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American Airlines (AAL) Pay Raise: Will It Hurt the Industry?
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Shares of the Fort Worth, TX-based American Airlines Group (AAL - Free Report) have lost despite reporting better-than-expected earnings and revenues in the first quarter 2017. The reason for the sharp decline was the mid-contract wage hike announced by the company for its pilots and flight attendants. The announcement not only sent American Airlines shares tumbling, but its peers like Delta Air Lines (DAL - Free Report) and United Continental Holdings (UAL - Free Report) too felt the pinch and saw their stock prices moving south.
The Offer
American Airlines came out with this labor-friendly announcement as the wages of their concerned labor groups was below those offered by its peers. In fact, the carrier stated that the hourly base pay of its pilots and flight attendants lagged the highest rates in the industry by approximately 8% and 4%, respectively.
In a bid to match the industry leading levels in this respect, the carrier offered its pilots and flights attendants a pay rise to the tune of approximately 8% and 5%, respectively. The offer took all concerned by surprise, since the current contracts for flight attendants and pilots are expected to run til 2019 and 2020, respectively.
The pilots and flights attendants would not have to wait that long for their contracts to be renewed and could earn industry leading pays from this month itself, if this labor friendly proposals are ratified by Allied Pilots Association and Association of Professional Flight Attendants respectively.
Labor Costs Already Hurting Bottom Line
In the context of the ratification of this offer, American Airlines is likely to see an increase of approximately $230 million in salary and benefit expenses in 2017, and $350 million in each of the following two years. The timing of the proposed hike is surprising as stocks in the airline space are already witnessing their bottom line being hurt, due to escalated labor costs.
With airline companies constantly inking deals with various labor groups, it is of little surprise that costs on this front are on a rise. At Delta Air Lines earnings declined 41.7% year over year due to higher costs. Consolidated unit cost or cost per available seat mile (CASM), including profit sharing, increased 5.8%, mainly due to the labor deals inked by the company.
At United Continental Holdings, consolidated unit cost – excluding fuel, third-party business expenses and profit sharing – increased 5% year over year, primarily due to the labor deals ratified. United Continental expects unit costs in the second quarter to increase in the band of 4–5% on the back of higher labor costs.
At American Airlines, total operating expenses climbed 11.4% year over year to $9 billion. Also, expenses pertaining to salaries and benefits were up 6.5%. Consolidated operating costs per available seat miles (CASM: excluding special items) increased 7.6%. Moving ahead, Consolidated CASM (excluding fuel and special items) is projected to increase 7% in the second quarter.
At Southwest Airlines (LUV - Free Report) , Unit costs (excluding fuel and oil expenses, special items, and profit sharing expenses) in the second quarter are likely to increase 6% year over year. Apart from increasing labor expenses, rising fuel costs also distorted the earnings picture of carriers in the first quarter. Quarterly earnings also declined at the likes of JetBlue Airways (JBLU - Free Report) and Allegiant Travel Company (ALGT - Free Report) due to higher costs.
Therefore, based on this given scenario of increased costs, American Airlines’ proposal on materialization is expected to put further pressure on its bottom line. No wonder the Zacks Consensus Estimate at American Airlines for 2017 and 2018 have declined 3 cents and 12 cents to $4.63 and $5.13 per share respectively, over the last seven days, despite the outperformance in the first quarter.
Price Performance
The adverse effect on the airline space due to the wage hike announcement by American Airlines is the latest blow on the sector. Recently, it has also been struggling with multiple issues like the well-documented passenger fiasco at United Continental. This can be gauged from the fact that the Zacks categorized Transportation-Airline industry gained 5.61% so far this year, while the S&P 500 index increased 6.7%.
Will Others Follow?
Currently, the question that lingers is that whether the other airline players with sound balance sheets will follow American Airlines and offer mid-contract hikes to their labor groups. In that case, substantial air fare hikes might be on the cards as carriers aim to mitigate the effects of increasing costs.
According to data released by the Bureau of Transportation Services (BTS), average airfares (unadjusted) climbed 4.2% month on month in Feb 2017. In fact, the February reading was up 2.4% compared with January (on a seasonally adjusted basis).
In fact, with earnings growth being limited due to higher costs, carriers are likely to hike ticket prices further in the remainder of the year to boost their top lines to counter the pressure on bottom-lines.
Moreover, many carriers are displaying growth with respect to unit revenues this year, after struggling on this front in 2016. In the first quarter of 2017, carriers including American Airlines displayed growth with respect to total revenue per available seat miles (TRASM: a key measure of unit revenues).
The metric is expected to increase in the band of 3% to 5% in the second quarter of 2017 on a year-over-year basis. At Hawaiian Holdings (HA - Free Report) , the metric is projected to grow in the band of 5.5–8.5% in the second quarter of 2017.
Many other carriers like Delta aim to return to positive unit revenues this year. Hiking air fares is consistent with this objective of carriers as well. Consequently, air travel might become more expensive this year. Naturally, investors interested in the space should keenly await updates on this burning issue.
Sell These Stocks. Now.
Just released, today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500.
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American Airlines (AAL) Pay Raise: Will It Hurt the Industry?
Shares of the Fort Worth, TX-based American Airlines Group (AAL - Free Report) have lost despite reporting better-than-expected earnings and revenues in the first quarter 2017. The reason for the sharp decline was the mid-contract wage hike announced by the company for its pilots and flight attendants. The announcement not only sent American Airlines shares tumbling, but its peers like Delta Air Lines (DAL - Free Report) and United Continental Holdings (UAL - Free Report) too felt the pinch and saw their stock prices moving south.
The Offer
American Airlines came out with this labor-friendly announcement as the wages of their concerned labor groups was below those offered by its peers. In fact, the carrier stated that the hourly base pay of its pilots and flight attendants lagged the highest rates in the industry by approximately 8% and 4%, respectively.
In a bid to match the industry leading levels in this respect, the carrier offered its pilots and flights attendants a pay rise to the tune of approximately 8% and 5%, respectively. The offer took all concerned by surprise, since the current contracts for flight attendants and pilots are expected to run til 2019 and 2020, respectively.
The pilots and flights attendants would not have to wait that long for their contracts to be renewed and could earn industry leading pays from this month itself, if this labor friendly proposals are ratified by Allied Pilots Association and Association of Professional Flight Attendants respectively.
Labor Costs Already Hurting Bottom Line
In the context of the ratification of this offer, American Airlines is likely to see an increase of approximately $230 million in salary and benefit expenses in 2017, and $350 million in each of the following two years. The timing of the proposed hike is surprising as stocks in the airline space are already witnessing their bottom line being hurt, due to escalated labor costs.
With airline companies constantly inking deals with various labor groups, it is of little surprise that costs on this front are on a rise. At Delta Air Lines earnings declined 41.7% year over year due to higher costs. Consolidated unit cost or cost per available seat mile (CASM), including profit sharing, increased 5.8%, mainly due to the labor deals inked by the company.
At United Continental Holdings, consolidated unit cost – excluding fuel, third-party business expenses and profit sharing – increased 5% year over year, primarily due to the labor deals ratified. United Continental expects unit costs in the second quarter to increase in the band of 4–5% on the back of higher labor costs.
At American Airlines, total operating expenses climbed 11.4% year over year to $9 billion. Also, expenses pertaining to salaries and benefits were up 6.5%. Consolidated operating costs per available seat miles (CASM: excluding special items) increased 7.6%. Moving ahead, Consolidated CASM (excluding fuel and special items) is projected to increase 7% in the second quarter.
At Southwest Airlines (LUV - Free Report) , Unit costs (excluding fuel and oil expenses, special items, and profit sharing expenses) in the second quarter are likely to increase 6% year over year. Apart from increasing labor expenses, rising fuel costs also distorted the earnings picture of carriers in the first quarter. Quarterly earnings also declined at the likes of JetBlue Airways (JBLU - Free Report) and Allegiant Travel Company (ALGT - Free Report) due to higher costs.
All the above-mentioned companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Therefore, based on this given scenario of increased costs, American Airlines’ proposal on materialization is expected to put further pressure on its bottom line. No wonder the Zacks Consensus Estimate at American Airlines for 2017 and 2018 have declined 3 cents and 12 cents to $4.63 and $5.13 per share respectively, over the last seven days, despite the outperformance in the first quarter.
Price Performance
The adverse effect on the airline space due to the wage hike announcement by American Airlines is the latest blow on the sector. Recently, it has also been struggling with multiple issues like the well-documented passenger fiasco at United Continental. This can be gauged from the fact that the Zacks categorized Transportation-Airline industry gained 5.61% so far this year, while the S&P 500 index increased 6.7%.
Will Others Follow?
Currently, the question that lingers is that whether the other airline players with sound balance sheets will follow American Airlines and offer mid-contract hikes to their labor groups. In that case, substantial air fare hikes might be on the cards as carriers aim to mitigate the effects of increasing costs.
According to data released by the Bureau of Transportation Services (BTS), average airfares (unadjusted) climbed 4.2% month on month in Feb 2017. In fact, the February reading was up 2.4% compared with January (on a seasonally adjusted basis).
In fact, with earnings growth being limited due to higher costs, carriers are likely to hike ticket prices further in the remainder of the year to boost their top lines to counter the pressure on bottom-lines.
Moreover, many carriers are displaying growth with respect to unit revenues this year, after struggling on this front in 2016. In the first quarter of 2017, carriers including American Airlines displayed growth with respect to total revenue per available seat miles (TRASM: a key measure of unit revenues).
The metric is expected to increase in the band of 3% to 5% in the second quarter of 2017 on a year-over-year basis. At Hawaiian Holdings (HA - Free Report) , the metric is projected to grow in the band of 5.5–8.5% in the second quarter of 2017.
Many other carriers like Delta aim to return to positive unit revenues this year. Hiking air fares is consistent with this objective of carriers as well. Consequently, air travel might become more expensive this year. Naturally, investors interested in the space should keenly await updates on this burning issue.
Sell These Stocks. Now.
Just released, today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500.
See today's Zacks "Strong Sells" absolutely free >>