The crisis confronting the US airlines industry worsened on Wednesday as American Airlines said rising fuel costs would force it to eliminate flights, cut thousands of jobs and charge most passengers $15 (7.60) to check a single piece of luggage.
It declared the extraordinary measures as the spot price for crude oil reached a record $133.82 a barrel, heading above $134 in after-hours trading, and the cost scheduled for delivery in December 2016 surged to an all-time high of $142.14.
Gerard Arpey, Americans chief executive, warned the rest of the industry to take similar actions or risk repeating the downward spiral into bankruptcy that claimed carriers in previous downturns. American remains the only legacy US carrier that has managed to avoid seeking protection from creditors.
"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 US economy," Mr Arpey said. "Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve."
This years rise in fuel prices has added almost $3bn to Americans annual expenses. Its shares were down 25 per cent in late New York trading, leading the sector lower amid concern that the downturn would pull several big carriers into bankruptcy.
American, the worlds biggest airline, said it would make deep cuts to its flight schedule, retire at least 75 aircraft, close facilities and eliminate jobs.
The company intends to reduce system-wide capacity by as much as 4 per cent this year, up from a previous plans 1.5 per cent. Flights within the US will face the steepest cuts, with capacity expected to drop by up to 12 per cent in the fourth quarter. Regional service will shrink by 10-11 per cent.
American hopes to generate several hundred million dollars in extra revenue by fees ranging from $5 to $50 including an unprecedented $15 for a single checked bag. Premium customers will not have to pay the baggage charge. Other fees will include those for reservation services, allowing pets on flights or checking oversized bags.
The actions aim to "eliminate unprofitable flying and [to] improve the supply and demand equilibrium", Mr Arpey said.
Delta Air Lines, which will pass American to become the worlds biggest carrier after its merger with Northwest Airlines, said it would not match Americans plans with its own single-bag fee.
Oil prices rose on Wednesday after a big fall in US crude inventories, now 6.5 per cent below last years level. Samuel Bodman, the US energy secretary, said the rise reflected a tight oil market.
The jump in long-term prices is serious for airlines, which rely on these contracts to hedge oil cost exposure. Since January, long-term prices have surged 60 per cent, outpacing the 35 per cent rise in the spot price for oil.
American was one of the first US carriers to restrain expansion and stepped up capacity cuts in April. It said it has been hit with $1.9bn more in annual expenses since March when crude rose from an average price of $105 per barrel to $130.
Additional reporting by Daniel Pimlott in New York
http://www.ft.com/cms/s/0/ec2b8f42-274c-11dd-b7cb-000077b07658.html
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