May 3, 2017 at 5:00 am ET
Ahead of its recent first quarter earnings call, American Airlines announced pay increases for pilots and flight attendants totaling $350 million annually. The announcement came more than two years ahead of labor contract renegotiations. Employees were likely as delighted for more money in their paychecks as shareholders were disappointed to see the bottom line decrease by that same amount. Traders reacted with displeasure and sent the stock down more than 5 percent. A Citi analyst lamented, “Labor is being paid first…again. Shareholders get leftovers.”
Unfortunately, such remarks—while jarring—are not unusual. A “shareholder before and above all” mentality has become commonplace on both sides of the market, and it’s damaging future economic growth. The consolidated airline industry is a strong example of how short-termism—where focus on quarterly profits often comes at the expense of future performance—has become a business norm.
Every airline faces the same unavoidable expenses. Salaries, wages and benefits for thousands of pilots, flight attendants and other personnel are the single largest expense. Upfront capital expenses, meanwhile, are huge—a single purchased aircraft can cost hundreds of millions of dollars. Leased aircraft and maintenance costs are ongoing. Fuel prices can be volatile. Airports charge terminal rents and landing fees.
As airlines continue to make flying a less enjoyable way to travel—through shrinking leg room, a drawn-out boarding process, added fees and by outsourcing many core, customer-facing roles—passengers are less likely to choose a carrier based on loyalty or a pleasant experience. Airlines have responded by competing on price. Decreased prices increase consumer demand, but meeting that demand requires additional planes, gates and crews—capacity that airlines often don’t have.
Limited opportunities for revenue growth mean management teams face tremendous pressure to cut costs. Simply put, airlines have low profit margins.
This explains why Wall Street is upset at American Airlines’ “wealth transfer of nearly $1 billion” to its employees, as one JPMorgan Chase analyst put it. Many shareholders see salary increases as nothing more than a new expense on a balance sheet. In other words, pilots are viewed no differently than the aircraft they operate. Labor and capital are merely inputs to achieve a final product, getting passengers from one place to another. Increasing pay makes that product less profitable today, decreasing shareholder returns.
American Airlines’ management team seemed to abide by this philosophy, even as employee unions have been pushing for the company to increase wages. But after Chief Executive Doug Parker said, “Investments in our team are investments in our product,” it appears that the airline is changing its tune to argue that fairly compensated employees are a key component of a successful business.
Yet far too often, corporate management and shareholders abide by the philosophy of short-termism, and often at the expense of long-term investments. Executives receive lavish compensation packages, and performance stock makes up a significant and growing share of their pay. Many shareholders are more interested in short-term trading than long-term investing, so they have little reason to support anything to limit immediate profits. In both cases, incentives are clearly biased toward now instead of later.
The most mystifying aspect of executives’ initial reluctance and Wall Street’s unwillingness to support a pay increase is that American Airlines’ pay is already uncompetitive within the rest of the airline industry. That the airline’s pay rates are 4 percent to 8 percent lower than competitors may not matter much in the short term, but if left untouched, the pay rates would not have caught up until union contract renegotiations happen in more than two years. The failure to raise pay rates in the interim could have resulted in low-morale among employees, hurting service or increasing turnover as some workers left to take jobs elsewhere.
This phenomenon is not unique to this industry. A Center for American Progress report argues how worker training and other employee investments should be classified like research and development instead of a general expense across all corporations to provide better information to investors.
Each year, BlackRock Chief Executive Larry Fink writes to the CEOs of Fortune 500 companies on behalf of clients. Business sustainability is an ongoing theme in these letters, and this year Fink stressed that “the [political and economic] events of the past year have only reinforced how critical the well-being of a company’s employees is to its long-term success.”
Finally, at least one corporate suite sees the value in thinking long-term. As American CEO Parker commented: “This investment is going to make a difference in our service. And as that happens, all of you [shareholders] will be the beneficiaries.” When more corporations have a long-term focus, labor and shareholders across the entire economy will be the beneficiaries, too.
Andrew Schwartz is a policy analyst with the economic policy team at the Center for American Progress.
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