When the fighting starts in Iraq, one of the first casualties is likely to be America's airlines.

Some of the already wounded airlines may not survive the air travel collapse that is expected to result when the nation's angst ratchets above the already worrisome Code Orange Alert proclaimed Friday by President Bush.

Wall Street has pretty much written off the entire industry, bailing out of all 14 airline stocks indiscriminately. Shares of such profitable carriers as Atlantic Coast Airlines Holdings Inc. of Dulles have fallen along with wobbly ones like American Airlines, which is everybody's pick to be next in line at bankruptcy court.

In the past month, Atlantic Coast's stock has dropped to $8.09 a share from $14.54, plunging right past the $10 low that it reached when airline stocks crashed after Sept. 11, 2001.

Investors have good reason to be worried about the industry, but they may be making a mistake by not taking a flier on Atlantic Coast and some of the other successful smaller airlines, the stocks of which have been grounded by Wall Street's Iraqnophobia.

Analysts for Deutsche Bank AG, Goldman, Sachs & Co, BB&T Capital Markets and Raymond James & Associates issued new reports on Atlantic Coast stock last week, all four recommending clients buy the stock.

Even Morgan Stanley's William J. Greene, who gives Atlantic Coast shares a cryptic "equal weight-cautious" rating says "fundamentals aren't driving the stock."

The fine print in the reports of all the analysts cited in this column shows their firms have been, or would like to be, paid for doing investment banking work for Atlantic Coast.

Atlantic Coast's stock, the analysts agree, is being dragged down by fear about its future relationship with United Airlines, which is Atlantic Coast's partner and main source of income. Under a contract with United, the local airline flies United Express feeder flights that link smaller cities to United's hubs at Dulles International Airport and Chicago's O'Hare International Airport.

Because United is trying to reorganize under Chapter 11 bankruptcy protection and could cancel the Atlantic Coast contract, or even go out of business, Morgan Stanley's Greene says, "investors are probably best served by waiting on the sidelines" until that issue is resolved.

United's future, in turn, may be determined by events in Iraq.

"Nobody knows what's going to happen" when rhetoric is replaced with rockets, said Ray Neidl, the airline analyst for Blaylock & Partners LP, a New York brokerage and investment banking firm.

Conventional wisdom is that airline traffic, which has been climbing slowly since the terrorist attacks, would nosedive again after the fighting starts.

Already travelers' worries are worsening. The space shuttle Columbia disaster no doubt rattled those with unresolved aviophobia. Then last week the State Department issued a worldwide travelers advisory warning, which caused prospective vacationers to temper the temptation of low fares on overseas routes. Roundtrip winter fares from Washington to Europe are available for less than the $304 that Amtrak charges to go from Washington to New York and back on its high-speed Acela Express trains.

Even at those fares, planes aren't flying full. And far fewer planes are flying because airlines have been cutting routes, trying to scale down their operations to a size appropriate for the shrunken market.

The outbreak of hostilities alone will scare away more passengers, airline people fear. Should terrorists attack a plane, an airport or a tourist attraction, the impact on the industry could be catastrophic.

The worst case scenario is that war with Iraq will scare away so many passengers that it will abort the bankruptcy reorganizations of US Airways Group Inc. and UAL Corp., United Airlines' parent, and push others into Chapter 11. The stock of AMR Corp., the parent of American, fell Friday to $3 a share, which is about where US Airways stock was before the Arlington-based airline sought Chapter 11 bankruptcy protection from its creditors in August.

What happens to United is crucial to Atlantic Coast because 85 percent of its planes are painted with red, white and blue United Express logos. The rest carry the colors of Delta Air Lines, Atlantic Coast's other partner.

Under its deals with United and Delta, Atlantic Coast just does the flying. The big names sell the tickets and pay Atlantic Coast on a fixed fee, per-flight basis.

Bankruptcy laws permit companies trying to restructure the finances to cancel contracts -- with approval of the court. United hasn't asked to get out of its Atlantic Coast contract, but hasn't reaffirmed the deal either. Atlantic Coast took the initiative three weeks ago, asking the bankruptcy judge in Chicago to make United make a decision by the end of this month.

The legal action was only a procedural matter, Atlantic Coast officials say. But since The Post's air travel reporter Keith L. Alexander broke the story, Atlantic Coast stock has fallen on 12 out of 15 days.

If United does pull the plug, Atlantic Coast Chairman Kerry B. Skeen has said his airline has "other options" and has talked to other airlines about becoming their regional partner. It might also go back to operating as an independent airline, as it did before it partnered with United and Delta.

Analysts say it's unlikely that United will cancel its contract with Atlantic Coast. If it does, however, Atlantic Coast might actually be better off, Merrill Lynch analyst Michael Linenberg told clients last week..

Cautioning that it was "pure speculation on our part," he said he believes "it is possible for Atlantic Coast to generate higher margins as an independent operator."

"The risks of such a move could be significant," Linenberg added, but "alternatives do exist."

More likely United will try to do what it has done with its employees -- use the threat of failure to bludgeon Atlantic Coast into taking a pay cut.

All the analysts have spent lots of time crunching numbers to try to estimate what might happen to Atlantic Coast's profits under all kinds of scenarios and what those possibilities would mean for the price of the stock.

At this point, that's probably pointless, concludes Morgan Stanley's Greene. Calling the company by its stock trading symbol, he said, "ACAI is unlikely to trade at intrinsic value until the questions surrounding ACAI's future flying for United Airlines are clarified."

But when the BB&T analysts ran the numbers, they came to a different conclusion: "Under all scenarios that we see as realistic, we conclude that ACAI will remain a profitable, cash-generating airline."

Its profits, however, could be smaller, its cash generator less powerful. So while maintaining its "buy" rating on the stock, BB&T advised investors to aim for the stock to hit $15 in the next year, rather than the $22 previously targeted. Other firms recommending the stock have also told investors to reduce their expectations.

Blaylock's Neidl regards Atlantic Coast as "a buying opportunity" at this price. While Wall Street is worried that the airline might lose its United business, he suggests the opposite could happen. United may turn more of its short haul routes over to Atlantic Coast and the other regional airlines it has partnerships with. Flying regional jets that carry 30, 50 or even 70 passengers, Atlantic Coast can serve smaller cities at lower cost than United can with its own fleet of bigger planes, he pointed out.

Though gloomy about what a terrorist attack on planes or airports might do to the industry, Neidl says that if there is a short war with Iraq, "you may even see a pop in the stocks."

If that happens, Neidl added, "I would use it as a selling opportunity."

That short-term mentality dominates the thinking of professional investors in airline stocks. Traditional buy-and-hold investors have abandoned the stocks because, as Merrill Lynch points out, "airlines are infamous for wealth destruction."

Atlantic Coast, which earned investors a total return of 289 percent in the 10 years ended Dec. 31, and Southwest Airlines, with a 263 percent gain for that period, are among the very few carriers with a positive long-term track record.

The stocks of Delta, American, United and US Airways have crashed and burned. The latter two are worthless, or will be by the time their bankruptcy proceedings are over. Delta and American shareholders have lost half their money in the past decade. If the Iraq war hurts air travel as much as pessimists fear, shareholders of Delta and American could end up in the same boat, clutching their seat cushions as their airlines slowly sink into bankruptcy.

Jerry Knight's e-mail address is knightj@washpost.com.

Atlantic Coast Airlines pilot Austin George steps off his plane at Dulles. Under its deal with United, Atlantic Coast flies the regional planes on a fixed fee, per-flight basis.