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As American Airlines’ stock price fell 6 percent mid-day, CEO Doug Parker defended what the airline characterized as an “unprecedented step” taken Wednesday to raise the hourly pay of pilots and flight attendants outside of negotiations with more than two years left on their contracts.
Officials said the wage increases would cost American $230 million in 2017, and $350 million for 2018 and 2019. Flight attendants’ hourly wages will jump 5 percent on average while pilot pay rises 8 percent.
Parker acknowledged to analysts and investors during the airline’s first quarter earnings call Thursday that the move “might surprise and even dismay some of you because it adds costs to our airline.”
But Parker said pilot and flight crew salaries at American had been lower than at other airlines and the move was necessary for rebuilding trust and encouraging an engaged workforce.
“It’s the right way to lead any service organization,” Parker said, adding in a question and answer session that the move had been several months in the making and was “absolutely not” connected to recent customer service issues in the news, including one at American and several at United.
When challenged several times during the session with analysts, Parker pushed back and said that he’s “highly confident” that there is a correlation between employee pay and improved airline performance.
Having American’s employees working for wages that were subpar compared with salaries at competitors was “a big challenge,” Parker said.
Parker likened the pay hikes that increase hourly wages for crew to levels above that of competitors to similar moves when one airline introduces a new element to their in-flight experience and another carrier matches it.
“We are not leading the charge. We are just catching up,” he said.
Basic Economy and Premium Economy on Track
In other developments, American Airlines president Robert Isom said he’s confident that the new Basic Economy and Premium Economy tickets would generate some $1 billion in incremental revenue.
The airline launched Basic Economy seats, which comes without access to overhead bin space and where seats are assigned at check-in, on 10 domestic routes March 1 and will expand it to more routes in May and June, officials said.
American expects to have 14 Boeing 787-9 aircraft outfitted with Premium Economy seats, geared for international service, by the end of 2017.
In early tests, 50 percent of people who saw a Basic Economy fare displayed ended up choosing a main cabin fare instead, Isom said.
One factor inhibiting a faster rollout of the service is that American needs to ensure that distribution partners — everyone from online travel agents to traditional travel agents and global distribution systems — can properly sell the products, said Don Casey, the airline’s senior vice president of revenue management.
Current distribution models, Casey said, make it very difficult to display anything but the lower fare, adding that having two distinct products that distributors can display will make it easier for customers to understand.
Parker returns to a theme
The rollout of Basic Economy and Premium Economy, as well as redesigning AAdvantage, expanding the airline’s sales force, and simplifying and optimizing its fleet and network would get American to the point where it would average $5 billion annually in pre-tax profits, officials said.
Some years it might be $7 billion in pre-tax earnings and other years it could be $3 billion but the average run rate would be $5 billion, Parker said.
Returning to a theme he has discussed frequently over the last couple of years, Parker said that the U.S. airline industry has matured and is “dramatically different” than it was years ago when red ink was accumulating.
In the past three years the airline industry’s capacity grew greater than demand so unit revenue declined; employee pay increased “at a rate no one has seen before,” and fuel prices rose 20 to 30 percent, Parker said. Although earnings turned out lower than targeted last year, “I feel really good about that [$5 billion] target over time,” he added.
For the first quarter of 2017, American’s net income fell 66.6 percent to $234 million on revenue of $9.62 billion, a 2 percent jump.
Parker said he’s bullish on the future of American and the U.S. airline industry despite some of those trends cited above. “We still have a business that is producing returns that it has never seen before,” he added.