While pilots and flight attendants cheered American Airlines’ decision to give them pay raises, Wall Street jeered.
American stock [ticker: AAL] traded almost 9 percent lower on Thursday as industry analysts said boosting wages outside of contract negotiations could set a troubling precedent. The stock regained some of its value by the end of the day, closing down 5 percent at $43.98. But it sent other airline stock down as well.
American’s chief executive Doug Parker acknowledged that the news may have surprised and dismayed some investors as it will cost the company an additional $230 million in 2017. The announcement came after the close of trading on Wednesday afternoon.
“There is a history at American that bred some mistrust and we’re working hard to change that culture,” Parker said during a conference call to discuss the carrier’s financial results. “We recognize pay alone won’t build trust.”
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Wall Street analysts repeatedly questioned Parker about his decision and whether the carrier can generate higher revenues to offset the costs of paying employees more. The queries came as American said its first-quarter profits declined by 66 percent due to higher costs from fuel and labor.
“We are troubled by [American’s] wealth transfer of nearly $1 billion to its labor groups. In addition to raising fixed costs, American’s agreement with its labor stakeholders establishes a worrying precedent, in our view, both for American and the industry,” J.P. Morgan analyst Jamie Baker wrote in a research note Thursday.
Gary Kelly, chief executive at Southwest Airlines, said American’s decision was “well done” and he doesn’t think it sets a dangerous precedent in the industry.
“It’s just part of ongoing negotiations,” Kelly said during Southwest’s earnings conference call. “[Founder] Herb [Kelleher] always said we negotiate our contracts every single day and I agree with that.”
Helane Becker, an analyst with Cowen & Co., told investors not to expect labor unions to stop asking for more, such as higher profit-sharing, now that American management has given out pay raises.
“We expected this increase [albeit in July], but it is still frustrating that management was given no credit by their employees for pulling off one of the most complex mergers with little to no real customer-facing issues,” Becker wrote in a note to investors.
Costs have already increased at American. The carrier spent 11.4 percent more in the first quarter on higher salaries and jet fuel.
The Fort Worth-based carrier said net income declined to $234 million as revenues grew 2 percent to $9.6 billion. The company paid $1.70 per gallon for jet fuel, up 40 percent from the first quarter of 2016.
During the quarter, American launched its new basic economy fare on 10 routes, offering customers cheaper fares but no seat assignments or overhead bag space. American President Robert Isom called initial results encouraging, saying that 50 percent of customers offered the basic economy fares end up choosing the more expensive main cabin fares.
“What we’re seeing is that, by and large, our customers understand the restrictions that are on the basic economy fare and are complying with the practices at the gate,” Isom said, noting there have been no issues related to the fare restrictions.
Excluding one-time accounting items, American reported income of 61 cents a share, beating Wall Street analysts’ estimates of 57 cents a share, according to FactSet Research.
American also announced it will delay the first delivery of the Airbus A350 from 2018 to 2020. It is also deferring the delivery of two Boeing 787-9 aircraft from 2018 to 2019.
Chief Financial Officer Derek Kerr said the carrier needed to make sure the airline did not add too many wide-body aircraft to its fleet at one time. The moves reduced American’s capital expenditure plans by $500 million in 2018 and $300 million in 2019 and in 2020.