By Mary Jane Credeur and Mary Schlangenstein
May 21, 2008
AMR Corp.’s American Airlines, the world’s largest carrier, said it will cut “thousands’ of jobs as it slashes U.S. capacity and retires as many as 85 jets to blunt surging fuel prices and slowing demand.
AMR plunged the most since 2003 in New York trading, slicing its market value in half since the start of this year to $1.53 billion. The carrier also added a $15 fee to check one bag, the first in the U.S. with such a charge.
Chopping domestic seating by 12 percent “is the right and necessary thing for American to do with oil at $130,’ said Doug Runte, managing director at RBS Greenwich Capital in Greenwich, Connecticut. The move will help American boost fares, he added.
AMR’s retrenchment went beyond steps taken by peers, and comes as analysts predict possible bankruptcies among the biggest airlines amid an 84 percent jump in jet fuel in the past year. Chief Executive Officer Gerard Arpey said the job losses would be in the “thousands,’ without giving an exact figure.
Paring flights and charging for checked luggage may hurt customers’ views of American, which exceeded the industry average for consumer complaints in 2007. Extra-baggage fees at other big U.S. carriers start with the second piece, and flight cuts will trim options for travel times and destinations.
Arpey didn’t say how the cutbacks would affect specific flights or cities; American now has operates about 2,200 daily flights with its main jet fleet. The reductions are the third this year and are more than twice what AMR announced in April.
The jobs being eliminated will be “commensurate’ with the drop in seating capacity, Arpey told reporters after AMR’s annual shareholders meeting in Fort Worth, Texas, where the company is based. Counting part-time workers, AMR had about 95,000 employees as of May 1, spokesman Tim Smith said.
AMR tumbled $1.91, or 23 percent, to $6.29 at 3:27 p.m. in New York Stock Exchange composite trading. It was the biggest decline since March 2003, when AMR was at the brink of filing for bankruptcy. This year’s 55 percent slide outpaces the 35 percent decline at Continental Airlines Inc., the top performer among U.S. full-fare carriers.
American’s new baggage fee will take effect June 15, as the U.S. summer travel season gets under way. It excludes some members of American’s frequent-flier program, travelers buying full-fare tickets and passengers on international flights.
International capacity growth will slow and possibly decline in the fourth quarter, when the rest of the reductions are in place, American said.
`You Have to Shrink’
As many as 45 planes will be dropped from American’s fleet, most of them aging Boeing Co. MD-80s, and as many as 40 jets at the Eagle regional unit, the company said. American said some Eagle turboprops also may be parked, without giving details. Eagle’s capacity will fall by 11 percent, American said.
As of this month, American had 655 jets, and Eagle had 305 planes, according to AMR’s Web site. The MD-80s are almost half of American’s fleet, and Boeing fell $3.90, or 4.6 percent, to $81.24 in New York.
The plan for pruning capacity “might not be drastic enough,’ said Roger King, a CreditSights Inc. debt analyst in New York. “When oil is this high and they’re bleeding this much cash, you have to shrink’ to return to profit.
The changes may result in the closing of some facilities, AMR said, adding that the company still is assessing the costs of the job cuts and possible closures.
`Very Perilous Time’
AMR’s moves extend an industrywide contraction by competitors including UAL Corp.’s United Airlines and Delta Air Lines Inc. Delta, which plans to acquire Northwest Airlines Corp. in an all-stock merger, plans a 10 percent cut in domestic capacity.
This is a “very perilous time’ for U.S. carriers, retiring Southwest Airlines Co. Chairman Herb Kelleher said today at the company’s annual meeting in Dallas.
“We’re being forced back to the days when fewer people flew because the cost barrier was so significant,’ Kelleher said. “As you have a contraction of service and higher fares, you may see a lot less air service across the U.S. We hope it’s not a permanent situation. Fuel prices are just beyond belief.’
Crude oil soared, reaching $133.56 a barrel in New York trading, meaning the price has doubled in the past year. Combined 2008 losses at the biggest U.S. airlines may reach $7.2 billion, JPMorgan Chase & Co. analyst Jamie Baker estimated this week.
Credit-default swaps linked to AMR bonds jumped 101 basis points to 2,612 basis points, a 52-week high, according to CMA Datavision in London. The contracts, which are designed to protect bondholders against default, have climbed more than fivefold in the past year. A rise in the price indicates a decline in the perception of credit quality.
AMR said it ended the first quarter with $4.9 billion in cash and short-term investments, including a restricted balance of $426 million.
“AMR has enough cash to avoid bankruptcy for the next year,’ Standard & Poor’s analyst James Corridore in New York said in a note today. Corridore, who rates AMR as “hold,’ widened his 2008 loss estimate to $6 a share from $3.14.
Fee increases for checked baggage and other services including carrying pets will generate “several hundred million dollars’ in annual revenue, AMR said today. The higher charges range from $5 to $50.
“Our pricing for the services we provide remains extremely competitive in the industry,’ Arpey said. “Our revenues, which include ticket sales and fees, must keep pace with our increasing costs.’
Underscoring the strain of higher fuel expenses was the company’s $328 million first-quarter loss. The deficit was AMR’s second straight and its largest since the end of 2005.
In addition to cutting capacity, AMR said earlier this year it would sell its American Beacon Advisors Inc. investment unit for $480 million, and froze hiring of managers and support employees.
The airline still expects to divest Eagle this year, Arpey said today. Lower valuations because of the credit crunch and slowing U.S. demand are “a factor’ in American’s decision on when to sell the unit, he said.
American has struggled operationally as well as financially in recent months. The airline ranked 17 out of 20 carriers for worst on-time arrival performance in 2007, with 68.7 percent of flights arriving with 15 minutes of schedule, the Transportation Department said. American’s complaint rate, at an average of 1.64 per 1,000 passengers, was worse than last year’s industry average of 1.35, U.S. data show.
In April, the carrier canceled more than 3,300 flights as it grounded its MD-80 fleet for safety inspections.
To contact the reporters on this story: Mary Jane Credeur in Fort Worth, Texas, at firstname.lastname@example.org; Mary Schlangenstein in Dallas at email@example.com.