Shares in American Airlines dived as the world’s largest airline announced plans to combat high fuel costs and weakening demand by cutting jobs, retiring old planes and charging passengers to check in their bags.

The group said it would reduce its US capacity by up to 12 per cent in the fourth quarter, in the biggest service cutback since the aftermath of the September 11, terrorist attacks.

Furthermore, the airline will take 85 jets out of circulation, fire an unspecified number of staff and, from the middle of next month, charge most passengers $15 for their first checked bag, in what is an unprecedented move for a major US airline.

Gerard Arpey, the group’s chief executive, said: "The airline industry as it is constituted today was not build to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak US economy."

"Our industry simply cannot afford to sit by hoping for industry and market conditions to improve," Mr Arpey added.

Shares in American Airlines fell by $1.23, or 15 per cent, to $6.97 in mid-day New York trading as the group’s announcements fuelled investor concerns that it was in trouble.

American Airlines cost cutting measures come in the month after Northwest Airlines said it would retire some of its older planes and cut its domestic service capacity by about 5 per cent.

In March, Delta Air Lines announced plans to cut 2,000 jobs and reduce its domestic capacity by 5 per cent – in addition to a 5 per cent reduction that had been previously announced.

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