American to charge for even first checked bag

By Elizabeth Strott

Flying just got more expensive.

AMR's (AMR, news, msgs) American Airlines announced this morning that, as of next month, most passengers will have to pony up $15 for their first checked bag.

American Airlines said the move, a potential game-changer for the industry, is part of an effort to deal with the skyrocketing price of oil.

Crude closed at a new high of $133.17 a barrel in New York, up 3.3% from Tuesday, and traders pushed it to $134 a barrel in after-hours trading. Crude is up 38% this year and more than 200% since the end of 2004.

Crude's gains and a signal from the Federal Reserve that it is done cutting interest rates combined to batter stocks.

American also said that it will cut U.S. capacity -- the number of available seats per miles flown -- by 11% to 12% in its fourth quarter compared with the same time period last year. That's far more than the 4.6% reduction American had forecast just one month ago.

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"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 in a statement.

Shares of the airline plunged 24% to $6.22 on the day. Other airline stocks fell in sympathy. UAL (UAUA, news, msgs), parent of United Airlines, was down nearly 30% to $8.15, and Continental Airlines (CAL, news, msgs) fell 13% to $14.20.

The Amex Airline Index ($XAL.X) was down 12% to 18.71.

Airlines clobbered by surge in oil

American made its decision with crude oil at $125, and matters got worse as the day wore on.

"Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve," Arpey said. "We must work to overcome our near-term challenges and to secure our company's long-term future."

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American said today that the capacity changes will result in the airline retiring at least 75 jets and cutting an unspecified number of jobs at both American Airlines and American Eagle Airlines.

The soaring cost of jet fuel, which has surged more than 80% in the past year, is "making things very difficult for the airlines," said analyst Ray Neidl of Calyon Securities. With fuel costs so high, he added, airlines have few options to make money.

"At this point, airlines are looking for ways to obtain additional revenues," Neidl said. Because consumers want low airfares, airlines are now charging for other aspects of a flight, like inflight meals, he said.

Neidl predicted that other airlines will follow American's lead.

On a broader level, Neidl said it will take significant upheaval to ease the industry's pain. "One way would be for a major airline to go bankrupt and liquidate. A second way would be a merger in the industry, and a third would be for each airline to significantly cut capacity," but that is not likely to happen, Neidl said.

Other fees for fliers

American said today it also has boosted other fees, including those for reservation services and bringing pets aboard planes. The increases range from $5 to $50 per service, American said. In late April, American and other airlines announced that they would charge as much as $25 for a second checked bag.

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"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."

The checked-bag fee is effective for tickets purchased on or after June 15.

The fee does not apply to American's AAdvantage Gold, Platinum and Executive Platinum members, nor to customers who purchase full-fare tickets in the economy, business and first-class cabins. International itineraries, except to and from Canada and U.S. territories such as Puerto Rico and the U.S. Virgin Islands, are also exempt from the fee, the airline said.