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At American Airlines, profit sharing shows CEO’s willingness to adapt

American Airlines announced it will offer profit sharing to its employees in 2016. Analysts say it’s too early to tell if it will improve the corporate culture.
American Airlines announced it will offer profit sharing to its employees in 2016. Analysts say it’s too early to tell if it will improve the corporate culture. Star-Telegram

It was a surprising reversal by an airline CEO who for two years had stuck to his guns, saying that higher wages are better for employees than risky profit-sharing plans.

But last month, American Airlines’ chief executive Doug Parker announced that the Fort Worth-based carrier would implement a profit-sharing program for more than 110,000 employees.

“This is a CEO who had a point of view and then changed it to one that is frankly a more employee-friendly point of view,” said Henry Harteveldt, an analyst with Atmosphere Research.

But will the prospect of getting a profit-sharing check at the end of the year make American employees pull together to make the airline great again?

Parker and other senior executives at American hope so.

Industry analysts, however, say it’s too early to tell if the offer will translate to more motivated workers, particularly if the payout ends up being less than expected because fuel prices go up or a slowing economy hurts demand for travel.

“If they don’t see how their job affects corporate profits, it will be just a short-term bump in engagement,” said Brad Harris, an assistant professor of management at Texas Christian University’s Neeley School of Business.

Analysts say Parker’s move is a step in the right direction to improving labor relations at the airline, and a necessary one if American wants to remain competitive with Delta Air Lines and United Airlines, both of which already have profit-sharing plans in place.

“Many people want to think (they have), and many do actually have, a day-to-day influence on how customers view the airline. And for that they would like some recognition,” said airline analyst Bob Mann. 

How employees reacted

When the profit-sharing plan was announced, reaction from employees on social media ranged from “It’s about time” to “I’ll believe it when I see it.”

Some view profit sharing as an unexpected raise while others cynically see the offer as a year too late since American posted a $7.6 billion profit last year and may not earn as much this year.

Parker acknowledged last month that front-line employees “still don’t trust us,” and since its competitors had profit-sharing plans, American employees felt as if they weren’t benefiting from the company’s financial success.

“We were the ones who didn’t have one and it left us with ... perhaps less of an ability to make everybody feel like we’re all in this together,” Parker said in an interview with the Star-Telegram when the program was announced. “We wouldn’t do it if we didn’t think it would help us to do a better job of bringing the team together.”

Harteveldt said airline workers, particularly those at American, have worked for management teams in the past that made promises that were either not kept or were rescinded. American’s unionized employees used to have a profit-sharing plan prior to the company’s bankruptcy reorganization, but it didn’t pay out over most of the decade it was in place.

“The cynicism that exists among the legacy American Airlines work groups is massive,” Harteveldt said. “I understand why they feel the way they do. But it’s regrettable that two years into this merger, they do not feel that Doug Parker or any of the senior executives are really trying to turn American Airlines into a much better place to work.”

Will it work?

Profit sharing can improve employee morale and is often used by management teams to motivate workers, business professors said.

“A lot of these programs depend on mutual trust that management is doing the right things to put the company on firm footing and management is trusting employees to do their best to make the company as good as it can be,” said Miguel Quiñones, a professor at Southern Methodist University’s Cox School of Business.

In terms of improving the corporate culture at American, Quiñones said the bigger impact may be from Parker changing his mind after hearing employees ask about profit sharing for two years since the merger closed.

“We know people are more engaged when their opinions are listened to and they feel like they have a voice,” Quiñones said. “Fairness matters to people. It’s a big driver of people’s behavior at work.”

By offering the profit sharing to unionized employees in the middle of a contract, instead of waiting to offer it as part of contract negotiations three years from now, Parker may have laid the groundwork to ask for productivity improvements from workers in the future.

“Parker is doing a lot to negotiate in good faith with the union and have a legitimate open dialogue so he can build trust and do what he wants to do with future initiatives,” Harris said.

But if the profit sharing doesn’t pay out or competing airlines continue to offer more lucrative plans to their employees, American workers could be disgruntled again, analysts said.

“If they can’t get everybody on the same team and pulling the oars at the same time, the boat is going nowhere, and in the meantime they are getting outpaced by Delta and United,” Mann said.

Wall Street’s reaction

By setting aside 5 percent of its profits for employees, shareholders will get less either in the form of dividends or investments back into the company, Wall Street analysts said.

However, several analysts told investors the move was necessary to keep American competitive, with one comparing it to eating broccoli.

“Criticize them now a bit, or wait a year had they not done this and criticize them for having awful labor relations and a [unit revenue] deficit to peers,” Wolfe Research analyst Hunter Keay wrote in a research note to investors.

Shares of American (ticker: AAL) have declined almost 6 percent since the profit sharing plan was announced on March 23 as analysts reduced their earnings estimates for this year.

Cowen and Co. analyst Helane Becker told investors that management must be confident about American’s outlook since Parker did not ask for additional productivity from employees.

“We believe this sets a bad precedent by opening a contract that was already negotiated, but we certainly understand the motivation behind the decision,” Becker wrote in a research note to investors. “Labor has taken every chance it could to complain about the lack of profit sharing.”

A competitive necessity

Since Delta, United and Southwest Airlines all offer profit sharing to their employees, American’s lack of a plan was hurting the company when recruiting new workers. And with a looming pilot shortage, American could not afford not offering that extra benefit.

“If American wants to attract and keep the best possible employees, they have to be competitive,” Harteveldt said. “What we’ll now have to see is to what extent does this higher compensation translate into a more motivated workforce.”

American’s announcement also puts pressure on Delta’s current contract negotiations with its pilots. The two sides filed for federal mediation last week as talks have stalled. Delta has offered pilots higher wage rates in exchange for lowering the profit-sharing formula.

Airline consultant Mike Boyd said that by reversing its decision on profit sharing, American has shown its rivals at Delta and United that it is willing to change policies quickly when something isn’t working competitively.

“This sends a very strong and dangerous message to competition,” Boyd said. “It shows you have a senior management team that is flexible and willing to change.”

Andrea Ahles: 817-390-7631, @Sky_Talk