American Airlines aircraft are parked at Ronald Reagan Washington National Airport in Washington, U.S., August 8, 2016.Joshua Roberts/Reuters
American Airlines Group Inc. sent industry stocks reeling after unexpectedly granting pay raises to pilots and flight attendants – a move that weakened the case that carriers are poised to generate steady profits.
The pay bumps will add $930-million (U.S.) in costs through 2019, American said. Chief executive officer Doug Parker reversed his earlier opposition to such mid-contract increases after months of pressure from employees who argued they were falling behind counterparts at rival carriers.
Stepped-up compensation at American is fuelling doubts about airlines' ability to avoid spiralling costs and cash in on industry consolidation that's supposed to lead to steady returns after decades of boom and bust. Berkshire Hathaway Inc., billionaire Warren Buffett's company, became one of the biggest shareholders in American and its rivals last year, rewarding Mr. Parker's efforts to woo investors with the promise of a new era for airlines.
The compensation action "establishes a worrying precedent, in our view, both for American and the industry," said JPMorgan Chase & Co. analyst Jamie Baker on in a noteThursday. "In our minds, this is a seminal event, and represents the first credible potential blow to our long-held 'it's different this time' investment thesis."
Higher pay could reduce American's 2017 earnings per share by 29 cents and 2018 results by 46 cents, said Baker. He cut his recommendation on American to neutral from overweight.
American tumbled 5.2 per cent to $43.98 after dropping as much as 8.6 per cent for the biggest intraday decline in 10 months.
A Bloomberg index of U.S. airlines fell as much as 4.3 per cent, the most since Jan. 30.
Mr. Parker said the pay raises would lead to better customer service and improve the airline's fortunes in the long term. The CEO has struggled to improve a long history of strained management-union relations at Fort Worth, Tex.-based American since assuming control of the airline after its 2013 merger with US Airways.
"It's a move that might surprise or even dismay some of you because it adds costs to the airline, but we couldn't be more convicted about doing it," he told investors and analysts on a conference call after announcing earnings. "This increase in our near-term expenses in no way changes our view about our long-term prospects."
American Airlines isn't the only carrier wrestling with higher expenses. Southwest Airlines Co.'s costs jumped as higher wage rates took effect for pilots and flight attendants under contracts that were ratified last year. The company is also investing in a new reservation system.
'Intensely Focused' Costs for each seat flown a mile climbed 6.9 per cent even after excluding the effect of oil, special items and profit-sharing, the Dallas-based carrier said in a statement. That was at the high end of the company's forecast.
"We remain intensely focused on controlling costs," Southwest CEO Gary Kelly said in the statement. He said the pressures should "abate dramatically" later this year.
Southwest fell 1.2 per cent to $55.75. An earlier decline of as much as 4.3 per cent was the biggest intraday slide since November.
Investors were probably disappointed by Southwest's cost outlook on higher employee wages and fuel prices and its lack of progress in improving average fares, said Logan Purk, an analyst at Edward Jones.
"Those combined are a bit too much of a headwind for Southwest to offset," he said in an interview.
Pricing Gains Cost pressures are increasing at American just as it's finally strengthening its grip on fares.
Revenue for each seat flown a mile, a proxy for pricing power, will rise 3 per cent to 5 per cent in the current quarter, the carrier said in a statement Thursday. That would be the third straight gain in the benchmark measure as American emerges from the aftermath of a fare war that erupted in 2015.
American reported first-quarter adjusted earnings of 61 cents a share, topping the 57-cent average of analyst estimates compiled by Bloomberg. Sales were $9.62-billion, in line with estimates.