I have to say that I don't think shorting airlines to "extinction" is gonna happen. WE will fly...makes more sense than driving. Personally right now I'm long CAL via short dec puts...simply because I know the company...its based in Houston...(uhmmm can you say OIL)...and ppl NEED to FLY...TIME is MONEY.
I would look for an AMR bankruptcy filing very soon (this summer) as they approach the last 2 billion in cash holdings threshold. AMR has higher labor costs that need to be adjusted to survive, and they have debts and acft leases that need reworking. The current JET A cost environment has just been a nightmare for the airlines, and this "THANKS BUSH" global oil wealth entity wet dream will not go away soon. I do not see the major airlines getting a break until we see oil sub $100 and an economy that is at least hanging on by life support. The smart play imo is to do your homework for better options to the long side. There will be a large domestic route "fleet type" transition ahead as the major carriers continue to ditch their older DC-9/737/MD-80/F-100 acft. The winners will be the regional and commuter carriers who can service the shorter domestic routes much more efficiently with CRJ900/Q400/EMB170,175,190,195 acft. The major carrier shorter domestic route glut will be handed off to the more efficient and flexible commuters. I would look at Mesaba, Comair, and American Eagle as strong plays if they were spun off as stand alone stocks (damn would I love to have some Mesaba stock!!!). Other interesting plays would be to get into Allegiant and ExpressJet as they have some good potential for market share increases in the down times and/or buyout plays. Do your homework and look to the commuters for the LONG play as the majors are still looking ugly but may be a bit late for shorting
There maybe more downside, but I can't see a rational reason to initiate a new short position at these levels. Although most of them should go bankrupt and be stoned in town square.