If American Airlines was a seat, it would be a middle one in coach, sandwiched between two behemoths, pledged as collateral for a loan.

American's parent, AMR Corp., has broken formation with larger rivals United Continental Holdings and Delta Air Lines. The entire sector dropped sharply in July. But while other airline stocks have since rallied, AMR's is still descending. At US$3.13, it is down 60% since the start of the year.

Concerns center on AMR's balance sheet, with net debt of about US$12 billion perched on a US$1.1 billion market capitalization. The cost of insuring its debt against default almost competes with Greece. Indeed, some wonder if the airline should pull a General Motors maneuver, and use pre-packaged bankruptcy to rinse out legacy costs and obligations.

For now, though, AMR's problems look chronic rather than acute. Like another car company, Ford Motor, AMR had the foresight to borrow before any crisis hit. Consequently, it should end the year with liquidity of more than US$3.5 billion, equivalent to more than 15% of annual revenue, according to J.P. Morgan Chase & Co. That's low relative to most other airlines, but above the 10% level signaling a real squeeze. For this reason alone, AMR filing for bankruptcy out of choice is unlikely.

Some US$1.8 billion of AMR's debt matures next year, says Basili Alukos, analyst at Morningstar. So AMR will likely continue having to tap borrowers. Thus far, however, the appetite for airline debt remains relatively healthy. Last week, AMR sold new aircraft-backed bonds which immediately traded higher, indicating strong demand, according to Matt Fuller of Standard & Poor's Leveraged Commentary and Data.

One wild card is a potential recession. But barring a meltdown akin to that of 2008 and 2009, the airline industry is better positioned to withstand a slowdown. Capacity cuts, helped in part by the mergers creating the new United and Delta, have kept planes full and ticket prices high. Moreover, even in 2009, traffic fell just 5%, so a milder recession may not dent air travel too much. It would also likely hurt oil prices, offering some relief: Fuel burns up 35 cents of every dollar AMR makes in revenue, according to James Higgins at Ticonderoga Securities.

Provided any recession isn't too sharp or long, AMR's access to credit markets should remain open.

But if rumors of AMR's demise look overdone - and this airline survived 9/11, the oil price spike and the financial crisis - the stock still looks unattractive. AMR remains hampered by high labor costs, a legacy of not filing for bankruptcy when its rivals did last decade. In the second quarter, AMR's margin of earnings before interest, tax, depreciation, amortization, and aircraft leasing costs was 6%, according to Roger King at CreditSights. Delta's was double that, United's almost triple.

Besides feeding fears of default, this low margin restricts AMR when investing in the business. Worse, its rivals have consolidated around it and, if higher revenues per passenger are anything to go by, enjoy a competitive edge with their bigger networks.

AMR is making headway on replacing old planes and spinning off its regional jets. However, tangible progress on labor - critical to generating free cash flow - remains elusive. Meanwhile, other battered airline stocks do not look terribly expensive right now, providing safer ways to benefit from a better economic outcome. AMR will survive, but survival isn't prosperity.