American Airlines and rival United announced further cuts in capacity and jobs Wednesday alongside fourth-quarter earnings that drove down shares of the broader sector.

AMR Corp. (AMR), American's parent, lost a quarter of its market value despite Chief Executive Gerard Arpey remaining "guardedly optimistic" over its ability to manage through falling demand.

UAL Corp.'s (UAUA) United Airlines unit said it will shed 1,000 salaried and management jobs this year, in addition to 1,500 cuts announced in 2008. That will bring total employment down 30% from the end of 2007.

Losses from the second- and third-largest U.S. airlines by revenue during the seasonally-weak fourth quarter, alongside their cautious outlooks, drove down share prices.

AMR's stock was down 25% at $7.85 as the airline executives started an afternoon conference call with analysts.

UAL was down 10.3% at $10.42, and other network carriers suffered double-digit declines. Only Southwest Airlines Inc. (LUV) shrugged off the reports, with its stock flat at $8.13.

U.S. carriers face slowing demand in domestic markets, though December traffic reports were not as bad as in November. All had announced substantial capacity cuts, the bulk of which were implemented in the fourth quarter of last year, just as the fuel prices that almost crippled the sector started to ease.

American and United are the first two U.S. carriers to report fourth quarter results, The industry as a whole is expected to report a full-year loss, following two years in the black.

Both airlines said they will continue to cut capacity in 2009. At American, overall capacity will fall more than 8.5% in the first quarter. United expects first-quarter capacity to decline about 14% to 15%. The Chicago-based carrier said capacity will decline 8.5% to 9.5% for 2009, slightly more than the 8% to 9% decrease it forecast in October.

 
   International Weakness

The U.S. network carriers responded to intense competition in the domestic market by deploying more capacity to international markets offering higher yields, notably from business travelers.

United executives said on a conference call Wednesday that demand for premium seats fell 25% in the fourth quarter, compared with the previous year, and remains at about that level.

The airline is in the midst of removing 20% of premium seats and converting them to coach seats, though the changes will take until the end of 2010 to complete.

United said passenger revenue had fallen on some transatlantic and transpacific routes, with London down 4% in the quarter while the rest of Europe was 3% higher.

The airline is the largest operator across the Pacific, and passenger revenue was down 20%, with Japan 9% higher and China up 2%. "I would not say we're bullish on China," said John Tague, chief operating officer, "but it's not a problem."

United had decided to cut international capacity in the third quarter of 2008. "I don't have any reason to expect that we will have to make additional corrections at this time," Tague told analysts. "We are confident that our network strength will win out at the end of the day in the Pacific," even if new competition enters the market, he added.

United said it still expects to get approval from U.S. regulators to form a joint venture with Continental Airlines Inc. (CAL).

 
   Losses Mount

AMR reported a fourth-quarter net loss of $340 million, or $1.22 a share, compared with a year-earlier loss of $69 million, or 28 cents a share.

The latest results included $126 million in charges related to severance, capacity cuts and pensions. Last year's results included $114 million in net gains related to asset sales. Excluding items, the company would have posted a loss of 77 cents, compared with a year-earlier loss of 74 cents. Revenue decreased 3.8% to $5.47 billion.

Analysts polled by Thomson Reuters expected a loss of 77 cents a share on revenue of $5.52 billion.

American said Wednesday it still plans to invest in new, fuel-saving aircraft this year, while United is sticking to its plan of not spending money on new planes.

United reported a pretax loss of $1.3 billion, or $9.91 a share, compared with a year-earlier pretax loss of $98 million, or 47 cents a share. Wrong-way fuel hedging accounted for about half of the loss, as fuel prices fell sharply between July and the end of the year.

Excluding charges related to restructuring, asset write-downs and fuel-hedging losses, UAL's quarterly loss would have been $4.22 a share.

Revenue decreased 8.7% to $4.17 billion.

Analysts surveyed by Thomson Reuters expected a loss of $4.42 a share on revenue of $4.55 billion.

Both airlines have worked to beef up their balance sheets to better weather a worldwide economic recession. AMR ended 2008 with $3.6 billion in cash, while United said it had $2 billion of cash on hand at the end of the quarter.

-By Ann Keeton, Dow Jones Newswires; 312-750-4120; ann.keeton@dowjones.com

(Kerry Grace contributed to this report.)

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