American’s pilots expose CEO’s $1bn labour bet

Bloomberg

American Airlines CEO Doug Parker is investing more than $1 billion to mend tattered labour relations at the world’s largest carrier. A recent spat with pilots is prompting some analysts to question whether he’s getting his money’s worth.
The aviators’ union warned that more than 15,000 flights were at risk of being scrubbed during the busy holiday season after a scheduling snag left many trips without crews. American promised extra pay for pilots willing to fly. As customer angst about potential cancellations mounted, the company further sweetened its offer before finally reaching a union staffing deal.
The high-profile dispute underscored the lingering challenge for Parker as he seeks to reverse years of labour tensions at the world’s largest airline. Earlier this year, he installed a profit-sharing plan after reversing his earlier opposition. He also approved unusual mid-contract pay increases to pilots and flight attendants, spooking shareholders worried about rising costs.
“Management refers to it as an investment, that they need to invest in their employees,” said Joe DeNardi, a Stifel Financial Corp. analyst. “Investors are struggling to see what the return on that investment is going to be, or where it’s going to show up.”
American’s deal with the union will cover about 1,500 flights and will increase wage costs by about $10 million this quarter, said Jamie Baker, an analyst at JPMorgan Chase & Co. Helane Becker, an analyst at Cowen & Co., said Parker’s earlier decisions on profit sharing and pay “created no goodwill for American as, in our view, the union continues to take advantage of” the Fort Worth, Texas-based carrier.
“We do not believe the pilot groups at Delta, United or Southwest would have handled it this way,” Becker said to investors.
Elise Eberwein, American’s executive vice president for people and communications, said such comments were “short-sighted,” given the work and time it takes to rebuild trust among employees.
“We’d go back and make all those decisions a thousand times over,” she said.
The mid-contract raises, announced in April, will add $930 million to the company’s costs through 2019. Separately, American last year provided interim increases averaging 22 percent to mechanics, bag handlers and others because talks on a new accord were taking longer than expected.
American Airlines Group Inc. climbed 1.9 percent to $49.93 at the close in New York amid a broad rally among transportation stocks, which are poised to benefit from proposed cuts to corporate taxes. The shares climbed 6.9 percent this year, just ahead of the 5 percent advance of a Standard & Poor’s index of major US airlines.
Despite the higher fourth-quarter costs from pilot pay, JPMorgan’s Baker raised his forecast for American’s earnings, citing stronger demand. But beyond the short term, Parker is trying to forge improvement after years of sour relations between American’s managers and employees.
Workers embittered by $1.6 billion in concessions in 2003 to stave off bankruptcy endured more cuts when American filed for Chapter 11 in 2011.
Months later, tensions were so high that the airline’s unions fought the company’s plan to emerge from bankruptcy under its existing executive team, opting instead to support Parker’s plan to merge American with US Airways, where he was CEO. Since then, Parker has vowed to make sure new labour contracts at American top industry pay scales. Workers invested in the success of their company take better care of customers, who, in turn, reward shareholders by providing repeat business, he has said, espousing a philosophy championed by Southwest Airlines Co. co-founder Herb Kelleher.

American’s Error
In the latest spat with pilots, Eberwein and David Seymour, American’s senior vice president for integrated operations, acknowledged that the airline erred by not seeking input from the Allied Pilots Association as soon as it discovered a clerical mistake that let too many aviators take time off in December.
Union leaders were notified of a problem, but didn’t learn details or American’s proposed solution until an email to pilots, APA said. Seymour declined to specify how many flights were potentially affected, saying only that “we saw numbers a lot higher than where we would like to see them.”
A telephone call between American President Robert Isom and APA President Dan Carey led to a December 1 meeting among leaders from both sides. A resolution was announced hours later and finalised over the weekend.
“The biggest evidence of culture change is the fact you did get really senior people at APA and the company involved quickly, instead of everybody getting into a corner and getting ready to go to battle,” Eberwein said.