AMR Corporation (AMR), the parent company of the world’s largest carrier, American Airlines, announced a turnaround plan to increase revenue as well as cut costs. AMR reported a $328 million loss in the first quarter and something had to give as jet fuel prices continue to soar. Crude oil hit another record yesterday at $132 a barrel and airlines fear the worst as the price of jet fuel—refined from crude—has already increased 84% from levels just one year ago. Facing increasingly expensive fuel costs and a lull in demand, AMR plans to reduce its capacity by 12%. In order to reduce excess capacity, the company will retire 75-85 planes from its fleet and—more importantly—shed “thousands” of jobs. AMR would not put an exact number on the job cut, but a spokesperson said it will be “commensurate with the lowered capacity”.

The pull-back on routes and flights was absolutely necessary in order for American to deal with the harsh realities of skyrocketing fuel prices. (This is the third such reduction this year.) Simple economics dictates that by lowering the supply of flights, American will be able to charge more per remaining ticket. They hope that AMR planes will be filled to capacity during the looming summer travel season.

In a further attempt to close the gap on runaway costs, the airline will become the first in the country to charge a $15 fee to check baggage. (Can you see the fights for overhead space now?) Furthermore, fees will rise for everything from booking a reservation over the phone to flying with your pet. As much as it hurts the average flier to pay more and have fewer free conveniences, the airlines were eventually going to pass the rising costs of fuel on to the customer and AMR could wait no longer.

AMR stock was in a tailspin yesterday —off 24% at the time of writing — and the stock has dropped more than 75% in the last year. Analysts had predicted the difficulty posed by record high oil prices in a weakened economy for some time. For example, according to Zacks Investment Research, consensus earnings estimates for AMR this fiscal year, -$.17 just three months ago, have sunk all the way to -$5.70 today.

Unfortunately for AMR, we at Ockham Research agree that more difficulties remain as oil will likely continue to rise. We think it will exceedingly hard for American to continue to grow revenue at a pace that will exceed the pace of growing costs. This move was a necessary one for AMR, but we are comfortable with a Sell rating for now until fundamentals and the competitive landscape improve.

Disclosure: none