The rocketing price of a barrel of oil has prompted American Airlines to make swingeing cuts to its aircraft fleet, workforce and timetable in a sign of the severity of the cost storm gathering over the global aviation industry.

The world's largest airline intends to scrap 75 planes and will reduce the number of seats available on domestic routes by between 11% and 12% this year. An unspecified number of jobs will be lost from AA's 85,000-strong payroll as the airline closes and merges facilities.

The downsizing is AA's sharpest since the aftermath of the terrorist attacks of September 11 2001. On Wall Street, the company's shares plunged by 16% to a three-year low of $6.93.

Speaking at AA's annual meeting in Texas, chief executive Gerard Arpey said: "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 US economy."

Airlines around the world are struggling to cope with oil prices which have pushed the cost of aviation fuel to record levels. Each increase of $10 in a barrel of oil means a cost of $800m (£406m) for AA - which means that the commodity's surge since the start of the year has raised the airline's annual costs by $3bn.

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

Experts believe that AA's downsizing will be merely one of many belt-tightening moves by air carriers.

British Airways' board has examined a scenario in which the £883m pre-tax profit falls to zero this year. Japan Airlines has raised fuel surcharges on its tickets by 40% citing an "unprecedented increase" in the price of fuel. Ryanair's boss, Michael O'Leary, today admitted that oil was "really hurting" and that his low-cost carrier "certainly won't make a lot of money" if the price of a barrel stays over $125.

Chris Tarry, an aviation industry analyst, said: "Here you have an industry that has the potential, if nothing changes to current oil prices, to lose $40bn this year."

He said the impact was "several magnitudes greater" than the downturn in international travel which forced several US airlines into bankruptcy after terrorists struck the World Trade Centre: "Airlines have not been particularly successful in recouping the price of fuel."

Fierce competition has made it difficult for carriers to raise headline fares. Many are trying to claw back revenue through supplementary fees - AA announced that it was imposing a $15 charge for checking in bags, although this will not be levied on international passengers.

The aircraft to be retired by AA are largely regional jets which burn more fuel per passenger than larger planes. Transatlantic services, which are relatively profitable, are unlikely to be significantly trimmed - AA said its international capacity will fall, at most, by 0.5%.

Roger King, an analyst at CreditSights in New York, told Bloomberg News that the carrier's cuts may not be drastic enough: "When oil is this high and they're bleeding this much cash, you have to shrink to a core market that is profitable."

As they scramble to reduce costs, other airlines are reducing flying speeds andcutting the weight of aircraft - measures have even included removing magazine racks and altering drinks trolleys to make them lighter.

The US airline industry recently called on the Bush administration to tap the nation's reserve supplies of home heating oil in order to bring down the price of fuel. Top carriers are exploring mergers to cut costs - Delta Airlines is planning a combination with Northwest Airlines, while United Airlines has held talks with US Airways.

Fuel costs have contributed to several airlines going bust. Recent casualties include the all-business transatlantic carriers MaxJet and Eos, together with Hawaii's Aloha Airlines and the US carrier ATA. In Europe, Alitalia is relying on financial support from the Italian government to keep flying.

Kevin Crissey, an airlines analyst at UBS, said in a research note: "The industry needs to shrink in a huge hurry to be able to raise fares and reduce fuel burn and other expenses."

Oil is becoming an increasingly contentious political issue. Executives from leading oil companies including BP, Shell and ExxonMobil were accused of taking advantage of consumers' pain during a hearing by the senate judiciary committee in Washington today.

"The president once boasted that with his pals in the oil industry, he would be able to keep prices low," said senator Patrick Leahy, a Democrat from Vermont. "Instead, it is his pals in the oil industry who have benefited."