In the past three weeks, the discussion about the future of airlines has shifted from possible mergers to impending bankruptcies. Is a merger preferable to a long, fast slide toward deeper financial trouble?

Let's take American. A deal has to be preferable to the difficult work of scraping a living out of the airlines' dying business model. American -- one of the few airlines to win kudos from analysts on its business -- has been battling rising fuel costs and an aging fleet that has been staggering around the skies for an average of 14 years. Oil prices right now make up 40% of American's operating costs. American will force travelers to pay $15 for the first checked bag, which would raise a paltry $320 million a year in extra revenue, according to Citigroup analysts. That wouldn't even cover American's first-quarter loss of $328 million.

That $320 million also isn't going to put much of a dent in American's estimated burn of $2.5 billion for each of the next three years. That's going to eat into American's cash balance of $5 billion. Think about it: American paid $2.1 billion for fuel just in the first quarter.

And there's more: The airline is planning to cut jobs, capacity and customers. (Yes, it's come to cutting customers). In addition, management is facing a public demonstration from the really ticked-off pilots' union. On American's last conference call, CEO Gerard Arpey said he was "very mindful of that experience" of the firm's recovery from near-bankruptcy in 2003 and 2004. "That is why we have, for many years, been working very hard on our capital structure and our cash balance and the pay-down of debt and putting ourselves in the best possible position to weather this kind of storm," he said.

But financial engineering seems to have come to the end of its usefulness for American. An analyst on the first quarter earnings call bluntly told Arpey, "the market seems to be reaching a conclusion that an AMR bankruptcy filing is increasingly, shall we say, difficult to completely rule out." Last week, American convinced its lenders to relax the minimum cash-flow ratio it needs to keep two credit facilities totaling $695 million. Does that sound like good news? In addition, the industry needs capacity cuts of 20%, J.P. Morgan analysts estimated. That's never been done outside of a liquidation. But a merger also helps cut capacity. J.P. Morgan's Jamie Baker wrote last month, "This is how consolidation is best framed, in our view. Not in terms of short-lived revenue synergies, but rather by what the industry saves by flying less."