Soaring fuel prices force American into US cutbacks

American Airlines in the US is cutting domestic capacity, retiring 75 aircraft and imposing a charge for the first bag to be checked in.

The measures are in response to record fuel prices, growing concerns about the US economy and a “difficult competitive environment”.

Gerard Arpey, chairman and CEO of parent company AMR Corporation, said: “The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak US economy.

“Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.

“We must work to overcome our near-term challenges and to secure our company’s long-term future for the benefit of our shareholders, customers and employees.

“We must find ways to cover the cost of providing our services so that we can remain viable and have the resources to reinvest in our company for the future. Those goals are central to the actions we are outlining today.”

“American has introduced a $15 fee on flights from June 15 for the first checked bag on US domestic routes, “given the increasing costs of transporting checked baggage”.

The carrier has also hiked fees for certain other services, ranging from reservation service fees to pet and oversized bag charges. These mostly range from $5 to $50 per service.

The company estimates that new and increased fees will generate several hundred million dollars in incremental annual revenue.

“While we understand that these fees affect customers, we also believe that our pricing for the services we provide remains extremely competitive in the industry and continues to offer our customers ample choice and value,” Arpey said. “The bottom line is that our revenues, which include ticket sales and fees, must keep pace with our increasing costs.”

Reductions to the domestic flight schedule, include a mainline domestic capacity reduction of 11% to 12% in the fourth quarter of the year.

AMR expects to retire 40 to 45 mainline aircraft from American’s fleet, the majority of which will consist of MD-80s but will also include some Airbus A300 aircraft.

The capacity cutback will also result in the retirement of 35 to 40 regional jets, as well as a number of turbo-prop aircraft from AMR’s regional affiliate fleet.

The capacity changes will result in workforce reductions at both American Airlines and American Eagle and could result in facility closures or facility consolidation, the company warned.

“AMR is assessing the scope and location-specific impact of any workforce reductions resulting from the capacity reductions,” a statement said. “In addition, AMR is assessing the impact of these capacity reductions on its overall cost outlook.”

The cuts come against a background of the US airline industry recording a first quarter pre-tax loss of $2 billion and the fact that eight US airlines that have filed for bankruptcy protection this year, including five that have ceased service.

AMR paid $665 million more for fuel in the first quarter than it would have paid at prices a year earlier.

Its first quarter fuel expense increased by 45% year over year, while its total revenue increased by five per cent.

The price of jet fuel has increased by more than 10% since April 16, when AMR expected its 2008 fuel bill would be well over $6 billion higher than in 2003.

by Phil Davies