Hammered by rising fuel costs and facing a soft U.S. economy, American Airlines will begin charging for a first checked bag and announced cuts to its flight capacity.

AMR Corporation, the Fort Worth, Texas-based parent company of American Airlines, said Wednesday it will start charging $15 US for a first checked piece of luggage on June 15.

The airline said it will also raise fees for a variety of other services, including reservation services, and shipping pets and oversized bags.

The fees will apply on all of American's U.S. domestic routes, plus flights to and from Canada and U.S. territories. Passengers paying for full-fare tickets, those on other international routes and elite level frequent flyers will be exempted from the new fees.

American said in April it will begin charging $25 US for a second checked piece of luggage.

"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," said Gerard Arpey, chair and CEO of AMR.

"Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.

AMR said it paid $665 million more for fuel in the first quarter than it would have paid at prices from the same quarter of last year.

It said its first-quarter fuel expense increased by 45 per cent year over year, while its total revenue increased by five per cent.

Delta Airlines quickly said it would not follow American's lead on charging for a first checked bag.

AMR also said American Airlines' U.S. domestic capacity will be cut in the fourth quarter of 2008 by 11 to 12 per cent, compared to the fourth quarter of 2007.

The company also expects to retire 40 to 45 aircraft from American's fleet, the majority of which will be MD-80s but also some Airbus A300 aircraft.

Arpey said he expects the airline will lay off thousands of employees as it cuts its capacity and fleet size.

Investors reacted to the announcement by sending shares of AMR down sharply. The company's stock fell by more than 24 per cent, or $1.98, to close at $6.22 on the New York Stock Exchange.

Airlines around the world have been forced to grapple with the rapid rise in the price of fuel. Montie Brewer, the CEO of Air Canada, said Wednesday that passengers can expect to see more fare hikes in the future.