American Airlines on Thursday did something that's good for its workforce and good for its passengers: It announced healthy pay increases for its pilots and flight attendants, two years ahead of the expiration of their union contracts.
In response, Wall Street absolutely slaughtered American's stock. The airline's shares lost more than 8% in value over the ensuing two trading sessions, a loss of about $1.9 billion in market value in 48 hours.
This slide tells you much more about Wall Street than American Airlines, and nothing good. In fact, the incredible whining about the pay raises that has come from Wall Street securities analysts is proof positive that they have no conception of what it takes to operate a successful airline under today's conditions, or about the customer service disasters that are turning the industry into a national joke.
"This is frustrating," Kevin Crissey, an airlines analyst for Citigroup, bellyached to clients after the announcement. "Labor is being paid first again. Shareholders get leftovers."
One doesn't know what to say to this, except: Is he kidding? From 2014 through 2016, American Airlines authorized $9 billion in share buybacks, money that went directly into shareholders' pockets. The company also paid out 40 cents per share in shareholder dividends in both years. By contrast, the pay raises will cost American $1 billion over three years. Pilots will get 8% and flight attendants 5% through the end of the current contract.
Crissey wasn't alone. Morgan Stanley downgraded American shares, on the grounds that the raises establish "a worrying precedent … both for American and the industry."
To their credit, American executives have stood fast against the onslaught of criticism. Chairman and CEO Doug Parker acknowledged during a conference call with analysts Thursday that the move "might surprise or even dismay some of you because it adds costs to the airline." A mid-contract raise for union members, he observed, "has never been done in our industry."
But he said it was necessary to shore up the culture of a service company whose pilots and flight attendants are, to customers, the face of the airline.
"These are people to take care of our customers, the people that are on the frontline," Parker said. He also cited mechanics, reservation agents and gate agents, who aren't included in the new raises. "What you're seeing here is the maturing of an industry … that has seen the people work in this business go through incredibly difficult times, and what we needed to have happen was that get corrected." He noted that Delta, a major competitor, recently instituted a 6% pay increase for nonunion employees.
Customer service has been a grinding problem for U.S. airlines, especially legacy carriers such as American, where mergers and cost-cutting have kept employees on edge. That surely has contributed to customer service disasters such as the spectacle of passenger David Dao being hauled violently off a United Airlines flight so his seat could be available for company employees, in part because gate staff didn't have the knowledge or authority to find an alternative course. (American merged with US Airways in 2013, United with Continental in 2010, and Delta with Northwest in 2010; none was a particularly smooth transition.)
Customer satisfaction ratings for American, United and Delta have been mired behind those of nimbler, newer carriers such as Southwest, JetBlue and Alaska for years. American, Parker said, faced the additional problem of pay scales for pilots and flight attendants that was lower than those of the major rivals. He told analysts that the raises probably would be necessary with the expiration of the contracts, so this week's steps amount to an "acceleration" of an inevitable expense, rather than a new expense.
Wall Street doesn't seem to understand that decades of enhancing "shareholder value" at the expense of workers has placed American business and the economy in a bad way. The upstreaming of corporate resources to shareholders and senior executives has increased economic inequality, which has been a drag on growth.
Nor is the cult of shareholder value rooted in ancient truisms, as its proponents claim. If anything, it's a gross distortion of the concept of the corporation. That's been true since it was propounded by conservative economist Milton Friedman in 1970.
Friedman wrote then that the only social responsibility of business is to "increase its profits."
As we observed in another context, Friedman's argument was disdained by business leaders of the time. Management guru Peter Drucker, writing in 1973, asserted, "There is only one valid definition of business purpose: to create a customer. … The customer is the foundation of a business and keeps it in existence."
But Friedman's doctrine was picked up by water carriers for the shareholding class — wealthy collectors of unearned income in the form of capital gains and dividends. Over time, the idea of shareholder value as the goal of the corporation became so ingrained in American business policy that it seemed to have existed forever rather than merely since the end of the 20th century.
By any fair measure of the hierarchy of interests in corporate management, "equity holders are the lowest level of financial claim," business analyst Yves Smith argued on her blog, Naked Capitalism. "It's one thing to make sure they are not cheated, misled, or abused, but quite another to take the position that the last should be first."
Yet Wall Street's reaction to American's effort to improve the lot of its employees, and through them service to its customers, shows that it's still blind to the consequences of treating shareholders' short-term interests as paramount. In the long run, those shareholders will be the victims of this approach, not the gainers.
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