As the price of oil surged passed $130 a barrel today, American Airlines chief Gerard Arpey walked into the company's annual meeting in Dallas with a list of brutal cutbacks for the nation's largest airline.

 
By the end of the year, he told shareholders, American would be slashing its seat capacity by more than 10 percent, grounding as many as 75 of its aging and fuel-guzzling aircraft, and next month begin charging most fliers $15 to check a bag.
 
Expect similar moves from American's network competitors—United, Continental, U.S. Airways and hoping-to-merge Delta and Northwest—in the coming days. It's what the airlines do best: Hit the panic button after ignoring the easy-to-see long-term financial changes that have been drastically remaking airline economics for more than a decade.
 
Unlikely as it may seem, the big airlines had been betting that oil costs would decline. As a group, they are less well-hedged for the rest of 2008 than they were in 2007. Continental Airlines, for example, has hedged just 5 percent of its fuel needs in the third quarter of the year.
 
The poster child for this energy self-delusion is United Airlines chief financial officer Jake Brace. When United exited the longest and most costly bankruptcy in history on February 1, 2006, he produced a five-year plan of reorganization that prognosticated average fuel costs at $50 a barrel. Oil was already selling north of $60 a barrel when he made the prediction, and a panel at the World Economic Forum in Davos, Switzerland, that week warned that oil would imminently shoot to $120 a barrel.
 
The network carriers have also been living in a pricing fantasyland. For decades they priced fares without regard to the actual cost of manufacturing a seat. It overcharged some fliers based on the perception of their willingness to pay and undercharged others because they might not be interested in paying a reasonable fare.
 
Airline traffic is also plummeting as business travelers cut back and leisure fliers defer vacation travel. "Business has fallen off the plateau," one usually upbeat executive at an international carrier said today. "Anyone who tells you anything different is lying."
 
And the airline industry has alienated its customers by driving service levels to unprecedented lows. Two separate surveys this week—one from the University of Michigan, the other from J.D. Power—showed exactly how much customers loathe the product peddled by American Airlines and its ilk.
 
The result of the oil delusions, goofy fares and lousy service? Since the dawn of deregulation in 1978, the biggest carriers have lost a point of market share each year. Travelers have moved in unprecedented numbers to simple-service-at-rational-prices carriers such as JetBlue, AirTran and Southwest Airlines.
 
In fact, the biggest beneficiary of the latest airline chaos is likely to be Southwest. While carriers collectively lost upward of $100 million since 9/11, Southwest has remained profitable. In fact, it has rung up annual profits for 37 consecutive years. It now carries more passengers than any other U.S. carrier, continues to buy new, fuel-efficient aircraft and has deferred plans to retire some older planes in order to expand its route network. It is sitting on about $3 billion in cash and short-term equities to ride out the current crisis, and its fuel needs are about 70 percent hedged at $51 a barrel for the rest of the year.
 
Last week Southwest borrowed $600 million by mortgaging some older aircraft. The only logical assumption is that it has earmarked the funds to pick up some assets that American and its other competitors are preparing to shed at distressed prices.