(RTTNews) - Wednesday, AMR Corp.
(AMR) said it would cut domestic flights, slash jobs and charge $15 for the first checked bag at American Airlines, as the carrier is struggling to cope up with the record oil prices that are hurting the airline industry, in general. The news send the AMR stock tumbling in intra-day trading by over 15%.
Commenting on the latest announcement, CEO Gerard Arpey 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 U.S. economy. Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.'
Arpey added, '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.'
AMR, which is holding its Annual Meeting of Shareholders today, said it currently estimates domestic capacity, or available seat miles flown, for American Airlines to fall by 11% - 12% in the fourth quarter and by 5% - 6% in the full-year. AMR previously expected domestic mainline capacity in the fourth quarter to decline by 4.6% and 3.6% for the full-year.
In addition, AMR regional affiliate capacity is now expected to decrease by 10% - 11% in the fourth quarter and by 5.5% - 6.5% in the full-year. Previously, regional affiliate capacity in the fourth quarter was expected to increase by 2%, while the full-year capacity was estimated to drop by 2.1%.
The company currently expects its consolidated systemwide capacity to decline by 7% - 8% in the fourth quarter and by 3% - 4% in the full-year. Previously, AMR expected capacity to decline by 1.6% and 1.5% for the fourth quarter and the full-year, respectively.
Arpey said the capacity reductions aim to significantly reduce costs as well as create a more sustainable supply-and-demand balance in the market.
As a result of significantly reduced flying, 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 reductions 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.
According to AMR, these actions will result in workforce reductions at both American Airlines and American Eagle Airlines and could result in facility closures or facility consolidation.
Apart from its ongoing cost-containment efforts, AMR is trying to boost revenues through fare increases and fuel surcharges. Since the release of its first quarter financial results on April 16, American Airlines has participated in or led 15 fare increases, 14 of which were at least partially successful.
On May 21, American Airlines introduced a $15 fee for the first checked bag, given the increasing costs of transporting checked baggage. This fee, which is effective for tickets purchased on or after June 15, does not apply to certain class of passengers, including American's AAdvantage program members.
American Airlines also raised its fees for certain other services, ranging from reservation service fees to pet and oversized bag fees. The increases mostly range from $5 to $50 per service. The company estimates that the new and increased fees announced this month would add several hundred million dollars to its incremental annual revenue.
Commenting on the fees hike, Arpey noted, '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. The bottom line is that our revenues, which include ticket sales and fees, must keep pace with our increasing costs.'
The airline industry is struggling to offset record-high fuel prices. For many airlines, fuel is now the biggest operating expense. Among other things, to stay afloat, airlines are raising fees, cutting jobs and slashing capacities. The sector has been in red since late last week as energy traders rewritten the record books for crude oil and refined products.
Light sweet crude for July delivery traded at $130.68, up $1.70 on the day. In the first half-hour after the release of the data, oil touched a record $130.90 a barrel. The Department of Energy reported that crude oil supplies dropped by 5.4 million barrels to 320.4 million for the week ended May 16. This came as a big surprise to analysts, who were looking for a build in supplies of about 900,000 barrels.
Prices have soared recently amid comments in a CNBC interview by oil man Boone Pickens predicting $150 oil prices later this year. Goldman Sachs also raised its forecast to $141 a barrel for the second half of the year.
Concerns about surging fuel costs have forced industry analysts to repeatedly revise their outlook for the sector in recent months. Early Wednesday, one more analyst lowered his expectations for the sector.
Soleil Securities downgraded the airline to 'Neutral' from 'Outperform'. Analyst James Higgins said, 'Forcing our hand is the relentless surge in fuel prices and the liquidity concerns it raises.'
Higgins also cut his ratings on market leaders such as AMR Corp. and United Airlines parent UAL Corp.
(UAUA) to 'Sell,' and downgraded Continental Airlines Inc.
(CAL) to 'Hold.'
Soaring fuel costs have forced American Airlines, United Airlines, and Delta Air Lines Inc.
(DAL) to raise their fuel surcharges. The additional $20 charge was started by Delta, its second increase in just over a week, and United Airlines and American Airlines quickly followed suit.
'You're going to see higher fares in the next few years,' airline analyst Darryl Jenkins told RTTNews.
Recently, soaring fuel prices were cited as a key factor in the Delta-Northwest merger. Delta and Northwest Airlines
(NWA) are considered to be the key competitors of AMR and their merger would create the world's largest carrier. Many analysts speculate that further mergers could take place within the airline industry as a result of the increased fuel prices.
Further, several airlines have gone bankrupt as a result of these soaring oil prices, including Aloha Airlines, ATA, Skybus, and Frontier. Five years ago fuel prices accounted for 15% of airline costs, but today they account for 50%.
Last month, United Airlines had opened the door for a round of fuel surcharge increases by boosting its domestic fuel surcharge between $10 and $20 round trip.
'The industry has changed dramatically - both globally and domestically - and the old paradigms no longer apply; the current fuel and economic environment are only accelerating the need for a different approach,' United Airlines said at the time.
American Airlines announced recently that it would check one bag for free and will charge $25 for second checked bag for travelers who purchase domestic economy class tickets on or after May 12. The policy changes also apply to travelers on American Eagle. At that time, the airline noted that this baggage policy revision is due to rising costs associated with the transportation of checked baggage, including the price of fuel.
In mid-April, AMR reported a net loss of $328 million for the first quarter of 2008, or $1.