When the economy is solid, demand rises and more people fly. But a rising economy also pushes up oil prices and offsets the airlines’ bottom line. Add to that the large number of carriers within the industry all fiercely competing and battling to win passengers, and that eats into profitability, too.

When the economy is struggling and the job market is poor, many people have less disposable income – and consequently fewer people want to fly. Here in Baltimore, for example, BWI Airport saw 7.5% fewer passengers in March, compared with March 2008. In addition to less demand, oil is a volatile resource, under threat from geopolitical shenanigans at any time.

Right now, of course, we have the latter. And the numbers paint an ugly picture…

Consider the following ugly bunch of data from the International Airline Transport Association (IATA).

1) From an estimated $4.7 billion loss as recently as March, it now forecasts $9 billion worth of losses.

2) Airline industry revenues are projected to hit $448 billion this year – a 15% drop over 2008.

3) By region, the numbers show a $1 billion loss for North American airlines this year (much better than the $5.1 billion loss in 2008, but this is largely due to the oil price decline)… a $1.8 billion drop for European carriers… and a $3.3 billion tumble for airlines in the Asia-Pacific region.

4) On Monday, Japan Airlines, which boasts the best revenues in Asia, said it will cut its international routes by 10% during the current business year. It was the latest in a string of route cutbacks from global airlines.

5) The IATA says passenger demand will fall by 8% to just over two billion this year, with cargo demand suffering a 17% drop, as the global economy slumps.

Martin says an easy way to profit from airlines woes is to short the Claymore/NYSE Acra Airline ETF (NYSE:FAA). This relatively new ETF tracks highly capitalized and liquid US and international passenger airlines. FAA is down 12.6% since its recent May 6 high. And there could be plenty more pain on the horizon.

Martin recommends shorting two airline indexes: The Airline Index (AMEX: ^XAL) and the Claymore/NYSE Arca Airline (NYSE: FAA).  Good luck!

The nation’s largest airline has now canceled a total of more than 2,400 flights since Tuesday, after FAA regulators implied that nearly half its airplane fleet could violate a safety regulations.

Shares of AMR stock fell more than 11% on Wednesday, recovering over 6% in morning trading on Thursday.

The fallout of the outages for AMR’s second-quarter financials should be even greater. In times of high fuel cost, airlines must cram each plane as full with passengers as they can, scrapping under-booked flights. Assuming just 100 passengers on each of the 2,400 canceled flights, over 240,000 people, each spending just $100 per flight, gross revenues would take a hit of a minimum $24 million — not counting vouchers for meals and accommodations.

With a price-earninge ration of just 5.47, AMR would now qualify as a “value stock” to those cherishing arbitrary numbers fetishes as salutary indicators of a stock’s inherent value. Indeed, given today’s impressing rebound in the face of more bad news (and medium-term fall-out), there seem to be plenty of traders who consider the recent low of $8.10 a bargain for a company that hit $34 just a year ago.

But given the outlook for U.S. consumer spending (especially on travel) and soaring gas prices, I believe the airline industry as a whole will dive-bomb into a sea of red ink by summer. (I said this much in the upcoming TFN 60-Second Buzz… which I taped before the AMR troubles hit.)

Unless you’re shorting the stock awaiting further bad news, I’d not put a dime into airline stocks just yet. No matter how cheap, you can always lose another 90% of principal…