American Cuts Flights, Adds Fees As Airlines Face Crisis

American Airlines on Wednesday took the most dramatic steps yet to respond to a deepening financial crisis that -- because of skyrocketing fuel costs -- many view as a greater threat to U.S. airlines than the industry crisis triggered by the Sept. 11 terrorist attacks. With the price of a barrel of crude hitting a record of $133, the unit of AMR Corp. said it will slash the number of seats offered by as much as 12% in the fourth quarter, its biggest single service cutback since the 2001 terror attacks. American said it will remove at least 75 of the 954 aircraft in its fleet and that of its regional American Eagle operation. Those steps could lead to job losses in the thousands. American Airlines is adding a $15 fee for passengers' first checked bag. The Journal asks some New Yorkers for their opinions. American, the world's largest airline by traffic measures, also said it will start charging some domestic passengers $15 to check a suitcase. American and other carriers, following the lead of UAL Corp.'s United Airlines, already charge some people $25 to check a second bag. "The airline industry will not and cannot continue in its current state," said Gerard Arpey, AMR's chief executive, at the company's annual meeting in Fort Worth, Texas. The new measures are designed to "reduce unprofitable supply," he told shareholders. In plain language, that means weeding out money-losing flights and limiting the number of low-priced seats in coach. (See related article.) Other carriers -- many of which already have announced capacity reductions of their own -- are expected to continue shrinking in an effort to offset rapidly rising fuel bills. Fuel costs, which are up 64% from a year earlier, are threatening to drive a new round of airline bankruptcy-court filings this year, some analysts warn, and, perhaps, more outright failures. Ben Hirst, general counsel of Northwest Airlines Corp., said he thinks the industry generally agrees that a 20% capacity reduction is probably needed. "Cash is burning, in really, really large amounts," he said. If other carriers follow AMR's lead, travelers will quickly see not only fewer flights, but higher fares. That would also likely trigger heavy job losses for airline employees. The industry shed about 130,000 in the dark days after the 2001 attacks, and most of those jobs never came back. The passenger airlines currently employ about 415,000 people. 'Race Is On' "The race is on to see if airlines can raise fares high enough to cover the fuel bills before they run out of cash," Roger King, a CreditSights analyst, said in a research note on Monday. Airlines currently face fuel-expense increases "near or exceeding" their levels of cash on hand. If oil prices keep climbing, rising fares could start to push a significant percentage of travelers away from flying entirely. That could reverse one of the most dramatic effects of the industry's deregulation in 1978, which led to a huge increase in flights, and brought intense fare competition, opening the world of air travel to millions of people. Among airlines, AMR has perhaps the most motivation to move aggressively. It's the only major, traditional U.S. airline that hasn't been through a bankruptcy-court restructuring, meaning it faces higher labor, fleet and other costs than its rivals. American also hadn't reduced its capacity as much as its rivals in recent months, so it is also playing catch-up. In addition to tacking on the $15 checked-bag fee, American said it is also boosting fees for other services, such as phoning for reservations assistance, shipping pets and checking oversize bags. The fee increases range from $5 to $50. The goal, it said, is to generate "several hundred million dollars" in additional annual revenue. That would be a drop in the bucket. Despite more than a dozen industrywide fare increases in recent months, airlines are capturing only a sliver of the added cost of fuel. Some analysts believe the U.S. industry will lose more than $7 billion this year, on an operating basis. By comparison, in 2001, the industry posted a $10.3 billion operating loss. The chief culprit of the current woes is a fuel bill that could total $60 billion this year -- a remarkable $18 billion to $20 billion higher than it was last year. The industry earned just $3.8 billion in net profit last year. Economic Shock Jim May, chief of the Air Transport Association, said the current situation represents "the worst economic shock since 9/11, and possibly one that is worse." The association, the leading airline trade group, forecasts fuel expense rising 72% this year from last. It's hurting carriers' bottom lines. AMR's first-quarter revenue increased 5% over the previous year period, but its fuel bill soared 45%. Northwest, which consumed the same amount of fuel in the first quarter as it did in the year-earlier period, spent $445 million more on fuel. However, it took in only $150 million in additional revenue in the latest quarter. Northwest, which plans to merge with Delta Air Lines Inc. if antitrust regulators don't block the combination, already has announced more modest capacity reductions and plans to remove some aircraft from service. Delta has done much the same and is offering buyouts to reduce its ranks by 2,000 employees. United has also announced capacity reductions. Some of the smaller discounters have reined in their growth projections. Other small airlines have already succumbed and gone out of business. The big airlines, deep in red ink again after two years of profits aided by their intense, post-2001 cost-cutting, are trying to raise more cash through debt offerings and asset sales, along with boosting the fees imposed on travelers. Further cuts are possible later in the year. Most observers expect airlines to maintain as much capacity as they can through the busy summer season, then cut back sharply in the fall when traffic traditionally slows anyway. Michael Linenberg, a Merrill Lynch analyst, said that if oil prices rise well past $150 a barrel, as some economists say is possible, "I think the government is going to have to step in," he said. "We can't have all these airlines shutting down." Staying Afloat In the wake of Sept. 11, 2001, the federal government poured $5 billion into the industry to provide airlines with much-needed cash to stay afloat, and to reimburse them for the shutdown of airspace following the attacks. Still, industry revenue took four years to return to 2000 levels, and profits took six years to bounce back. The sector racked up $35 billion in losses in five years before turning profitable again in 2006. The record price of crude oil is exacerbated by a further problem. Refiners currently charge up to $36 a barrel to turn crude oil into jet fuel; by contrast, a few years ago, they charged just $3 to $5 a barrel. As a result, the cost of fuel as it's pumped into an aircraft today is more like $160 a barrel, including taxes and fees. In 2002 the figure was $30. Last year it was $88.