American, Continental to Cut Flights, Raise Fares

American Airlines plans to cancel 15 daily round-trip domestic flights from its two largest hub airports because of the skyrocketing price of jet fuel, the No. 1 U.S. air carrier said on Friday.

Rival Continental Airlines Inc. (CAL) said it was eyeing similar flight cutbacks, adding that it had raised fares by $10 each way on domestic flights, also in response to the fuel surge. American and bankrupt Delta Air Lines Inc. (search) both said they were matching the fare hike.

Refinery outages caused by Hurricanes Rita and Katrina have made worse an already bad situation for U.S. airlines. In addition to record crude prices, the airlines are paying as much as a 60 percent premium for refined jet fuel.

Surging fuel prices helped push Delta and Northwest Airlines Corp. (search) into bankruptcy earlier this month, briefly leaving American and Continental as the only solvent U.S. "legacy" carriers.

Refined fuel prices are over $100 per barrel, industry association the Air Transport Association (search) said, after the hurricanes exacerbated a supply crunch that had already begun because of strong flight volume as well as demand from the U.S. military.

"We're paying enormous amounts for jet fuel right now," said ATA Chief economist John Heimlich. "It's insane."

The airlines are asking the U.S. government to give them a one-year tax holiday from a 4.3 cent a gallon federal tax which would save the industry $600 million annually.

Fort Worth-based American, owned by AMR Corp. (search) , said the cancellations would take effect Oct. 5 and last at least through Oct. 29.

After that, flights from Dallas/Fort Worth and Chicago's O'Hare to destinations including Atlanta, Newark and Toronto could be restarted depending on what happens with fuel prices.

In addition to the cancellations to those airports, which will still be served by other American Airlines flights, AMR said it plans to discontinue service between O'Hare and Nagoya, Japan, at the end of October, also because of fuel.

Calyon Securities analyst Ray Neidl attributed AMR's move to its inability to raise ticket prices enough to offset energy costs, noting that Delta and Northwest would use bankruptcy to scale back capacity even more aggressively.

"American is basically still restructuring, it's just that they're doing it outside of the bankruptcy process," he said.

AMR shares were up 42 cents, or 3.9 percent, at $11.17 in afternoon trading on the New York Stock Exchange, while Continental was up 29 cents, or 3.1 percent higher, at $9.71, both outperforming the Amex Airlines index.

A spokesman for Northwest noted that it has also suspended service between New York's JFK International Airport and Tokyo, among other international flights, due to fuel prices.

Delta spokeswoman Chris Kelly said the Atlanta-based carrier has been selectively canceling flights for which there is limited demand and where there is minimal customer impact, also due to high fuel prices.

UAL Corp.'s United Airlines (search), also operating in bankruptcy, said it was not mulling any service cuts but was studying the fare increase.

The so-called crack spread, representing the difference between crude oil and refined jet fuel, surged to a record $58.64 on Wednesday, according to figures provided by American Airlines, pushing the effective price per barrel to $124.99.

That compares with an average spread for January through August of $11.26, which in turn was nearly double last year's $6.26.

The ATA is estimating that the soaring fuel prices will push industry losses up to between $9 billion to $10 billion for the full year, confounding earlier hopes the industry's years of pain since the Sept. 11 attacks would finally start to ease.