American Airlines, the wholly owned subsidiary of American Airlines Group Inc. (AAL) has finally reached an agreement with the Association of Professional Flight Attendants – the union representing 24,000 of its flight attendants.
The settlement follows years of negotiations between the two parties. The agreement removes a major overhang on the shares and marks a step ahead toward the completion of the integration process between American Airlines and U.S. Airways. Naturally, the news of the first labor contract after the merger impacted the company’s shares positively.
The contract covers the flight attendants of American Airlines and U.S. Airways. We remind investors that the merger, which was completed in late 2013, led to the formation of American Airlines Group. The merger had taken place after a bankruptcy filing by American Airlines. Interestingly, the merged entity has witnessed huge profits thereafter.
Last month, the five-year contract (tentative agreement) was voted down by the flight attendants primarily because it did not cover a profit sharing plan. As per the tentative agreement, flight attendant costs were to be raised by $193 million annually. Following the rejection, arbitration meetings decided the fate of the contract.
We remind investors that in 2012, the two parties had agreed that $112 million would be the maximum value necessary to ensure that the joint contract was on par with industry standards, apart from being worth at least as much as the individual contracts for American Airlines and U.S. Airways.
The agreement with the flight attendants was finally imposed by the panel of arbitrators who met earlier this month. The joint contract called for $112 million in annual wage improvements for flight attendants. The wage increase comes into effect from Jan 1, 2015.
According to media reports, CEO, Doug Parker, has expressed his willingness to restore the lost amount (through higher pay raises) to the flight attendants. The loss is due to the voting down of the higher-valued contract last month.
However, Parker is not in favor of the profit sharing scheme and believes that wages should be raised instead. According to him, the profit sharing scheme is outdated and given to make up for wage cuts. We note that other leading carriers such as Delta Air Lines, Inc. (DAL) and Southwest Airlines (LUV) have shared profits with their employees.
Apart from the deal, American Airlines was also in the news recently when it inked a codeshare agreement with the Mexican low cost carrier Interjet. The codeshare deal is a smart move by American Airlines aimed at improving its network in Mexico.
Zacks Rank
American Airlines Group carries a Zacks Rank #1 (Strong Buy). An equally well-ranked stock in the airline industry is Ryanair Holdings plc (RYAAY).
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