There is one fact about Aer Lingus that you would not have heard repeated too often in the past few days. It is that, on December 31st last year, the "troubled national airline" had €825 million (£650 million) in cash in its various bank accounts.

This cash pile has certainly shrunk over the past year, given the airline's losses to date of €40 million and the €130 million in debt repayments that fall due this year. In addition, half of the money is secured against aircraft finance leases and not easily available to the company. But the figure is illuminating all the same when you consider that, as of last Tuesday evening, the market capitalisation of KLM Royal Dutch airlines was €423 million and Swissair Group was €419 million.

The Irish national flag carrier is in trouble but is far from being the European basket case that it was in 1991. "It is somewhere around the middle of its peers," according to Mr Stephen Furlong, an analyst with Davy Stockbrokers. The strong cash balances are a testament to the extent Aer Lingus outperformed its peers in 1999 and 2000, he says.

Aer Lingus is in a better position than many other European airlines to weather the current storm and, perversely, its chances of doing so may have been enhanced by the horrific events of last week. Prior to the New York and Washington attacks, Aer Lingus was trying to implement a rationalisation plan against a constantly changing background. The biggest imponderable was the depth and length of the slowdown in the US economy, which is the airline's most lucrative market. Other considerations - such as foot-and-mouth disease - made it hard to predict the extent of demand in the European and domestic markets. The difficulties were compounded by the fraught industrial relations atmosphere that would have made the implementation of redundancies among low-skilled workers difficult to justify at the same time that pilots were getting a 30 per cent pay rise.

That all changed at 8.45 Eastern Standard Time last Tuesday when terrorist hijackers flew an American Airlines jet into the north tower of the World Trade Centre.

Some things are now certain. The US economy already is or shortly will be in recession. The number of people - and Americans in particular - travelling by air will fall dramatically in the coming months. If the Gulf War slump of 10 years ago is any guide, there will be a 20 per cent fall-off initially and something in the region of a 6 per cent decline in the year as a whole. The full-year figure may not seem significant but it is worth remembering it was the first time that global passenger numbers had fallen since record-keeping began.

The events of last week have given Aer Lingus the clarity it needs to make some hard decisions and also created the environment that will allow them to be implemented. Abandoning two US routes within 12 months of launch is not a decision that an airline would take lightly. "When you stop flying a route the revenue falls to zero but you still have costs such as leasing the plane and paying the staff," explains Mr Furlong. Prior to last week, Aer Lingus had indicated it was not going to retreat from any transatlantic routes, the implication being that it saw a business case for continuing to incur loses on the Baltimore/Washington and Newark routes in the hope that they would start to make money when the US economy picked up.

That thinking went out the window this week, along with any hope that the airline would not be seeking significant lay-offs. Aer Lingus has not named a target figure for retrenchment, and has rather coyly talked of a 25 per cent reduction in operations and cost savings of a similar magnitude. It does not require an in-depth knowledge of the airline to conclude that this means shedding up to 1,700 jobs. The 700 seasonal employees are clearly the most vulnerable, followed by those working in catering and ground-handling, which are seen as two functions that could be easily outsourced.

The Aer Lingus unions met yesterday to consider the situation outlined to them by management on Tuesday and Wednesday. Not surprisingly, the airline kept the pressure up in the media saying that the first lay-offs of temporary staff could come as soon as next week. The company also briefed that the airline could run out of cash by next January. This would be some achievement given the €825 million opening cash balance.

The airline's need to resort to what could be seen as scare tactics speaks volumes about the complete failure of the Aer Lingus management to get the staff to accept realistic pay increases. Having agreed to rises that pushed the €237 million annual wage bill up by something in the region of €50 million in the past 12 months, the company now seems to be hyping the extent of its problems to try and undo the inevitable damage of such concessions.

At the same time, the unions will have be realistic about the jobs cuts. The management's problem is that the unions know the situation they face is not as grave as the 1991 crisis that gave birth to the Cahill plan. The company learnt a number of hard lessons that are standing to it now. It has a very manageable debt and has built flexibility into the fleet structure. This will allow Aer Lingus to return two leased planes to their owners under break clauses this week. In addition, oil prices - for the moment anyway - are nowhere near the $40 a barrel they hit in 1991, and in any case the company has hedged its fuel costs.

The main threat to Aer Lingus's continued survival is any unnecessary delay in agreeing the cut backs with the unions.

It has not been lost on the Irish operator - and several US airlines - that the carriers who cut early and cut deep during the Gulf crisis were the ones that came through best.

But it was also the case that those with serious structural problems prior to the crisis, such as Pan Am and TWA - once America's flagship airlines - came out very badly.

No one can predict, at this stage, how long or how deep the new crisis will be, but most observers are in agreement that there will be casualties in the sector.

The most vulnerable are probably the second- and third-division European airlines, such as Aer Lingus, with exposure to the transatlantic market. Their chances of survival will be reduced significantly if they are forced to compete against US airlines that are being subsidised by the US federal government while Brussels adheres to its ban on state aid.

Yesterday it appeared that the European Commission was preparing to allow governments pick up the bill for the extra security measures. It may also consider lifting the ban on state aid for the sector.

Even without state aid, Aer Lingus's chances of survival must be considered relatively good, provided it is not unfairly disadvantaged and that it can make use of its current difficulties to force through some significant cost savings.