The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, AMR (NYSE: AMR).

Coffee, tea, or parachute
Legacy carriers have historically been bad bets for investors, but this week's diss isn't a knock on the industry. AMR is the only major airline that's expected to post a loss this year -- and a widening deficit at that.

Yesterday's quarterly report was another one for the lavatory flush lever.

Revenue may have clocked in 9% higher, but a sharper-than-expected loss reversed a year-ago profit. Ineffective fuel hedges and foreign currency fluctuations may have padded losses at the parent company of American Airlines, but it still would have posted a steep loss.

Fuel costs may be higher than they were a year ago, but that's not getting in the way of its rivals hitting the tarmac in the black. Even some of its chunky rivals that have been susceptible to cyclical swings in the past -- US Airways (NYSE: LCC), Delta (NYSE: DAL), and United Continental (NYSE: UAL) -- are all comfortably profitable this year.

The combination of passenger-milking fees and steady fares has created an environment where you have be pretty bad to not make money.

Fearing an economic slowdown, AMR is already making plans to reduce its capacity for the balance of the year. It's easy to see why AMR is the nervous one. If there's a shakeout in the industry under a pronounced slump, AMR is likely the first to buckle. It has failed to lower its cost structure to the point where it can be competitive. Meanwhile, AMR's net debt has ballooned to $12.6 billion.

Buckle up. There's turbulence ahead.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Alaska Air (NYSE: ALK) : It's hard to find a carrier that is humming along as nicely as Alaska Air. The regional carrier earned $7.14 a share last year, and analysts see it posting a profit of $7.91 a share this year and $8.95 a share come 2012. In other words, Alaska is cheap at a mere seven times forward earnings. Alaska Airlines and Horizon Air serve 90 different largely northwestern cities -- and apparently quite effectively and profitably.
  • (Nasdaq: PCLN) : Instead of betting on individual airlines, why not bet on one of its more profitable ambassadors? The online travel portal has evolved into more than just a "name your price" bargain hub. In fact, just 23% of its bookings are originating domestically. The dot-com darling's latest quarter was another analyst-thumping beauty. Revenue rose 44%, and adjusted earnings soared a sharp 79%.
  • Spirit Airlines (Nasdaq: SAVE) : Given the choice between legacy carriers with legacy problems and nimbler upstarts, I would argue that bigger isn't better in this industry. Spirit is a perfect example. It woos a cult of travelers with dirt cheap base fares, knowing that everything extra is going to cost them. I do mean everything. Things that are included with even the greediest of carriers -- sodas, carry-on bags, and assigned seating -- are upcharge items at Spirit, but travelers know that it's the only way to get in on fares that start as low as $9 per flight. Managing passenger disgust for crazy airline fees is apparently easier when you're practically giving away the seat. Spirit went public with its apropos ticker symbol in May, blowing past Wall Street's bottom-line estimates in its first quarter as a public company. Its second report comes next week.

I'm sorry, AMR. Aadvantage out. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.