During the last airline industry downturn, low-cost carriers capitalized on the woes of the legacy airlines to expand market share. But their much-admired lean business models now appear inadequate to protect them from the fallout of record fuel prices.

"They were fine at $40-a-barrel oil, but not at $140," says Raymond Neidl of Calyon Securities. He expects troubles to continue as long as fuel remains high, or until carrier managements pull themselves out of their vulnerable state.

Revenues will need to climb to counter rising costs, meaning higher fares and additional fees attached to special services. The analyst expects most airlines will endure through this year but will encounter trouble in 2009.

The inability to price for profitability is hampering all U.S. carriers, Neidl says. He is concerned that some low-cost operators are not knowledgeable in the techniques of yield management as applied to selling seats. Yield management enables airlines to offer a mix of discount and full fares to produce a profitable flight.

Neidl recommends that investors monitor cash positions of individual carriers. If cash falls below 10% of revenues of the last 12 months, "it makes it hard to function."

Successful low-cost carriers are beginning to look to the international market for continued growth. George Hamlin of ACA Associates says Southwest Airlines' teaming with Canada's WestJet is a step in that direction.

Across the Atlantic, Ryanair is contesting the European Union's decision that denied its hostile takeover of Irish flag carrier Aer Lingus. Ryanair holds a 29% stake in the carrier.

Ryanair has followed Southwest's early strategy of serving secondary airports, says Christian Torrego, senior manager at PricewaterhouseCoopers Advisory in France. Torrego expects Ryanair eventually will begin serving primary airports much as Southwest has done. Ryanair and EasyJet "are shaping the European markets for all participants."

Hamlin says airlines can achieve success by focusing on serving markets and containing growth. "Big is not always better . . . . The question is, who survives and who will not. Those in good financial health and strong liquidity will endure."