CHICAGO (Reuters) - American Airlines parent AMR Corp <AMR.N> will eliminate up to 700 jobs as it downsizes its maintenance and engineering operations, the company said on Wednesday in a letter to employees.

The second-largest U.S. airline, which has slashed capacity amid economic woes, said it would "resize and reshape" its M&E operation to better meet the needs of its smaller fleet.

AMR said it would wind down all operations at its Kansas City Maintenance Base next year after it closes the location in September. The changes will affect operations in other locations throughout its system, including the St. Louis line operations, which will be downsized.

"Unfortunately, these changes will cause a reduction of up to 700 positions, both management and union, in the M&E and supporting departments' workforce," Carmine Romano, AMR's senior vice president of maintenance and engineering, said in the letter.

The 700 job cuts represent about 5 percent of AMR's 12,700 M&E employees systemwide. The company said it would offer voluntary exit options for its unionized workforce.

The airline industry has been battered in the last year as the recession has eroded travel demand. Industry leaders have reported tentative signs of a rebound in demand for business travel.

Shares of AMR were down 1.2 percent at $5.83 in early New York Stock Exchange trading.

(Reporting by Kyle Peterson; Editing by Lisa Von Ahn, Dave Zimmerman)