American Airlines Plans Major Reductions

Rising oil prices prompt the carrier to make a 12% cut in domestic flights and some labor reductions as well.
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Updated from 10:30 a.m. EDT

In response to rising fuel costs and a slowing economy, American Airlines said Wednesday it will chop mainline domestic capacity by 11% to 12% in the fourth quarter and lay off thousands of workers.

The carrier, a holding of

AMR

(AMR)

, said it will retire at least 75 mainline and regional aircraft. It also unveiled several revenue initiatives.

"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," CEO Gerard Arpey said in a prepared statement.

"Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve," Arpey said. "We must work to overcome our near-term challenges and to secure our company's long-term future." He noted the industry has been hurt by overly rapid growth at other carriers.

Trading in AMR was halted briefly before opening Wednesday in anticipation of the announcement. Shares were down $1.45, or 17.7%, at $6.75 in recent trading Wednesday morning.

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. "The objective would be to try to eliminate overhead and cost commensurate with the capacity reduction," Arpey told reporters following the meeting. Asked if job cuts would number in the thousands, he responded: "I would think so."

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.