Airlines Fall As American Pay Raises Seen As ‘Worrying Precedent’

U.S. airline majors have been pressured Thursday after a series of headlines from the sector, including quarterly reports from both American Airlines (AAL) and Southwest (LUV), indications of a potential “wage race” and signals of a coming end to the industry overbooking practices that have recently created a public relations nightmare for United Airlines (UAL).

AMERICAN ENTERS WAGE RACE: In a letter to employees Wednesday, American Airlines announced it is offering mid-contract pay raises for flight attendants and pilots averaging 5% and 8%, respectively, which it estimated would cost $230M in 2017 and $350M in 2018 and 2019. CEO Doug Parker explained in the letter that, due to the leapfrogging effect of recent labor contracts at industry rivals, “we intend to work with the unions to adjust the hourly base pay rates of all American pilots and flight attendants to levels that are equal to the highest rates currently in place at either Delta (DAL) or United.”

JPMORGAN DOWNGRADE: JPMorgan’s Jamie Baker downgraded American to Neutral while cutting his target to $52 from $59 in response to the wage news, saying he’s “troubled” by what he calls a $1B wealth transfer to labor groups. Beyond simply raising costs for American, the move also sets a “worrying precedent” for the industry and represents the first real blow to the “it’s different this time” investment story, the analyst says. Baker concedes that employee dissatisfaction within American was proving a “material distraction,” but contends that chasing a rising wage bar is not the solution.

UNITED, SOUTHWEST TO REDUCE OVERBOOKING: Also making waves in the sector was United Airlines, which outlined 10 changes to its customer policies in the wake of the David Dao “dragging” incident. Among the changes, the carrier committed to limit use of law enforcement to “safety and security” issues; increase compensation for voluntary denied boarding up to $10,000; and form a team to give agents “creative solutions” to get customers to their final destination. Notably, United also promised to “reduce the amount of overbooking,” though no specific targets were offered. This afternoon, United Airlines told CNBC that it is “pleased” to have reached an amicable resolution with Dr. Dao, though details of the settlement were not offered. Meanwhile, Southwest CEO Gary Kelly stated in a CNBC interview earlier that “we’re seriously reconsidering that [overbooking] practice. I’ve made the decision – the company’s made the decision – that we’ll cease to overbook going forward. We’ve been taking steps over the last several years to prepare ourselves for this anyway.”