Shares of AMR Corp. (NYSE: AMR) crashed today on Wall Street on a string a bad news out of its principal subsidiary, American Airlines, as current record-high oil prices continue to wreak havoc on the airline industry.Oil prices have been continuing to soar, and earlier today crude traded through the $133 mark, and nearly busted $134, trading as high as $133.82.
What does this mean for airlines? You guessed it... major changes in order to combat the rising costs of keeping their planes in the air, and after announcing a few new changes today, AMR took the full brunt of Wall Street, as nervous traders pushed the already beaten-up stock down another 24.2%.
So what exactly got the market so spooked? Well, I am not really sure which of the following was the final nail in the coffin; you can almost just take your pick:
- The company announced that it would be slashing the number of flights that it offers
- The company announced that it would start charging for all checked luggage
- And, last but not least, the company is being forced to reduce its workforce
With the reduction of flights will come the reduction of personnel as well. I couldn't find a concrete estimate for the number of job cuts, only that it will be in the thousands.
This is not the first time this year that we have seen a major carrier change its checked baggage policy. Earlier this year we braced ourselves for the reality that most airlines would start charging for a second piece of luggage. That was a hard enough blow to most travelers, but now American becomes the first of the major airlines to charge for the first piece of luggage.
Under the new policy, travelers will be getting hit with a $15 fee on their first piece of luggage. If you ask me, this is basically an across-the-board $15 ticket increase, since hardly anyone travels without any checked luggage. It makes you wonder to what lengths travelers will go when trying to carry as much luggage as they can on board. You think those overhead bins are crowded now? You just wait until people start jamming anything they can in there to avoid that extra $15 fee.
You can almost be sure that other airlines are paying attention, and now that the ice is broken look for more carriers to follow suit in the weeks to come. For American passengers, this change will take effect on June 15. There will also be raises in reservation fees and fees for oversize bags. Last time I flew, I believe the weight limit was 50 pounds before I was hit with extra fees... something to keep in mind, who knows how much more those fees will rise.
All in all, some pretty bad news for an already ailing and fragile airline industry. While it does not really come as a surprise that the airlines are feeling the pain, what was obvious today was that Wall Street was just waiting for someone to speak up and admit what everyone already knew -- times are tough, really tough for the airlines. AMR stood up and admitted to that, and well, Wall Street gave it exactly the response that you would expect.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
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Reader Comments (Page 1 of 1)
5-21-2008 @ 7:59PM
John said...
One of the outcomes of the moronic notion that cheap energy created our wonderful economy is the existence of industries that grew to a bloated and unsustainable size. Being stupid became cheaper than being smart, and that goes nowhere good.
The airline industry has to die. Most of it should not exist. We should have been building passenger railroads. Intelligent life knew that all along.
Unfortunately, it's unintelligent life that usually elects the President.
Hate Amtrac now you twits?
5-21-2008 @ 8:51PM
frank said...
I am selling off 250 c stocks of AMR ,something is very bad going wrong with the stock stock holders ,beware
5-21-2008 @ 8:54PM
Ski said...
With the stock falling on all domestic carriers, don't be surprised to see foreign country or foreign investors swoop in and make american carriers foreign owed and operated.
5-21-2008 @ 10:25PM
AEMSN said...
Would take a change in the law I believe as foreign ownership of domestic carriers is prohibited is it not?
5-22-2008 @ 1:07AM
PETER BARBARISI said...
JUST THINK: ARAB SPEAKING AIRLINE WORKERS, AH, THE JOY!
5-22-2008 @ 2:14AM
John said...
Boycott the airlines. Don't fly unless forced to do so. This will stop the abysmal customer service, the Gestapo tactics of the TSA and drive the losers out of business, forcing change in our airline industry. There are many alternatives to flying, including teleconferencing, taking a train, driving, etc. It is time these absurd airlines are driven out of business and the ones left begin to cater, once more, to the customer. And, perhaps, if the ticket prices go up people who fly won't have to put up with whiny kids, obnoxious TSA agents, loud obnoxious tourists, filthy planes, miniature seats, thimblefulls of a drink, etc., etc. We might actually return to a time when flying was a nice experience and those who flew knew something about manners, the airlines fell over one another to provide great customer service and the airports tried to make things convenient...the days before price wars and McAirlines after deregulation. This situation shows that the right wingnuts "market forces" often simply cause disaster.
5-22-2008 @ 4:32AM
kirk said...
I understood that AMR was grounding primarily their MD80 fleet. Not their larger aircraft (which actually are the most efficient on a per passenger mile basis). By removing 45 to 50 of the fleet they are eliminating something like 5% of the seats. Which if on the least filled connection would reduce revenue to a lesser degree and improve earnings.
The luggage fee is not being imposed on frequent flyers and higher priced tickets. Just on infrequent, cheap tickets. Currently the infrequent traveller are the travellers that comsume a disapportionate amount of overall agent time between booking, ticketing, confirming, getting boarding passes, boarding agent checkin, baggage etc. while at the same time getting the cheapest air fare. This charge is a small step in correctly this issue.
What AMR has missed is the opportunity to charge more for aisle and window seats. Make the middle seats the cheap seat and do not allow changes at the gate to the better seat. People can move around after the boarding is complete anyway.
The problem AMR has is their forecast. They forecast a loss this year, and a loss next year, they have limited cash in the bank, and Crandall is calling for re-regulation. Today's announcemnet is not a profit improvement plan, but rather a loss reduction plan. AMR is losing altitude with no light on the horizon to provide hope and this is why the stock is down.
Their competitors on the other hand, with less leverage (because they already went through the process of bankruptcy) have better balance sheets. Now with AMR cutting the flights they get a little better revenue profile (minor I sure).
One thing I am baffled by is why AMR or another doesn't simply acquire Greyhound. Greyhound is suffereing as is AMR. And the plance is the bus of the 60's. AMR currently flights short commuter regional flights from 90 miles to 180 miles from an airport. The passengers have to board a flight 2 to 3 hours in advance. The alternative is to run a bus route, have 2 or 3 stops along the way to the airport, at a much lower operating cost. The ride on the bus would be nicer, take less time, cost less and would be closer to home.
5-22-2008 @ 5:32AM
STX001 said...
I live on an island 1200 miles from no where...my alternate to flying is non existent...
6-12-2008 @ 1:31PM
paul said...
With all the concern about rising costs and the comments about how much it keeps costing in fuel to fly why do the air lines keep giving free or near free tickets to employes familis and friends with standby tickets and companion tickets. I guess prices arent that bad yet