American CEO gambles big for labor peace

American Airlines Chief Executive Officer Doug Parker is investing more than $1 billion to mend tattered labor relations at the world’s largest carrier. A recent spat with pilots is prompting some analysts to question whether he’s getting his money’s worth.

The aviators’ union warned last week that more than 15,000 flights were at risk of being scrubbed during the busy holiday season after a scheduling snag left many trips without crews. American promised extra pay for pilots willing to fly. As customer angst about potential cancellations mounted, the company further sweetened its offer before finally reaching a union staffing deal.

The high-profile dispute underscored the lingering challenge for Parker as he seeks to reverse years of labor tensions at the world’s largest airline. This year, American paid out a profit-sharing plan after Parker reversed his earlier opposition. He also approved unusual mid-contract pay increases to pilots and flight attendants, spooking shareholders worried about rising costs.

“Management refers to it as an investment, that they need to invest in their employees,” said Joe DeNardi, a Stifel Financial Corp. analyst. “Investors are struggling to see what the return on that investment is going to be.”

American’s Friday deal with the union will cover about 1,500 flights and will increase wage costs by about $10 million this quarter, said Jamie Baker, an analyst at JPMorgan Chase. Helane Becker, an analyst at Cowen & Co., said Parker’s earlier decisions on profit sharing and pay “created no goodwill for American as, in our view, the union continues to take advantage of ” the Fort Worth, Texas-based carrier.

“We do not believe the pilot

groups at Delta, United or Southwest would have handled it this way,” Becker said in a note to investors.

Elise Eberwein, American’s executive vice president for people and communications, said such comments were “shortsighted,” given the work and time it takes to rebuild trust among employees. “We’d go back and make all those decisions a thousand times over,” she said.

The mid-contract raises, announced in April, will add $930 million to the company’s costs through 2019. Separately, American last year provided interim increases averaging 22 percent to mechanics, bag handlers and others because talks on a new accord were taking longer than expected.

Despite the higher fourth-quarter costs from pilot pay, JPMorgan’s Baker raised his forecast for American’s earnings, citing stronger demand. But beyond the short term, Parker is trying to forge improvement after years of sour relations between American’s managers and employees.

Workers embittered by $1.6 billion in concessions in 2003 to stave off bankruptcy endured more cuts when American filed for Chapter 11 in 2011. Months later, tensions were so high that the airline’s unions fought the company’s plan to emerge from bankruptcy under its existing executive team, opting instead to support Parker’s plan to merge American with US Airways, where he was CEO at the time.

Since then, Parker has vowed to make sure new labor contracts at American top industry pay scales. Workers invested in the success of their company take better care of customers, who, in turn, reward shareholders by providing repeat business, he has said, espousing a philosophy championed by Southwest Airlines Co. co-founder Herb Kelleher.

Having the best employee relations is key to competing with Delta Air Lines and United Continental, Parker has said.