It is a no-brainer that low oil prices have been nothing short of a godsend for stocks in the airline space. Just when Ebola fears were wreaking havoc on airline stocks in 2014, oil prices started to dip from over $100 levels, courtesy an over-supplied oil market as demand remained lackluster. Since fuel costs account for a major chunk of an airline company’s operating expenses, the massive drop in oil price (currently hovering around the $40-per-barrel mark) has resulted in impressive bottom-line performances at carriers.
Bankruptcy Filings: A Thing of the Past for Legacy Carriers
Needless to say, the massive savings emanating from cheap oil has caused a rebound in the financial health of carriers. Most carriers had been under pressure on the financial front, even a few years back, as they struggled to cope with high fuel costs along with other challenges. Financial woes caused many leading carriers to file for bankruptcy. For example, Atlanta, GA-based Delta Air Lines DAL had plunged into bankruptcy in 2005. Its merger with Northwest Airlines, a few years later, helped the carrier come out of the mess.
American Airlines too had filed for bankruptcy in 2011. The subsequent merger of AMR (American Airlines' parent group) and US Airways in 2013, which resulted in the formation of American Airlines Group AAL, was a masterstroke. The carrier, which does not hedge fuel costs, has witnessed solid profits in recent times.
Financial Rebound: A Blessing for Employees and Investors
When carriers were under financial strain, their employees too had to bear the brunt. Pay cuts were a common practice then. However, with carriers currently in the pink of financial health, the situation is definitely looking better for employees.
The strong balance sheet of airline companies has also prompted a surge in shareholder-friendly activities like increased dividend payouts and an uptick in buyback activities. Naturally, employees too are now expecting better remuneration. Meanwhile, labor deals have taken center stage with major carriers including United Continental Holdings UAL and American Airlines apart from low-cost ones like Spirit Airlines SAVE being highly active on the labor font.
Profit Sharing Reaches New Highs: American Airlines Reverses Stance
Now financially strong, airlines have also gone employee-friendly with their profit sharing initiatives. For example, earlier this year, Delta’s employees received the highest payout in the history of corporate profit sharing programs. The total payout of $1.5 billion meant that employees received more than 21% of their 2015 annual earnings. The comparable figure was 16% in 2014. Southwest Airlines LUV too announced its highest profit sharing payment (total of $620 million). The payment, to be made on Apr 29, equates to approximately 15.6% of each employee’s earnings in 2015.
The popularity of the profit sharing scheme became evident last week when American Airlines Group, which had earlier opposed the scheme, also decided that its employees will enjoy a share of its profits.
We remind investors that Doug Parker, CEO of the Fort Worth, TX-based carrier had earlier consistently opposed the profit sharing scheme, calling it outdated and a method to merely make up for wage cuts. Parker had been in favor of pay raises instead without any variable component attached. However, last week the carrier reversed its stance and announced that it would pay 5% of 2016 pretax profits to its employees apart from those in management. Consequently, the carrier’s first profit sharing payment will be made early next year. Although Parker has acknowledged that the 5% payout is lower compared to its peers, the carrier intends to offer higher hourly pay rates to make up for the lesser share.
While announcing the profit scheme through a letter, Parker stated that even though he still believes that the most effective means of compensation comes through a raise in base pay, he conceded that profit-sharing enhances team-spirit. With the top U.S. carrier (in terms of traffic) changing its stance and resorting to profit sharing, we firmly believe that that focus will stay on this employee-friendly scheme going forward as oil prices remain soft continuing to boost the financial health of carriers.
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