American Airlines Group (NASDAQ: AAL) made peace with its pilots union and avoided a potential work disruption. But the ailrine paid a steep price to win that peace.
Shares of American fell 12.1% in August, according to data provided by S&P Global Market Intelligence, on concerns that costs are going up at the same time that demand might be heading in the opposite direction.
American and other airline stocks have recovered somewhat from the pandemic, but the industry in recent months has paid a price for that increase in demand. With the airlines short of qualified pilots and flight attendants after offering early retirements amid the pandemic, the unions have been in a strong position as one airline after another has entered into negotiations.
American got its deal with its pilots mid-month. Factoring in increases to retirement contributions pilot compensation rates will rise by more than 46% during the contract’s duration. All in, American pilots will receive about $9.6 billion in additional value compared to the old arrangement through August 2027, when the deal becomes amendable.
The airline has struggled with labor harmony in recent years, and the deal is a positive in that it reduces the risk of labor strife. But it also raises operational costs at a time when domestic booking momentum appears to be slowing.
Historically, airlines have performed poorly during periods of rising inflation and slowing economic growth because flights tend to be a luxury item. So far, the industry has largely avoided issues this time around due in part to pent-up demand for travel following the pandemic. But if conditions turn south from here it could end up that American signed its new deal with pilots right at the peak, which could crimp earnings until the economy recovers.
American has a lot of issues to juggle right now. The company’s alliance with JetBlue Airways to round out its service in the northeast is being unwound due to regulatory concerns, leaving a gap in its network. It does not yet have a new deal with its flight attendants, and late in the month the group voted in favor of authorizing a strike if the two sides can’t reach a compromise.
Add in the concerns about the macroeconomic environment, and investors are rightly concluding that there is a lot that could go wrong with American right now. The stock could have trouble regaining altitude until some of these headwinds clear.
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