Record Profit Is a Bad Optic as American Air CEO Decries Profit Sharing

Profit sharing is a controversial topic at American Airlines (AAL) for two reasons.

First, CEO Doug Parker believes strongly that profit sharing is not a reliable method for compensating employees because profits sometimes disappear for reasons that have nothing to do with employees -- such as the economy or perhaps even the Zika virus.

This may be an eminently logical argument but it has become a tough one to make at a time when airline profits are at record levels.

Secondly, Delta (DAL) , American's fierce rival, offers profit sharing, as does United (UAL) . This year, Delta will pay employees $1.5 billion in profit sharing.

Delta likes for people to know that it offers profit sharing. Profit sharing, in good years, is a sign of a healthy company where workers are rewarded for success.

Also paying profit sharing, while unionized American does not, strengthens the case that Delta employees do not need unions. While Delta pilots are unionized, most of the rest of its employees are not.

Both aspects of the profit sharing controversy came up when Parker discussed the topic on American's fourth-quarter earnings call.

Before the call, Parker wrote about American's $6.3 billion profit for 2015 in a letter to employees. "That's more than American has ever made in its history, and indeed represents the highest profits of any airline in our industry's history," he said.

During the call, during a question, Parker was told that a Delta spokesman had said that if profit sharing was included, Delta would have earned $7.4 billion and would have had the highest profit of any airline.

In his response, Parker first discussed his opposition to profit sharing. "We have made a decision to compensate our people more per month and not have them be subject to the whims of things like Zika virus and people's concerns about that," he said.

"We think people should be paid what they earn, as they earn it as opposed to waiting for the end of the year to see if indeed the airline is profitable or not," he said. "So we put more in our base wages."

Parker added, "Our pilots right now are making 7% more per hour than theirs are because we choose to pay our people higher than {Delta} to offset the fact of profit sharing." He said the rest of American's employees are union members with better work rules than those of Delta's non-union workers.

As for Delta profits, Parker said the reason Delta profits were lower than American profits was fuel hedging losses. Delta had 2015 fuel hedging losses "that cost them a couple of billion dollars," he said.

Delta lost about $2 billion hedging fuel in 2015; American does not hedge fuel.

Meanwhile, American's pilots strongly favor profit sharing.

"As American management strives to equal and surpass Delta's product, it has forgotten that Delta partners with its employees while it's making record breaking profits," said Dennis Tajer, spokesman for the Allied Pilots Association. "That is a huge part of the reason Delta is so successful.

"Delta pilots are days away from receiving a profit sharing check for more than 20% of wages, making them, by a large margin, the best compensated pilots in the industry," Tajer said. "Similarly, United pilots will receive double digit {percentage of wages} profit sharing checks that will catapult them past American pilots in total compensation levels."

 

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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