4

CONTINENTAL (CAL) Since 1984, this twice-bankrupt airline has become one of the country's best. In the first half of 2001, it was the only large airline besides Southwest to turn a profit. Continental was hurt by the slowdown in the Northeast (Newark is a major hub), but its larger presence in Houston has helped to mitigate the effects. In the first half of October, its planes were 65.6% full--13.2 percentage points higher than in the previous two weeks.

Revenue: $10.1 billion Price: $16.65 52-week range: $12.35 to $57.88 2001 earnings: -204% Price/book: 0.7

US AIRWAYS (U) Ever since its deal to be acquired by UAL fell apart, long-suffering US Airways has been trying to reposition itself as a regional carrier. Problem: It still spends like a national one. Since the attacks, its flights in the Northeast have lost passengers to Amtrak, and it has decided to fold its MetroJet commuter service. The firm lost $433 million in the third quarter, more than analysts were expecting, and investors have pushed the stock price below $5.

Revenue: $9.1 billion Price: $4.65 52-week range: $3.95 to $48 2001 earnings: -415% Price/book: N.M.

SOUTHWEST (LUV) This no-frills wonder is the only big airline expected to make a dime this year, and it's the only one not axing workers. Its balance sheet is solid and labor relations are good. Analysts figure Southwest could gain market share in the turmoil, especially with UAL getting rid of its short-hop United Shuttle and US Airways bailing on MetroJet. The biggest risk is valuation: Southwest sells for 15 times cash flow, three times more than AMR commands.

Revenue: $5.8 billion Price: $15.77 52-week range: $11.25 to $23.33 2001 earnings: -42% Price/book: 3.2

Notes: Data as of Oct 30. Revenue is for the latest 12 months. Earnings figures are year-end estimates. N.M.: Not meaningful. Source: Baseline.