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American Air: We're Not Built for $130 Oil05/21/08

Updated from 10:30 a.m. EDT
As rapidly rising fuel prices take a bigger and bigger toll on airlines, AMR's (AMR - Cramer's Take - Stockpickr) American Airlines moved Wednesday to sharply reduce capacity and said thousands of job cuts will likely follow.

"The U.S. airline industry as it is constituted today was not built for $125 or $130 oil," CEO Gerard Arpey told reporters following the carrier's annual meeting. "The industry cannot continue in its current state."

American said it will chop mainline domestic capacity by 11% to 12% in the fourth quarter, retiring at least 75 mainline and regional aircraft. Overall capacity will decline by 7% to 7.5%. "The objective would be to try to eliminate overhead and cost commensurate with the capacity reduction," Arpey said. Asked if job cuts would number in the thousands, he responded: "I would think so."

Arpey said airlines are in new territory due to the combination of rising fuel prices and a slowing economy. "It is very troubling to see the economy continue to soften at a time when oil prices continue to rise," he said. "Historically, when you get a softening economy, usually that is taking pressure off of oil, and you get some relief. Quite the opposite is happening right now."

To illustrate the impact of rising fuel costs, Arpey noted that in 2000, the average revenue per segment (or flight) was $163, of which $24 went to pay for fuel. In the first quarter of 2008, the average revenue per segment was $149, while fuel had risen to $64. Today, Arpey said, fuel is at about $82 per passenger. So, "to get oil where you need pricing to be, you need another $58 per passenger."