AMR Corp (AMR), the parent company of American Airlines, saw its stock tumble yesterday on talk that it could be headed into bankruptcy. AMR’s shares fell as low as 41% at one point during the day but settled down 33% to just under $2 a share after the company publically denied that it was seeking bankruptcy protection. That gives AMR a market value of around $727 million, which is about the cost of buying just five new Boeing 787 aircraft, according to official market prices. That’s quite a humbling valuation for a company that has 872 aircraft and 78,000 employees.

American is the only legacy carrier left standing that has managed to avoid a trip to the bankruptcy court in the last decade. Continental Airlines shared that distinction with American, but decided to merge with rival United last year in a bid to cut costs and expand its network.

American was able to avoid bankruptcy by gaining painful concessions from its unions back in 2003. Employee salaries were slashed between 16% and 23%, while thousands of employees were laid off. The unions at American figured that taking a big hit on their terms was better than having possibly larger cuts forced on them while in bankruptcy. The unions over at the other legacy carriers like United (UAL), Delta (DAL), US Airways (LCC) and the now defunct Northwest Airlines, were unable to agree on concessions, forcing management to seek bankruptcy protection.

In bankruptcy, the airlines were able to force a new cost structure on its employees that better matched the current operating environment. Once they emerged from bankruptcy, they enjoyed a significant cost advantage compared with airlines like American, which had not sought bankruptcy protection. Today, American’s labor costs is equivalent to around 28% of its revenue, the highest of any major airline operating in the US today. That compares with Delta, US Airways and United, where labor costs are 18%, 17% and 20% of revenue, respectively. This huge cost disadvantage means that American pays annually around $600 million more in wages compared to its peers.

In addition, American pays around $200 million a year in pension costs, something that the other legacy carriers don’t have to deal with. While in bankruptcy, the other airlines were allowed to bulldoze through pension modifications with the help of a judge and generous support from the Federal government. For example, Delta entered bankruptcy in 2005 with a pension scheme that was underfunded to the tune of $10.6 billion. Payments to the fund were bleeding the airline dry. Delta was able to terminate its pilot pension plan in bankruptcy, transferring $4.7 billion in liabilities from its balance sheet to the government. Delta pilots, who once could retire at 50 years old and receive half of their benefits in a lump sum payment, saw their benefits reduced by as much as 50% as a result of the bankruptcy. US Airways and United Airlines went further and eliminated all of their employee pension plans, dumping a combined $10 billion in underfunded liabilities on the government.

Even with the $200 million a year in pension payments, American’s pensions are underfunded by some $7.9 billion. It is extremely unlikely that the company will ever be able to pull in enough cash to cover that shortfall. Last quarter, American reported a loss of $286 million, the only loss reported by a major US airline. Reporting losses has become old hat for the airline over the years as it hasn’t reported a profit since 2007. In total, American has managed to set over $12.4 billion alight in the last decade — a cash burn of epic proportions.

The company is trying to convince the market that the answer to all its cost woes will come with the overhaul of its gas-guzzling, clunker-like fleet of aircraft. Fuel is after all the largest cost of any airline, not labor. This summer, American announced the largest aircraft order in history in a bid to modernize its fleet – a total of 460 planes, half of its current fleet. Along with a much needed improved passenger experience, the new fleet of single-aisle Boeing 737s and Airbus A320s will be 35% more fuel efficient compared to its retiring MD-80 aircraft and 12% and 15% more fuel efficient than its 757 and 767 aircraft.

The fleet overhaul won’t happen overnight, but even if it did, it still wouldn’t save the airline from its loss making ways. For example, the company paid $2.2 billion for fuel in the second quarter of the year. Say with half of its fleet now around 20% more fuel efficient on average, that would mean that the company’s total fuel bill would fall by around 10%. That would have translated to a savings of $220 million in the second quarter. While that is significant, it still wouldn’t have been enough to erase the $286 million loss.

The fleet overhaul will take a decade to occur — time American simply doesn’t have. Its unions are growing restless and have been working under their old contract for the last three years amid disagreements over pay. Workers are demanding that American “share the wealth” and return their salaries to pre-2003 levels.

Unfortunately, there is little wealth to be found. American’s saving grace through all this mess is its massive $4.2 billion cash buffer. Airlines typically have tons of cash on hand to weather cyclical downturns. But American’s cash buffer has been eaten away year after cash-burning year with no hope of profitability anywhere on the horizon. And even if its labor cost structure stays the same and its fuel costs fall by 10%, the company is still making little headway in closing that massive funding gap in its pensions.

American will continue burning cash until it gets real about its costs structure and pension shortfall. Those relatively fixed costs will become even more of a burden as the economy declines and passenger numbers start to fall. The International Air Transport Association (IATA) reported yesterday that passenger growth slowed by 4.5% in August, which was down 6% from the previous month. It warned that the “industry has shifted gears downwards” and that it was unlikely to get any better in the near future.

The one upside from an economic downturn is that fuel costs should decline with the price of crude. But there is still strong demand for jet fuel given the rise in passenger air service in Asia. That means jet fuel probably won’t fall as much or as fast as crude if the economy truly heads south.

Airlines have to deal with a lot of unknowns when doing business — from fuel costs to economic headwinds. Its labor and pension costs are not a mystery, though, and can be dealt with in advance before they spiral out of control. American’s cash buffer can keep the airline afloat for now, but not forever. Delta had $2.8 billion in cash when it declared bankruptcy in 2005. That cash allowed the airline to keep operating while it spent two years restructuring. Eventually the airline emerged leaner and stronger.

American could do the same and restructure in time for its new fleet to come online. But if it continues to burn through its cash at its current rate, it won’t have much left to keep it going if it eventually does head into bankruptcy. Without sufficient cash, American could go the way of the once iconic Pan Am or Eastern Airlines and simply cease operating. Such a scenario would put thousands of jobs at risk and hurt competition. That would not only be bad for the employees and pensioners of American, but it would also deliver a strong blow to the millions of business and leisure travelers that depend on the airline to move them around the world every day.