American Airlines to slash jobs, charge for bags

FORT WORTH, Texas (Reuters) - American Airlines' shares fell 24 percent on Wednesday as it said it will cut thousands of jobs, retire old aircraft and charge passengers to check bags in a move to counter record fuel prices and a weak U.S. economy.

The world's largest airline, owned by AMR Corp (AMR.N), said it would reduce domestic capacity by 11 percent to 12 percent in the fourth quarter, its biggest service cutback since the attacks of September 11, 2001.

"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," AMR Chief Executive Gerard Arpey said in a statement.

"The industry will not and cannot continue in its current state," Arpey told shareholders at the company's annual meeting in Fort Worth, Texas on Wednesday.

As all the major U.S. airline stocks slumped amid a brokerage downgrade for the sector, AMR shares fell $1.98 to close at $6.22.

U.S. crude oil futures soared to a record above $133 on Wednesday, more than twice the price a year ago.

American Airlines plans to charge $15 for many passengers' first checked bag starting in mid-June, an unprecedented move by a major U.S. airline as it tries to claw back more of its extra fuel costs.

Rivals are considering following suit.

A spokeswoman for UAL Corp's (UAUA.O) United Airlines said it was "seriously studying" American's $15 charge and a spokeswoman for Delta Air Lines Inc (DAL.N) said it was looking at every area of its business, but "at this time" has no plans to charge for a first checked bag.

RETIRING OLD PLANES

American said it would take at least 75 mainline and regional aircraft out of its aging fleet, including some of its old MD-80s, which were grounded last month because of maintenance issues.

The airline said it would cut domestic capacity, as measured by available seat miles, by 11 percent to 12 percent in the fourth quarter.

Only last month, it had projected a 4.6 percent drop in capacity from the fourth quarter of 2007.

Available seat miles is the standard way of gauging the scale of a carrier's operations, reflecting the number of seats available for sale and the length of the flights.

The capacity cut will mean work force reductions at American and its American Eagle regional unit.

Asked if the job cuts would run into the thousands, Arpey said they would and added that every work group will be impacted.

"We are not doing our best by employees if one of our considerations is not being competitive," Arpey said.

More than 100 employees protested outside the annual meeting, calling for management changes.

"Our message is that we want new leadership," said Laura Glading, president of the Association of Professional Flight Attendants.

American's $15 checked bag fee will not apply to international flights, some of its AAdvantage reward program members, or people with full-fare tickets.

The company also increased fees for services such as reservations, pet handling and oversized bags. Most of the increases range from $5 to $50.

In the last two years, most U.S. carriers have removed capacity from less profitable domestic routes and introduced charges for checking extra bags as they try to keep up with rising fuel costs and fierce competition.

On Wednesday, the Soleil brokerage cut the U.S. airlines sector to neutral from outperform, according to flyonthewall.com, which tracks analyst ratings.

Shares of United Airlines parent UAL Corp (UAUA.O) fell 29.5 percent to $8.15, Continental Airlines (CAL.N) fell 13 percent to $14.20 and Delta Air Lines (DAL.N) fell 16.4 percent to $5.77.

The Amex airline index (.XAL) fell 11.95 percent.

(Additional reporting by Bill Rigby and Mark McSherry, Editing by Andre Grenon, Tim Dobbyn, Gary Hill)

Fed lowers growth forecast, raises inflation

WASHINGTON (Reuters) - The Federal Reserve on Wednesday slashed its U.S. economic growth forecast for 2008 and signaled that mounting concerns over inflation would make further interest rate cuts unlikely.

"Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term," the Fed said in minutes from its April 29-30 policy meeting.

Fed officials said that cutting benchmark interbank lending rates by a quarter percentage point to 2 percent at their last meeting was "a close call," reinforcing the impression that policy-makers may be putting further interest rate moves on hold.

"If you had any doubt that the Fed is signaling a pause, that doubt is gone," said Christopher Low, chief economist at FTN Financial in New York.

In an accompanying forecast, the Fed cut its projection for 2008 growth to a scant 0.3 percent to 1.2 percent, down from the 1.3 percent to 2 percent it forecast three months ago.

At the same time, the U.S. central bank said it expects inflation to remain "elevated" and unemployment to increase "significantly."

Wall Street stocks tumbled after the Fed forecast, with the Dow Jones industrials (.DJI) closing off nearly 1.8 percent. Treasury debt prices also fell while the dollar eased against the euro and the yen.

U.S. short-term interest rate futures expect no imminent change from the Fed, but point to rate increases in the final months of the year.

SLOW RECOVERY

The minutes showed a Fed increasingly concerned about inflation and anticipating sluggish growth for a while, but cautiously optimistic the worst of the most serious financial crisis in years has passed.

"Much of the concern about severe disruptions to financial markets, which had motivated the aggressive policy actions at the beginning of the year, appears to have abated in the minds of most members," said Lehman Brothers economist Michael Hanson.

Given recent shocks to the economy, it could be years before growth rates and unemployment levels return to their optimal levels, the Fed said.

The interest rate cut on April 30 was the seventh in a series of that has taken the interbank lending rate down by 3.25 percentage points since September as the central bank moved to buffer an economy battered by the housing downturn and a credit crunch.

The economy has expanded at a sluggish 0.6 percent annual rate in both the last three months of 2007 and the first quarter of this year.

At the same time, however, record high oil prices have pushed up energy and food prices, raising the consumer price index by 3.9 percent in the 12 months to April.

Policy-makers felt at their April meeting that the risks that growth could slow were more closely balanced than in the past by the risks that inflation could spike higher.

"Members were ... concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and the fact that some indicators suggested that inflation expectations had risen in recent months," the Fed said.

DIFFERENCES OVER INFLATION RISK

Participants at the Fed's meeting were about evenly divided as to whether the risks to the inflation outlook were balanced or were tilted to the upside, the minutes said.

The Fed boosted its forecasts for inflation to 3.1 percent to 3.4 percent in 2008 from its January 2.1 percent to 2.4 percent projection for the personal consumption expenditures index. It expects unemployment to rise to 5.5 percent to 5.7 percent for the year. The jobless rate was at 5 percent in March and employers had cut jobs for the fourth month in a row.

The Fed also warned that the risks to its scaled-down growth projection remain to the downside, particularly if house prices continue to slide lower.

"Participants saw little indication of a bottoming out in either housing activity or prices," the minutes of the meeting said.

Fed officials took some comfort from signs that fragile credit markets, which have been severely shaken by doubts about bad credit, appear to be on the mend.

"The generally better state of financial markets had caused participants to mark down the odds that economic activity could be severely disrupted by a further substantial deterioration in the financial environment," the minutes said.

(Reporting by Mark Felsenthal and Glenn Somerville; Editing by Gary Crosse)

Big Oil defends profits before irate senators

WASHINGTON - On a day oil prices leaped to unheard-of highs, senators lined up Big Oil's biggest executives and pummeled them with complaints that they're pretending to be "hapless victims" while raking in record profits.

"Where is the corporate conscience?" Sen. Dick Durbin, D-Ill., asked the top executives of the five largest U.S. oil companies.

It's all about economics, came the reply. Supply and demand. The company leaders tried to shift attention from motorists' anger over $4-a-gallon gasoline to a debate over new areas for drilling.

But senators at the Judiciary Committee hearing weren't having any of that. They wanted to press the executives about public anguish over paying $60 or more to fill up a car's gas tank.

"People we represent are hurting, the companies you represent are profiting," Sen. Patrick Leahy, D-Vt., told the executives. He said there's a "disconnect" between legitimate supply issues and the oil and gasoline prices motorists are seeing.

The executives, sitting shoulder to shoulder in the hearing room, said they understood people were hurting, but they tried to blunt the emotion with economic analysis.

Profits have been huge "in absolute terms," conceded J. Stephen Simon, executive vice president of Exxon Mobil Corp., but they "must be viewed in the context of the massive scale of our industry." And high earnings "in the current up cycle" are needed for investments in the long term, including when profits will be down.

"'Current up cycle,' that's a nice term when people can't afford to go to work" because gasoline is costing so much, replied Leahy with sarcasm.

"The fundamental laws of supply and demand are at work," said John Hofmeister, chairman of Shell Oil Co., acknowledging it is something the oil industry has been saying for some time and that the explanation may sound "repetitive and uninteresting."

Hofmeister was joined by executives of Exxon Mobil Corp., Chevron Corp., BP America Inc. and ConocoPhilips Co. Together the five companies earned $36 billion during the first three months of this year.

As the executives sought to explain their profits and why prices are so high, the global oil markets were moving into new, uncharted highs, touching $133 a barrel for the first time. The national average price of a gallon of gasoline hit $3.80, with $4 showing up in more places. Crude prices increased even more in late electronic trading Wednesday hitting $134 for the first time.

It was the second time this year the executives had been summoned to testify before Congress. When they came in early April oil cost about $98 a barrel.

This time the exchanges got personal.

Simon was asked what his total compensation was at Exxon, a company that made $40.6 billion last year. Simon replied it was $12.5 million.

John Lowe, executive vice president of ConocoPhillips Co., said he didn't recall his total compensations. So did Peter Robertson, vice chairman of Chevron Corp. Hofmeister said his was "about $2.2 million" but was not among the top five salaries at his company's international parent. Robert Malone, chairman of BP America Inc., put his "in excess of $2 million."

Sen. Arlen Specter, R-Pa., noting that Exxon's profits had nearly quadrupled from $11.5 billion in 2002, said he had heard nothing from the oilmen that would explain "why profits have gone up so high when the consumer is suffering so much."

The executives, appearing under oath, cited tight global supplies with scant spare production capacity and the fact that large areas of land and offshore waters remain offlimits to drilling. And they said they're worried Congress was talking of requiring the five companies to pay more taxes.

"I urge you to resist these punitive policies," said Hofmeister.

It was not what many senators wanted to hear.

You have "just a litany of complaints that you're all just hapless victims of a system," Sen. Dianne Feinstein, D-Calif., told the executives. "Yet you rack up record profits ... quarter after quarter after quarter."

One senator after another cited the pain that high energy prices are causing farmers, small businesses and people trying to find a way to afford a vacation trip this summer.

"Is there anybody here that has any concerns about what you're doing to this country with the prices that you're charging and the profits that you're taking?" Durbin asked.

The titans of America's oil industry sat quietly for a moment.

"Senator," replied Exxon's Simon, "We have a lot of concern about that. And we're doing all we can to put downward pressure on prices."

American to charge $15 for 1st checked bag

FORT WORTH, Texas - 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.