If the worst happens — a major terrorist attack occurs when war breaks out — the biggest airlines could collapse, the industry association said.
The most likely scenario is a war in which passenger traffic falls more sharply than in the 1991 Gulf conflict, according to the report. In that case, airlines would lose $10.7 billion, nearly 10 percent of daily flights would be canceled and 70,000 airline jobs would be cut.
"We're in a crisis," said James May, the association's president. He said the airlines weren't asking for a bailout, but for help in withstanding the consequences of war.
A relatively short conflict like the first Gulf War would cause $7.6 billion in losses, the report said.
This time, airlines are already in trouble. It will be a tough sell. Many feel it's now up to the industry to streamline operations, cut costs and find a more efficient, profitable way to fly, reports CBS News Correspondent Bob Orr.
Lawmakers may be willing to extend war-risk insurance, which protects airlines from liability claims for injuries resulting from war or terrorism, said Steve Hansen, spokesman for House transportation committee chairman Don Young, R-Alaska. Congress authorized the government to issue the insurance, which got too expensive after the terrorist attacks on New York and Washington.
Sen. Kay Bailey Hutchison, R-Texas, said Congress may consider moving air marshals into tourist class from first class, freeing up seats so airlines can capture more revenue. She also said a holiday from the fuel tax is possible.
"We need to look at some short-term measures to get the industry over the hump," said Hutchison, whose district includes American's headquarters.
White House spokesman Ari Fleischer was noncommittal on whether the administration would consider new breaks for the industry. "We'll of course continue to talk to the airlines about various issues," he said.
"The situation really is dire and I think in the next 6 months if we don't see concessions between labor and management at that time, it would not surprise me if we saw 2 or 3 or even all the top ten carriers, with the exception of Southwest, filing for Chapter 11," aviation analyst Darryl Jenkins tells Orr.
Meanwhile, adding to the airline industry woes, Standard & Poors removed American Airlines parent AMR Corp. from its index of 500 large companies as investors sold the airline's stock to a 52-week low Tuesday amid reports the carrier is arranging bankruptcy financing.
AMR will be dropped on Thursday because of the steep fall in its stock price and market capitalization, S&P said. It will be replaced by Apartment Investment Management Co., a Denver-based real estate firm.
The report's scenarios were based on recent bookings, data from the last war and assumptions about the economy and passenger behavior.
The government's decision to raise the nation's terror alert status to orange last month produced a 20 percent decline in advance bookings despite fares that are at 15-year lows, according to the association, which represents the largest air carriers. The alert has since been lowered to yellow.
A terrorist attack similar in scope to Sept. 11, 2001, coupled with war, could lead to 100,000 more job cuts and elimination of 3,800 daily flights, many to small and medium communities. That could cost the airlines $13 billion, the report said.
"The mere prospect of war with Iraq has already further weakened this industry, which is literally struggling to survive," the report said.
The first Gulf War led to the liquidation of Eastern, Pan American, Midway and Markair airlines, the association said. Now, two of the nation's largest airlines are in bankruptcy — United Air Lines and US Airways — and all others except Southwest Airlines are losing money.
The airlines want a holiday from six taxes they pay into a trust fund, beginning with the start of the war and ending one year after it ends. They also want the government to pay for security improvements at airports, on grounds they are a matter of national defense.
The taxes include user fees on cargo and passengers, a $2.50-per-passenger security surcharge and a 4.3-cent-a-gallon jet fuel tax.
Congress stepped in after the Sept. 11 attacks, granting airlines $5 billion in cash and $10 billion in loan guarantees to offset losses from four days of groundings and passengers' reluctance to fly. The Federal Aviation Administration also issued war risk insurance — which the airlines want extended — after private insurance became too expensive.
Major airlines lost $7.7 billion in 2001 and more than $10 billion in 2002. The airlines blamed security requirements for $4.1 billion of that loss, including indirect costs such as background checks, security equipment, ramp security and aircraft inspections, as well as direct payments to the federal government through the $2.50 passenger tax and assessments for security.
Since the Sept. 11 attacks, major airlines have cut 100,000 jobs, slashed in-flight food service, hedged fuel costs, closed reservation centers, installed automatic check-in kiosks and changed flight schedules at hubs to use planes more efficiently.