A week and a half ago American unilaterally offered raises to pilots and flight attendants before contracts were up. Over three years this costs the airline an extra billion dollars.
American’s CEO Doug Parker sees this as a one time cost because they’d wind up giving out the raises when contracts come due anyway (and if it takes time to negotiate those contracts, the raises would presumably be retroactive).
Cockpit of an American Boeing 787
In the airline’s earnings call Parker said he’s “highly confident” that increased pay and increased revenue are “correlated.”
Kevin Crissey from Citigroup slammed American’s commitment to ratchet up pay when their competitors do as “taking your number one cost item and handing it over to the most aggressive competitor effectively.”
Whoever thinks that they can pay the most goes out and signs a contract and your labor rates are going to go to that optimistic or arguably the dumbest management team out there is an argument investors could look at. You’ve taken it out of your hands and put it in the hands of others and that doesn’t feel like what well run companies do.
Jamie Baker from JP Morgan pointed out that it takes more employees at American than it does at Delta to do the same job. Doug Parker says the data isn’t comparable. Baker downgraded American Airlines stock.
The question here is, will paying employees more translate into higher profits for the airline than they’d earn without giving employees raises outside of their contracts? The case in favor is,
- Ameican does’t have to do it, but employees are unhappy they’re being paid less than peers at other major airlines who increased pay more recently
- Unhappy employees provide bad service and chase customers away
- Paying employees more will motivate them
US Airways employees were brought up to higher paid American Airlines levels with the merger. Renegotiated contract increased wages. And in between contracts American is increasing wages. Delta and United have given employees substantial raises as well. There are individual airline employees who offer incredible service both onboard and on the ground (I wish American would clone the incredible staff at their Admirals Club in Austin) but overall and on average are we seeing unprecedented levels of inflight service?
In my experience happy motivated employees:
- Feel they are paid fairly
- Like and respect colleagues
- See themselves as a part of something bigger than themselves, on a mission
Being paid well alone isn’t motivating above a certain level, and that’s doubly true when the other elements aren’t present. Sure, if you’re making a good living and you see that living as contingent on strong performance you may be motivated to perform well. But if you’ll receive your pay no matter what then there’s little connection. If the people you work with shirk, putting out maximum effort feels futile.
What’s really motivated is feeling you’re on a mission. If you’re the underdog fighting to survive, and survival doesn’t just protect your own compensation but you’re in this together with your friends who are working towards the same goal, you’re going to try your hardest. It’s difficult to maintain that kind of culture.
Unions aren’t the issue here per se.
- Southwest flight attendants are unionized but they have fun and offer great service. The airline was born as an underdog, with major airlines suing to try to keep it from flying and with a team that managed to maintain a four aircraft schedule even when finances required them to return one of their planes (and the “ten minute turn” was born). They’ve managed to maintain their culture despite occasional labor acrimony.
- Delta flight attendants aren’t unionized, but their work rules and scheduling have many of the same features of their unionized counterparts at other airlines. Delta service is arguably marginally better on average than American’s or United’s.
At the same time the kinds of rules often found in union-negotiated contracts make it hard for employees to succeed or feel passionate about their jobs.
The jobs they perform are based on seniority, not performance. Their pay is based on seniority (and the jobs they do which are based on seniority) and no performance. The potential to personally succeed by performing better than average is limited. There are very few consequences when coworkers don’t perform well.
And a seniority system locks employees into their jobs and make them feel trapped, they may be unhappy but they can’t jump to another employer because they’d start at the bottom and lose their accumulated seniority and pay.
Employees may be well paid, or poorly paid, but rarely fairly paid (in the sense that pay corresponds with effort). Some employees go above and beyond because of their own nature but not because of the culture, but employees around them often won’t.
The opportunity for leadership remains to bring employees together as part of a common mission.
- The airline is an underdog, fighting against the odds (this is like joining together on a sports team
- The airline is fighting for its survival, we’re all in this together, and our efforts will make the difference at the margin (the motivator here is fear)
- We’re the best and we’re fighting to stay on top as the biggest airline against competitors nipping at our heels (employees need to be proud of their airline for this to work)
Giving employees more money for the job they’re already doing, without aligning compensation with effort or performance, doesn’t mean better customer service. At most it may reduce or eliminate resentment of management, indirectly affecting customer service (if employees were taking resentment out on customers).
Fair pay relative to a person’s range of alternatives and perhaps compared to similarly-situated employees at competitors may be necessary to motivate a workforce, but it’s absolutely not sufficient to do so. And the kind of work rules that management has negotiated over the years makes it impossible to motivate and fairly compensate any individual employee.
I don’t have an opinion on the ‘right level’ of overall employee compensation and it’s difficult to know in a world of pay by seniority and across-the-board negotiated salaries. But don’t count on these pay increases delivering better customer service or contributing to American’s bottom line.
Good for AA – wages in the US has been stagnant and not really keeping up with cost of living because of constant pressures from the street where the mentality is only shareholder’s interest matters, everything else doesn’t.
More companies should be increasing wages.
Kevin from Citigroup should fear how many employees will boycott their financial services or snip/snip their bank cards.
I’d argue that Delta’s ground and FA staff is 100% better than AA’s. Most of my (as of late frequent) experience on AA has resulted in grumpy and unhelpful staff while DL continues to shine. Corporate culture transcends pay, if you want the bottom fixed then fix the top.
Its proven that raises alone do not foster better employee performance. Improvement in culture, job satisfaction, and the perception that management continually respects the hard work of its employees (even if it really doesn’t) score well above compensation in exit interviews. That’s where the airlines and AA fail.
Having lived in Dallas for nearly 33 years I have witnessed unending whining from American’s unions, especially the FA’s and pilots. I doubt very seriously that they will be any happier and I can guarantee you as soon as UA or DAL raises their comp there will be more whining. The small sample of pilots I heard from did not expect the increase and think Parker is a dope for giving a raise without asking for anything in return. The one thing they have going for them is that the fuel prices seem stuck in a low range for the foreseeable future, but that worm will ultimately turn.
I am lifetime Plat so I get a few perks, but I value AA miles at <1cent a piece, because that is their value for flights I actually want to take. Because of the perks I will fly AA if they are equal or cheaper than their competitors. But if SW, Blu, VA are cheaper, they get my business, because American and its employees generally have rotten attitutudes.
Usually companies offer raises, in part, as a tool to encourage employees to accept changes in benefits and work rules that favor the company. Here AA is giving out raises and getting nothing tangible in return. This is very progressive thinking for penny pinching AA. It might work but is risky.
You mean the lard flight attendant who sat on her ass except for one service for first class PHX-SEA might be more inclined to do pre-flight & a second & god forbid third service? Doubt it. It’s an ingrained culture. It’s not just $ but constant training & harping. Delta did it with NWA flight attendants but they weren’t unionized. I’d expect to see more of the same lazy legacy flight attendants sitting in forward jump seat who do nothing.
I personally would not have given these raises to the employees without asking for something in return, but I also did not build the world’s largest (and probably most profitable) airline from “nothing” either. And doing that required assistance from labor: Parker had them pressure old AA management. I’d note that, after the initial negative reaction to the pay hikes, AA’s stock recovered and has been trading near its peak.
johhny says:
May 11, 2017 at 5:25 pm
Having lived in Dallas for nearly 33 years I have witnessed unending whining from American’s unions….
I just know where this one is going…
and it’s back, way back, it’s gone! Hey Hey
Jack Brickhouse RIP
Very well said Gary. I think you should send a link to Mr. Parker. In addition +1 to the comments from Robert and Johhny.
Evidently none of the commenters have any idea what is in the contracts of the FA s or Pilots. And they have the short term memory that the employees of American have been working under sub- market wages for the past 15 years much to the benefit of management who gave up nothing in the bankruptcy. Now the pampered lifer plats and Wallstreet criminals ( remember who broke the economy with their shenanigans?) think that a contractual raise that was denied by the CEO( can we say breach of contract?), is wrong? They clearly are out of touch with the real world .
Not sure how much these guys get paid, but its nice to see that wags are being raised. I am no communist, but over the last 20 years, the only stakeholders in any company who are taken care of are the shareholders. Constantly declining wages (in real terms) with the fruits of the labour being transferred to shareholders only serves to increase inequality.
Robert says:
“”May 11, 2017 at 4:11 pm
I’d argue that Delta’s ground and FA staff is 100% better than AA’s. Most of my (as of late frequent) experience on AA has resulted in grumpy and unhelpful staff while DL continues to shine. Corporate culture transcends pay, if you want the bottom fixed then fix the top.””
The fruit does not fall far the tree.
You are right they are not at all happy, they are grumpy, they look like they would rather be someone else doing something.
My most recent AA or US Air flight I had a connector in Charlotte, a family with a baby and a toddler were waiting to Board, the Gate Agent starting calling groups to board, the family was standing right in front of them. Guess what Gate Agent never called for people with special needs or little children, I look at the family and gate Agent and said you should have gone first the WORTHLESS GATE agent (heard me) at just looked right past me and kept talking,
I’m an AA shareholder as well as an ExecPlat (though unlikely to requalify next year given the new requirements) and have seldom experienced the type of indifference or other negatives from staff. My AA shares have almost doubled in value and paid me a modest dividend over the past two years. I applaud Parker’s decision to proactively compensate line staff for having lived through the past dozen or more years of uncertainty at both airlines because I do believe in sharing the recent upsurge in profitability (going to owners and employees instead of oil companies and sheiks who’ve long benefited from unjustified high oil prices) and am naive enough to hope this translates into a continued positive employee attitude to we flyers. It always irks me how Wall Street analysts and others believe positive employment news (higher wages, full employment numbers) is claimed to be a negative for the economy and a company…applauding execs who downsize and off-shore jobs to fatten margins to exceed quarterly forecasts. [We FFers tend to forget that one of the most attractive benefits of working for an airline is “free travel”…but given full flights its harder to make use of this stand by benefit so I see this as an offset for a diminished benefit.]
Extra $ will only go so far and will do nothing to change the culture, which is where the fundamental issue lies. This week employees got a new memo informing them that if they must return a uniform for ANY reason, they foot the bill for the return shipping. Most employees just shrug and move on, finding such petty treatment “typical ” for management.
Extra pay still can’t bail you out of a toxic culture.
There is a huge difference with Delta and American Airlines. Love the professionalism of their staff. Too many Americans’ flight attendants are not friendly and take their jobs for granted. Don’t welcomed you with a smile, don’t say good morning, on their cell phones when passengers are boarding. Some of the gate agents do not assist the wheelchair passengers.