American Airlines shares nosedive on proposed employee pay increases

NEW YORK (Reuters) - Shares of American Airlines Group Inc AAL.O dropped more than 8 percent on Thursday after the company said it had offered a mid-contract pay increase for pilots and flight attendants.

FILE PHOTO -- American Airlines aircraft are parked at Ronald Reagan Washington National Airport in Washington, U.S., August 8, 2016. REUTERS/Joshua Roberts/File Photo

American said that the move, which overshadowed the carrier’s solid quarterly earnings, will increase its salary and benefits expense by approximately $230 million for 2017 and $350 million for 2018 and 2019.

Flight attendants and pilots at American ratified new five-year agreements in late 2014 and early 2015. Under the new proposal, announced on Wednesday, they will now receive on average 5 percent to 8 percent increases in hourly pay, respectively, in an adjustment to match rival carriers.

In the years since American contract negotiations, labor groups at rival airlines United UAL.N and Delta DAL.N have negotiated compensation agreements, placing American at the low end of the pay spectrum.

“As our industry has rapidly evolved and pay increases at other airlines have accelerated, some of our colleagues have fallen behind their peers at other airlines in base pay rates. And, unless their current contracts are modified, they’ll remain far behind for more than two years,” Chief Executive Officer Doug Parker said in a statement on Wednesday.

Analysts worried about the possible effects of the pay increase on American and the implications it could have for the broader industry.

“We are troubled by AAL’s wealth transfer of nearly $1 billion to its labor groups. In addition to raising fixed costs, American’s agreement with its labor stakeholders establishes a worrying precedent, in our view, both for American and the industry,” JPMorgan analysts wrote in a research note.

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American posted earnings of 61 cents per share for the quarter ended March 31 on Thursday, versus analysts’ consensus forecast of 57 cents per share, excluding special items, according to Thomson Reuters I/B/E/S.

The Fort Worth, Texas-based airline reported first-quarter revenue of $9.6 billion, matching analyst predictions, and a net profit of $308 million.

Passenger unit revenue, which measures sales relative to flight capacity, rose 2.4 percent year over year.

The company also said on Thursday it had deferred the delivery of several wide-body Boeing and Airbus jets, in the latest sign of oversupply in the market for long-distance airliners.

That decision came two weeks after Delta Air Lines Inc DAL.N said it was reviewing pending wide-body jet orders to address excess capacity, noting that reductions were likely over the next several years.

American said in its earnings filing that it was pushing back the first delivery of its Airbus AIR.PA A350 XWBs from 2018 to 2020 and deferring the delivery of two Boeing BA.N 787-9 aircraft to the first quarter of 2019 from the second quarter of 2018 to "provide widebody capacity flexibility" in its fleet.

Reporting by Alana Wise; Editing by Chizu Nomiyama and Meredith Mazzilli