American Airlines announces pay raises, and investors balk

American Airlines is giving pay raises to its pilots and flight attendants, who have complained they are paid less than 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 additional 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,” Citi analyst Kevin Crissey wrote in a note to clients. Investors showed their displeasure by sending American Airlines Group Inc.’s stock down 5.2% to $43.98 on Thursday.

Rising costs hit the bottom lines of all the major airlines in the first quarter. American said Thursday that profit fell 67%. Earlier this month, United said earnings plunged 69%, and Delta reported a drop of 36%. Southwest Airlines Co., which also reported earnings Thursday, said profit dropped 31%; its shares fell 2.1% to $55.75.

The higher expenses have alarmed investors because airlines have struggled to raise airfares — 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, a proxy for average fares, rose 2% in the first quarter and 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 centered 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% more pay, and flight attendants 5%. American estimates the raises will cost it $230 million this year and $350 million a year in 2018 and 2019.

Chief Executive 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 called the raises an investment in the company that will lead to better service by employees and, eventually, higher revenue.

Time will tell whether the investment bears out, but Parker was right about how analysts would feel. 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’s net income was $234 million, or 46 cents a share, down from $700 million, or $1.14 a share during last year’s first quarter. Adjusted for one-time gains and costs, earnings were 61 cents a share, 4 cents better than the estimate of analysts surveyed by Zacks Investment Research.

The airline posted revenue of $9.62 billion in the quarter, up 2% and in line with Street forecasts. But the increase in costs was an even sharper 11%.