With oil prices hitting new records almost daily, the nation's largest air carrier, American Airlines, announced drastic steps Wednesday to "remain viable," including charging new fees for all checked baggage, slashing domestic flights and laying off thousands of workers.
It was one of the most extreme moves yet by a U.S. airline, and came as the price of oil jumped Wednesday to $133.17 a barrel, up $4.19.
For The Record
Los Angeles Times Friday, May 23, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 55 words Type of Material: Correction
Baggage fees: A story in Section A on Thursday reported that American Airlines will charge a fee for all checked baggage. The fees will not be applied to most international travelers. A photo accompanying the article showed a couple headed to Mumbai. Passengers flying the airline to India would not be charged the new fees.
For The Record
Los Angeles Times Saturday, May 24, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 28 words Type of Material: Correction
Baggage fees: An article in Section A on Thursday about American Airlines' imposing a bag fee misspelled the last name of travel website publisher Joe Brancatelli as Brocatelle.
Starting June 15 most American passengers must pay $15 for checking a single bag. That comes on top of the airline's decision two weeks ago to charge $25 for a second bag.
American, the largest carrier at Los Angeles International Airport, said it was compelled to take the actions in what it called an "extraordinary" environment.
Other airlines are expected to take additional steps to fight the twin curses of rising oil prices and a weak economy, increasing prospects for higher fares and crowded planes as the busy summer travel season kicks into gear with the upcoming Memorial Day weekend.
Already, domestic airfares for summer travel are up 20% compared with a year ago, according to Farecast.com, an online travel search service. American said rising oil prices had increased its expected annual fuel costs by nearly $3 billion since the start of the year.
"There is no sugar-coating the fact we are facing an extraordinarily difficult economic environment," Gerard Arpey, chief executive of American's parent, AMR Corp., said during a conference call with reporters Wednesday. "The industry cannot continue in the current state."
The fee is the first imposed by a major airline for checking in the first bag, a service that has previously been included in the price of the ticket. The fee does not apply to "elite" level frequent-flier club members, those paying full fare and some others.
The airline began charging $25 for a second checked bag earlier this month, and has imposed even higher charges for additional luggage. The airline said it also would raise fees for services including reservation help and the handling of oversized bags.
The moves to generate new revenue came on the heels of another record-breaking day in the petroleum market and raised the prospect of another round of airline bankruptcies if oil prices continued to rise unabated.
On Wall Street, a four-day selling wave in airline stocks intensified as crude oil prices reached record levels. AMR plunged $1.98, or 24%, to $6.22, its lowest since 2003.
Also hitting multiyear lows were UAL Corp., parent of United Airlines, which sank $3.41, or 29.5%, to $8.15; and Continental Airlines, which lost $2.15, or 13%, to $14.20.
In a dramatic reversal, the U.S. airline industry may post a $7.2-billion loss this year compared with a profit of $6.6 billion last year, said Jamie Baker, airlines analyst for J.P. Morgan Chase & Co.
In such a climate the airlines appear to be in a "war of attrition," Baker said, adding that the carriers seemed to be engaging in "destructive behavior as they attempt to merely outlast one another."
At current fuel prices, Baker said, a major carrier filing for bankruptcy was a "question of when, not if, in our minds."
Several major airlines filed for bankruptcy protection after the Sept. 11 terrorist attacks temporarily grounded air travel. Most emerged from bankruptcy by early last year and posted the industry's first full year of profits in 2007.
In April, however, four smaller airlines, including Aloha Airlines and ATA Airlines, went out of business, citing high fuel prices, and the rest of the industry has been in survival mode ever since.
Major airlines have cut unprofitable routes, slashed payrolls and added fees in hopes of countering their rising fuel expenses. Some domestic flights now include up to $130 in fuel surcharges.
"We are working hard on a number of fronts to cover our skyrocketing fuel costs," American's Arpey said.
Among them are plans to cut the number of seats on domestic flights by up to 12% in the fourth quarter by retiring at least 75 older, fuel-guzzling aircraft. American had previously expected fourth-quarter capacity to fall 4.6% from the same period in 2007.
The airline said it had not yet decided where the cuts would be made. At LAX, American and its regional subsidiary, American Eagle, operate about 130 flights a day, about a fourth of which are flown by aircraft identified for retirement. Last year, American flew 8.8 million passengers at LAX, accounting for about 15% of passenger traffic at the airport.
Many of the airplanes American plans to retire are older MD-80 aircraft, which were temporarily grounded last month because of missed wiring safety inspections.
Reducing capacity will lead to job cuts at American and American Eagle, the carrier said, adding that it didn't know exactly how many people would face layoffs but that the number could be in the "thousands."