American Airlines: Pack Light, Or Pay Up

By Wayne Pinsent | May 23, 2008 AAA

Passengers unable to cram all of their flowered shirts and tacky souvenirs into a carry-on bag will now have shell out 15 bucks to check a suitcase on an American Airlines flight. Rising fuel costs have forced the cash grab at the America's largest airline whose parent is AMR (NYSE:AMR).

The struggling airline is also cutting the number of flights by as much as 12%. These drastic moves shine a spotlight on the problems facing the entire airline industry, not just AMR.

Charging For Checked Bags
Many airlines including United Airlines (NYSE:UAUA), Delta (NYSE:DAL), Northwest (NYSE:NWA) and Continental (NYSE:CAL) have started charging $25 fees to passenger's who wish to check more than one bag. This is understandable and something many passenger have become accustomed to. AMR is taking this one step further. The company announced that it will start charging passengers $15 to check their first bag to increase net margins. This seems like something that should be included with the ticket, and the action will not likely be received well by customers.

The effort is another attempt to drive up revenue, and will likely be effective since many customers would have trouble flying without checking a bag. Still it will certainly hurt American Airlines' public image, which has already been tarnished as of late with the debacle in April where the company canceled a few thousand flights on short notice due to missed safety checks. The public image effect might be muted if the other airlines join in. Apparently, some airlines are already considering it.

Cutting Flights
In an already supply constrained market, American announced it will cut back the amount of seats offered by as much as 12% in the fourth quarter. This represents the most drastic cut in service since the September 11, 2001 attacks. The company is trying to cope with the high fuel costs that has been shaking the industry for some time, but now has hit over $130 per barrel. The cuts represent an effort to trim back unprofitable flights, and remove some of the lower priced fares that arrive. This should help to pump up profitability a bit, but will represent a severe blow to revenue as well. (For additional information on energy costs, see Get A Grip On The Cost Of Gas.)

In the end, what is there to say? AMR CEO Gerard Arpey said at the company's annual meeting that the industry cannot continue in its current state. This shows severe weakness, possibly more severe than most thought. People will keep flying American, because they have to, but the problems have been permeating the industry for years, and this is a temporary solution.

The Bottom Line
AMR made two big moves on Wednesday to combat the financial problems it has had due to skyrocketing oil costs. The company announced it will cut back 12% of service in the fourth quarter, and begin charging passengers for their first checked bag. I think the news puts an even bigger spotlight on the problems faced by the airlines. This is more bad news from a struggling industry, and I would not touch the airline stocks.

For more on airline stocks, see Is That Airline Ready For Lift-Off?

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