Airline shares grounded as American wage hike raises cost pressure fears

Airline stocks were grounded on Thursday after American Airlines unexpectedly offered to hike wages for its crew members, spooking investors who were already on the edge over the renewed costs and labour pressure seen in the industry.

American Airlines fell the most in 10 months – dropping 8.6 per cent to a two-week low of $42.41 – after the company proposed giving its pilots and flight attendants an average pay bump of 8 per cent and 5 per cent respectively.

The pay action was unexpected given that America’s current contracts with its pilots are not due for renewal until 2020 while those for its attendants don’t expire until 2019. Jamie Baker, an analyst at JPMorgan said the move could set “a worrying precedent…both for American and the industry.”

The raises – which could go into effect as early as May if unions for both groups approve the deal – is expected to cost American $230m in 2017 and $350m in 2018 and 2019, the company said in a regulatory filing.

While American is expected to offset some of this cost through fare increases, Mr Baker, the JPMorgan analyst, reckoned the move could cut American’s earnings by 29 cents per share this year and shave another 46 cents off in 2018. He lowered his view on the stock to neutral from overweight.

Jim Corridore, an equity analyst at CFRA Research, also lowered his forecasts for American’s full year earnings per share this year to $4.40 from $4.71 and cut his view on next year’s EPS to $5.00 from $5.34.

The step up in compensation is yet another reminder of the challenges facing the US airline industry this year following a couple of bumper years.

Having been buoyed by the sharp drop in fuel costs the last three years, rising fuel and labour costs are once again eating into carrier’s profits. At the same time, the industry has found itself under pressure to improve customer services following a series of high profile clashes with passengers, notably the one in which a Vietnamese-American doctor was forcibly dragged off a flight operated by United Continental.

Concerns that the wage increases would erode profits overshadowed American’s first quarter results, which saw revenue rise 2 per cent to $9.62bn during the first three months of the year, slightly ahead of expectations $9.61. Net income plunged by two thirds however to $234m as a result of costs related to its merger with US Airways. Excluding these items, adjusted net income came in at $308m, or 61 cents a share – beating consensus estimates for $288.9m, or 57 cents a share.

Worries that other carriers might also be pressured to raise wages knocked the wider airline sector. Shares in Southwest Airlines were down 3.5 per cent at $54.96, Delta Air Lines shed 2.9 per cent to $45.05 and United Continental dropped 3.1 per cent to $69.14.

Overall, the wider NYSE Arca index fell 1.8 per cent on Thursday, paring its gains for the year to just 0.2 per cent, compared to the S&P 500′s 6.5 per cent advance.