At a time when American and other airlines are seeing higher costs for labor, fuel and maintenance while finding it difficult to raise airfares, American’s goodwill gesture of a pay raise didn’t sit well with investors.
FORT WORTH, Texas — American Airlines is giving pay raises to its pilots and flight attendants, who have complained they are paid less that peers at other airlines. Wall Street isn’t happy.
The raises come about two years before contract negotiations. Assuming they approve the increases, pilots and flight attendants will receive extra pay totaling close to $1 billion over three years.
At a time when American and other airlines are seeing higher costs for labor, fuel and maintenance while finding it difficult to raise airfares, this goodwill gesture didn’t sit well with investors.
“This is frustrating. Labor is being paid first … again. Shareholders get leftovers,” wrote Citi analyst Kevin Crissey in a note to clients. Investors showed their displeasure by sending American Airlines shares down 5.2 percent to $43.98 Thursday.
Rising costs hit the bottom lines of all the major airlines in the first quarter. American said Thursday that profit fell 67 percent. Earlier this month United said earnings plunged 69 percent and Delta reported a drop of 36 percent. Southwest, which also reported Thursday, said profit dropped 31 percent and its shares fell nearly 4 percent.
The higher expenses have alarmed investors because at the same time airlines have struggled to raise fares — although there recently have been signs that fares are heading higher after falling for about two years.
American said revenue for each seat flown one mile by the airline, a proxy for average fares, rose 2 percent in the first quarter and the company expects it to rise again in the second quarter. United, Delta and Southwest all predict an increase in the revenue measures, known as PRASM, for the current quarter.
Despite the improvement in revenue, much of the discussion on American’s conference call with analysts Thursday centered on the decision to raise pay.
The union employees have been complaining loudly that they are paid less than their counterparts at Delta and United. Pilots now stand to get 8 percent more pay and flight attendants another 5 percent. American estimates the raises will cost the company $230 million this year and $350 million in 2018 and 2019.
CEO Doug Parker told analysts that the out-of-contract raises “might surprise or even dismay some of you because it adds costs to the airline.”
Parker described the higher wages as a correction to years of “incredibly difficult times” for airline employees. He called the raises an investment in the company that will lead to better service by employees and, eventually, higher revenue. “This investment is going to make a difference in our service,” Parker said on the call with analysts. “And as that happens all of you will be the beneficiaries.”
Wall Street didn’t seem to be buying it. Jamie Baker of Morgan Stanley downgraded American shares to “neutral” from “overweight,” saying the pay decision “establishes a worrying precedent, in our view, both for American and the industry.”
American reported net income of $234 million, or 46 cents a share, down from $700 million, or $1.14 per share a year earlier. Adjusted for one-time gains and costs, earnings were 61 cents per share, 4 cents better than the estimate of analysts surveyed by Zacks Investment Research.
The world’s largest airline posted revenue of $9.62 billion in the period, up 2 percent and in line with Street forecasts. But the increase in costs was an even sharper 11 percent.