American Pilots Expose Frailty of CEO's $1 Billion Labor Bet

(Bloomberg) -- American Airlines Chief Executive Officer Doug Parker is investing more than $1 billion to mend tattered labor 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 last week 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 labor tensions at the world’s largest airline. Earlier this year, American paid out a profit-sharing plan after Parker reversed 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.”

‘No Goodwill’

American’s Dec. 1 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 in a note 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.

Parker’s Vision

American Airlines Group Inc. fell less than 1 percent to $49.86 at 11:08 a.m. in New York. The shares climbed 6.9 percent this year through Monday, ahead of the 5 percent gain for a Standard & Poor’s index of major U.S. carriers.

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 at the time.

Since then, Parker has vowed to make sure new labor 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.

Having the best employee relations is key to competing with Delta Air Lines Inc. and United Continental Holdings Inc., Parker has said.

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 Nov. 24 that let too many aviators take time off in December.

Union leaders were notified of a problem that day, but didn’t learn details or American’s proposed solution until a Nov. 28 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 Dec. 1 meeting among leaders from both sides. A resolution was announced hours later and finalized over the weekend.

Battle Defused

“The biggest evidence of culture change is the fact you did get really senior people at APA and the company involved quickly, instead of of everybody getting into a corner and getting ready to go to battle,” Eberwein said.

Dennis Tajer, a spokesman for the pilots’ union, agreed, saying the speedy deal “was a sign that things are different.”

But the dust-up shows Parker still has a ways to go in his efforts to win over employees, said Samuel Engel, vice president of consultant ICF. A company with better labor relations probably would have been able to resolve a similar dilemma with less trouble.

“Since it takes so long to change and repair a history of strained labor relations, it is absolutely normal that these situations would be in negotiation today,” Engel said. “In the future, what Parker can hope for is more give-and-take and goodwill.” 

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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