How Investors Failed to See the Talent Connection in American Airlines’ Latest Wage Hike

How Investors Failed to See the Talent Connection in American Airlines’ Latest Wage Hike

American Airlines’ market value took a hit last week after its CEO Douglas Parker told investors of a plan to raise wages for crew members by an average of 6.5 percent, or a total of $930 million through 2019. Amid criticism, Parker stood by his decision, but within 48 hours, the company’s stock dropped by more than 8 percent, wiping out roughly $1.9 billion in American’s market value.

Rising fuel and labor costs are eating into profit margins across the industry, and low-cost competitors are making it difficult for airlines to increase fares. From investors’ perspective, this unexpected pay raise was simply not justified and raised the risk of an industry-wide wage war. So was American’s punishment fair?

Missing the Talent Connection

After the announcement, Citigroup analyst Kevin Crissey wrote in a note to clients: “This is frustrating. Labor is being paid first again. Shareholders get leftovers.” Of course, this simply is not true. As Los Angeles Times reporter Michael Hiltzik observed, “From 2014-2016, American Airlines authorized $9 billion in share buybacks, money that went directly into shareholders’ pockets… By contrast, the pay raises will cost American $1 billion over three years.” It is however, still too common for investors to view payments to employees as a zero-sum loss to shareholder value.

For starters, wage rates for American’s 15,000 pilots are around 8 percent lower than the rates that Delta Air Lines and United Continental offer. Similarly, rates for American’s 26,000 flight attendants are also about 4 percent lower than rivals. Raising rates to industry-leading levels is the right call not only from a talent management standpoint, but also from a competitive standpoint.

Perhaps more importantly, however, is the airline industry’s reputation for low customer satisfaction. Airlines across the board are under pressure to improve after a string of public relations disasters, and this was one of Parker’s central messages to investors in last Thursday’s earnings call, where he urged them to take a longer view:

There’s a history at American that spreads some mistrusts, and we’re working hard to change the culture and the team is making great progress in that regard. We recognize that pay alone won’t build trust, but we also know it’s an important step in the right direction. … As a service organization, investments in our team are investments in our product. … While this won’t happen overnight, we also think it’s the kind of investment that will continue to drive revenue outperformance for American. And as that happens, all of you will be the beneficiary of those returns.

The talent connection is that competitive compensation will eventually lead to better service. This will then allow American to stay ahead of its rivals. But even as the airline beat earnings forecasts leading up the call, investors weren’t convinced by the CEO’s message and the company’s potential to outperform.

Communicating the Talent Connection

To be fair, Parker was prepared for this backlash and even acknowledged that the move “might surprise or even dismay some of you [investors].” American Airlines understood the concerns of its shareholders, and that there was a strong emphasis on fuel and labor costs in the industry.

In fact, investors did not dismiss the talent connection outright, but they were struggling to understand it. Kevin Crissey asked for “evidence that cultural investments are more than recouped through higher revenue,” to which Parker responded:

This is about us getting our team to the levels that are currently in place at our competitor airlines and consistent with the commitment we made to our team at the time of the merger [with US Airways] that we would compensate them in line with their peers at other airlines. … And I do believe, Kevin, what happens so long as we do that, we have an engaged and excited team that is seeing the trust they place in us validate it and they go take care of our customers, and that’s the best way to take care of our shareholders.

Parker’s message to shareholders focused on the need to match pay rates that rival airlines offered in order to boost trust between management and employees, but he might have made a stronger case had he focused on the link between wage hikes and corporate performance.

That’s just one conclusion we found in our analysis of over ten thousand earnings calls at the world’s largest companies (which CEB Corporate Leadership Council members can read in full). Almost 90 percent of investors agree that qualitative information, such as around talent, is critical when deciding to buy and sell stocks, but conversations around talent have to be clear and concise. Even if investors like Crissey agree that wage hikes are “the right thing to do,” they must know how these people investments lead to increased performance to remain confident in how American Airlines spends investors’ money.

Communicating the talent connection is one way to buttress investor confidence. In the case of American Airlines, the talent connection is that wage hikes will better enable the airline to attract, retain, and engage its employees in serving customers. Better service will lead to higher customer satisfaction, and that will eventually lead American to stay ahead of its customers. Customers are actually currently more satisfied with American Airlines than legacy rivals like Delta and United, but American will lose out if it begins leaking its top talent.

Continuing Conversations Around Talent with Investors

Of course, investors don’t only care about the overarching message: Other actions such as investments in training will have to be taken to build a robust narrative that links talent to business performance.

Perhaps more significantly, companies can also invest in quantifying the talent connection to help companies strengthen their business case for investors. That’s why over 70 percent of organizations are increasing their resources dedicated to talent analytics over the next three years—one of several key findings in of our latest report on the State of Talent Analytics (available to Corporate Leadership Council members here). One advanced organization we spoke to, for example, started investing in this field over a decade ago. They now have the ability to identify the impact of specific initiatives on employee engagement, customer satisfaction, financial outcomes, and much more. These new tools can help CEOs like Parker make their business cases for investing in talent in terms shareholders can understand.