AMR Plans More Flight Cutbacks
Amid Soaring Fuel Costs
American to Charge $15 for First Checked Bag

By KEVIN KINGSBURY
May 21, 2008 10:49 a.m.

AMR Corp. became the first U.S. carrier to make more moves to deal with still-surging fuel costs, announcing additional U.S. capacity cuts, the planned retirement of at least 75 aircraft and more fees -- including charging some fliers $15 for their first checked bag.

The news pummeled stocks of many other airlines, sent shares of AMR tumbling -- recently falling 12% to $7.20 -- and highlighted the crossroads the aviation industry faces as it tries to overcome its fuel bill.

"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 U.S. economy," said Chairman and Chief Executive Gerard Arpey. "Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve."

As such, Mr. Arpey said the Fort Worth, Texas, company "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."

In April, AMR said it planned domestic mainline capacity to be down 4.6% in the fourth quarter from a year earlier, but now sees a drop of 11% to 12%. Regional capacity is now seen falling 10% to 11%, not the 2% increase foreseen last month.

Mr. Arpey said the reductions aim to "significantly" cut costs "as well as create a more sustainable supply-and-demand balance." Jobs cuts will result, as might facility closures and consolidation. He added American has participated in or led 15 fare increases the past five weeks, with 14 of them being at least partially successful.

AMR plans to cut 40 to 45 jets from American, primarily MD-80s but also Airbus A300s. The regional planes to be retired include both jets and turboprops.

Being becoming the first carrier to start charging some customers for the first checked bag -- just several months after carriers began hitting some with fees on a second checked bag for the first time -- American is raising a host of other fees by $5 to $50. They are estimated to generate several hundred million dollars a year.

"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," said Mr. Arpey. "The bottom line is that our revenues, which include ticket sales and fees, must keep pace with our increasing costs."

Earlier Wednesday, Lehman Brothers called for carriers to lower capacity in a research note, saying, "The consensus seems to be congealing in the 20% range, but we believe the number required to stabilize the industry and generate upside in the (companies' stocks) is well below that and closer to 11%."

UBS said, "The industry needs to shrink in a huge hurry to be able to raise fares and reduce fuel burn and other expenses." AMR noted jet-fuel prices have jumped more than 10% since the company released its first-quarter results five weeks ago.

Write to Kevin Kingsbury at kevin.kingsbury@dowjones.com