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American Air: We're Not Built for $130 Oil

Rising oil prices prompt the carrier to make cuts to domestic flights and staff.
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Updated from 10:30 a.m. EDT

As rapidly rising fuel prices take a bigger and bigger toll on airlines,


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American Airlines moved Wednesday to sharply reduce capacity and said thousands of job cuts will likely follow.

"The U.S. airline industry as it is constituted today was not built for $125 or $130 oil," CEO Gerard Arpey told reporters following the carrier's annual meeting. "The industry cannot continue in its current state."

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American said it will chop mainline domestic capacity by 11% to 12% in the fourth quarter, retiring at least 75 mainline and regional aircraft. Overall capacity will decline by 7% to 7.5%. "The objective would be to try to eliminate overhead and cost commensurate with the capacity reduction," Arpey said. Asked if job cuts would number in the thousands, he responded: "I would think so."

Arpey said airlines are in new territory due to the combination of rising fuel prices and a slowing economy. "It is very troubling to see the economy continue to soften at a time when oil prices continue to rise," he said. "Historically, when you get a softening economy, usually that is taking pressure off of oil, and you get some relief. Quite the opposite is happening right now."

To illustrate the impact of rising fuel costs, Arpey noted that in 2000, the average revenue per segment (or flight) was $163, of which $24 went to pay for fuel. In the first quarter of 2008, the average revenue per segment was $149, while fuel had risen to $64. Today, Arpey said, fuel is at about $82 per passenger. So, "to get oil where you need pricing to be, you need another $58 per passenger."

While every U.S. carrier has moved to cut capacity or reduce growth, American's cuts are the first to be announced since carriers reported first-quarter earnings results in April. Because of the fuel price surge that has occurred since then, they are the broadest cuts so far, and most likely presage future actions by other carriers. Most of the cuts are slated to take effect following the summer travel season.

In March,


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announced a 10% domestic reduction and 2,000 job cuts over several months. In April, with oil prices threatening to reach $120 a barrel,


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announced a 10% cut and



announced a 9% cut.

Meanwhile, cuts of 2% to 5% were announced by American,


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US Airways



"I am absolutely convinced that two or three months from now,

assuming oil prices at $116, the carriers who announced 5% reductions last week will be announcing more," AirTran CEO Bob Fornaro said at the time, on a conference call.

Trading in AMR was halted briefly before opening Wednesday in anticipation of the announcement. The news sent the stock to a new 52-week low. Shares were down $1.48, or 18%, at $6.72 in recent trading.

Before the capacity cuts announced Wednesday, American had expected a 4.6% decline in fourth-quarter mainline capacity and a 2% increase in regional capacity. Now, regional capacity will decline by 10% to 11% during the quarter.

Of the 40 to 50 mainline retirements, the majority will be MD80s, but some A300s will also be included. Additionally, 35 to 40 regional jets and some turbo-props will also be retired.

As for revenue initiatives, American said that since April 16 it has participated in or led 15 fare increases, 14 of which were at least partially successful. On Wednesday, the carrier introduced a $15 fee for the first checked bag for some passengers, but excluded premium passengers, full-fare passengers, and international passengers. It also increased fees by $5 to $50 for services ranging from reservations services to pet and oversized bags.