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AMR to Cut Domestic Capacity

The airline loses $604 million in the fourth quarter as the cost of flying skyrockets.
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Updated from 11:26 a.m. EST

American Airlines parent



said it will reduce domestic capacity by 4% in 2006 after losing $604 million in the fourth quarter, largely as a result of high fuel prices and intense competition.

Even though competitors such as

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are expanding, AMR Chief Executive Gerard Arpey said Wednesday his company is "much more focused right now on driving a very large asset base to profitability rather than to worry about market share.

"I am very concerned that an industry that is chronically destroying capital is continuing to pour investment into the business," Arpey continued. "I'm scratching my head over that."

Overall shrinkage at the world's largest airline will be less than 1% because international capacity will actually expand by 4%.

"We've got to eliminate our most unrewarding flying," Arpey said. Additionally, the airline will seek to reduce costs by $700 million, largely through a 5% reduction in its management ranks and reduced distribution costs. All of American's global distribution system contracts expire this year.

AMR's shares closed trading at $20.39, up $1.53, or 8.1% on the day

American's quarterly loss equaled $3.49 a share and compared with a net loss of $387 million, or $2.40 a share, in the fourth quarter of 2004.

The loss for the most recent quarter includes a net negative effect of $191 million from special items, including $155 million in charges for retiring aircraft, $73 million for airport improvements in Dallas and Miami and a $37 million gain related to debt restructuring.

Without the special items, AMR would have lost $413 million, or $2.39 a share, in the fourth quarter. On that basis, analysts surveyed by Thomson First Call were looking for a loss of $2.50 a share. The loss in the year-ago period was $473 million, or $2.94 share, excluding an $86 million net gain from items.

During the fourth quarter, the country's largest airline paid $433 million more for fuel than it would have paid at 2004 prices. For the full year, it paid $1.7 billion more.

Despite the loss, Arpey said American made improvements during 2005. The airline had its first annual operating profit, excluding special items, since 2000 and reported reduced unit costs, exclusive of fuel expenses, for the fourth consecutive year. Additionally, load factors set a record in every month of the year.

For 2005, AMR posted a $93 million operating loss and a net loss of $861 million, compared with the previous full-year's operating loss of $144 million and net loss of $761 million. Various items resulted in a net charge of $180 million last year and a net gain of $135 million in 2004.

Excluding the items, the company would have lost $681 million on the bottom line and had operating earnings of $100 million in 2005, vs. a loss of $896 million and an operating loss of $133 million in 2004.

American's fourth-quarter passenger revenue per available seat mile was up 13.8% year over year. Load factor -- or percentage of seats filled -- for the fourth quarter was 77.9%, up 3.6 points from the same period the prior year. Yield, representing average fares, rose 8.5%.

AMR ended the year with $4.3 billion in cash and short-term investments, including a restricted balance of $510 million.