For pilots and cabin crew at American Airlines Group Inc., though, there's some good news. They’re getting a raise to bring their pay into line with rivals. Trouble is, Wall Street thinks it stinks, with one analyst saying labor was "being paid first again" while "shareholders get leftovers."
Usually, I’m all for workers getting paid more. Part of the weakness of the post-crisis recovery is down to paltry wage increases. American can't be accused of that here. Pilots and flight attendants will on average get a 6.5 percent bump. It will cost more than $900 million over three years: a mini-stimulus package on American's dime.
It’s also amusing to hear bank analysts berate a management team for putting wages above returns. Maybe we should glance at the compensation-to-income ratios of a typical investment bank.
Still, while the complaints may be rich they're not totally baseless. The largest U.S. airline by revenues has been chucking money around recently. It's spending heavily on planes, with capital expenditure of about $17 billion in the past three years. Again, you could argue that this is necessary: anything to improve the experience of flying with a U.S. airline.
But American has also repurchased about $9 billion of its stock in that same period, according to Bloomberg data, cutting its share count by a third since the end of 2013, when the company emerged from Chapter 11.
That's jacked up net debt to almost $18 billion (or 2.5 times Ebitda), the highest of the big four U.S. airlines. Plus that doesn't include almost $13 billion in operating lease obligations. Generous pay isn't the only bad habit American has rediscovered.
While bankruptcy protection and a merger with US Airways helped American cut costs, its employee count (124,000) and personnel expenses are still pretty high. Salaries, wages and benefits are by far the largest operating expense and account of more than one-quarter of revenue. At European budget carrier Ryanair it's 9 percent, according to Bloomberg data.
Yet the shares have gained more than 20 percent over the past year. One reason is consolidation: bankruptcies and mergers have left four airlines controlling more than two-thirds of the domestic market, as I explained here. This hands pricing power to the airlines -- and more profit. American's 2016 operating margin was 13 percent. While lower than the previous year, it's still almost twice that of Deutsche Lufthansa AG, Europe's biggest airline by revenue.
It's safe to assume that many investors bought American's shares knowing that its benign competitive landscape would let it extract higher fares. Indeed, American's CEO Doug Parker noted yesterday that U.S. airlines have added more capacity than needed, boosted pay and swallowed rising fuel costs, yet "we still have a business that's producing returns like it's never seen before". It's not hard to see why.
And while it’s fair to ask whether paying workers more will mean better customer service (analysts seem skeptical), buybacks aren't exactly about priming a business for growth. Yet investors went along with those.
Crying now about employees trying to get their piece of the action is a touch hypocritical.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.