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American Slashes Routes, Charges for One Checked Bag

First airline to charge for a single checked bag; fuel costs blamed

By Mark Huffman
ConsumerAffairs.com

May 21, 2008

American said it would also raise other fees for services ranging from reservation help to oversized bags. The other fees will mostly range from $5 to $50 per service.

But wait, the news gets worse. American said it would reduce domestic passenger capacity by 11 to 12 percent in the fourth quarter of 2008, retiring at least 75 mainline and regional aircraft. American said the cuts are unavoidable.

"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," said AMR Chairman and CEO Gerard Arpey.

"Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve. 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," Arpey said.

By reducing capacity, Arpey said American hopes to to significantly reduce costs as well as create what he called a more sustainable supply-and-demand balance in the market. In recent years, he says, the industry has been hurt by some airlines growing faster than conditions warranted, and that impact has worsened in light of recent economic trends and soaring fuel prices.

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.

The capacity changes will result in workforce reductions at both American Airlines and American Eagle Airlines and could result in facility closures or facility consolidation. AMR is assessing the scope and location-specific impact of any workforce reductions resulting from the capacity reductions. In addition, AMR is assessing the impact of these capacity reductions on its overall cost outlook.

The company estimates that new and increased fees announced this month will generate several hundred million dollars in incremental annual revenue.

"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," Arpey said. "The bottom line is that our revenues, which include ticket sales and fees, must keep pace with our increasing costs."

As evidence of the crisis caused by soaring fuel prices, Arpey cited the U.S. airline industry's first quarter 2008 pre-tax loss of nearly $2 billion excluding special items and the fact that eight U.S. airlines have filed for bankruptcy protection this year, including five that have ceased service. AMR said it paid $665 million more for fuel in the first quarter than it would have paid at prices from the year-ago period.

Its first quarter fuel expense increased by 45 percent year over year, while its total revenue increased by 5 percent. The price of jet fuel has increased by more than 10 percent since April 16, when AMR expected its 2008 fuel bill would be well over $6 billion higher than in 2003.

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