American to charge $15 for 1st checked bag

FORT WORTH — American Airlines will start charging $15 for the first checked bag, cut domestic flights and lay off workers — probably in the thousands — as the nation's largest carrier grapples with record-high fuel prices.

American plans to cut domestic flight capacity by 11 percent to 12 percent in the fourth quarter, after the peak summer season is over. The carrier was previously planning a 4.6 percent cut.

Shares of American parent AMR Corp. tumbled 24 percent, down $1.98 to $6.22, as oil prices shot past $130 per barrel for the first time, signaling even more trouble for the nation's airlines.

American said rising oil prices have increased its expected annual fuel costs by nearly $3 billion since the start of the year.

In a further sign of the problems facing the industry, Southwest Airlines Co., the only major U.S. carrier to post a profit in the first quarter, won't earn as much for the rest of 2008 as it did a year earlier, its chief executive warned.

American said Wednesday that the fee for the first checked bag starts June 15, and it will raise other fees for services ranging from reservation help to oversized bags. Those fees could cost between $5 to $50.

United Airlines, the nation's No. 2 carrier, is "seriously studying" imposing its own fee on first bags, spokeswoman Robin Urbanski said. Delta Air Lines, the third-largest, has no current plans for a fee but is considering all options, spokeswoman Betsy Talton said. AirTran Airways and Northwest Airlines said they were weighing their response.

Last month, American joined other carriers in charging $25 for a second bag checked by passengers. The major airlines have also raised fares about a dozen times in recent months.

The first-bag fee will be charged to everyone except people who belong to elite levels of its frequent flyer program, those who bought full-fare tickets, and those traveling overseas.

Chairman and Chief Executive Gerard J. Arpey said he expects the fees will raise "several hundred million dollars" for American.

Arpey said American was reducing flights and charging more fees to adapt to "the current reality of slow economic growth and high oil prices." He said the fees would also get customers to pay for services they want.

Arpey didn't put a figure on the layoffs, but when asked whether he expected them to be in the thousands, he replied, "I would think so."

International flights are more profitable, even with costly fuel, so they are largely untouched by Wednesday's announcement. Overall, American will cut global capacity by 7 to 8 percent.

Arpey said he wanted to cut overhead and costs by the same 7 to 8 percent, but he declined to comment whether layoffs would equal a similar percentage of the work force. American has 82,000 employees, while regional affiliate American Eagle has 13,000. Both are owned by AMR Corp.

American expects to retire 45 to 50 planes, most of them gas-guzzling MD-80 aircraft. Those were the planes grounded for faulty wiring last month. American Eagle will also retire 30 to 35 jets, he said.

Even before news of the new fees and layoffs, Lehman Brothers lowered its earnings outlook for nearly all major U.S. carriers, and Soleil Securities cut its rating on AMR stock to "sell." Soleil also downgraded Continental Airlines Inc. to "hold" and United parent UAL Corp. to "sell."

American announced its changes as AMR shareholders attended their annual meeting. During the meeting and outside on the street, hundreds of uniformed pilots and flight attendants protested against stock bonuses for management.

Southwest shareholders met a few miles away, and the mood was festive despite the somber backdrop of industry problems. Shareholders gave a celebratory farewell to co-founder Herb Kelleher, who was presiding over his last meeting as chairman.

CEO Gary C. Kelly, who added the title of chairman on Wednesday, said he expects Southwest to remain profitable, as it has in every quarter since early 1991, but not as profitable as it was in the second, third and fourth quarters of last year.

"I would love for Southwest to grow modestly next year and in 2010, but at this point we're not making any announcements," he added.

Southwest shares fell 57 cents, or 4.4 percent, to $12.43 on Wednesday.