American Airlines Wants to Be Nice But Doesn’t Know How
Posted On: Oct 10, 2018
In April 2017, as airlines were swinging back to solid profitability following a rough decade and a half, American Airlines did something very unusual: It voluntarily gave substantial raises to its pilots and flight attendants, two years before their union contracts were set to expire.
The pay raises cost the airline about $350 million a year over two years. For a company producing pre-tax annual profits around $3 billion, that’s not a trivial amount.
Wall Street was displeased.
“This is frustrating,” Citibank analyst Kevin Crissey wrote in a note to investors. “Labor is being paid first again. Shareholders get leftovers.”
You could argue it’s a good thing for corporations to serve a wide group of stakeholders, and therefore that this raise was the right thing to do even if it meant less profit for shareholders. A number of columnists made that argument and dunked on Crissey in the process. But American executives had a different rationale for the raise.
“We think precisely this kind of investment in our people is going to make the difference in our service,” American CEO Doug Parker said on a conference call for investors just after the announcement. “And while this won’t happen overnight, we also think of the kind of investment that will continue to drive revenue out-performance for American and as that happens, all of you will be the beneficiaries of those returns.”
Lots of executives at lots of companies like to talk about “culture as a competitive advantage.” What makes Parker unusual is how he’s put his money where his mouth is: paying employees more as part of a broader effort to improve the customer-service culture at American, even over objections from Wall Street.
His hope is that, along with other product improvements, such as new aircraft, those investments in personnel will lead to better service and to happier customers, who are willing to pay higher fares, so shareholders enjoy higher profits.
This is a happy to story to tell: Companies that treat their employees and their customers well are more profitable in the end. If this story is true everywhere, we don’t have to worry about whether a singular focus on shareholder profits is ethical: To maximize profits, a company had better be nice to all its stakeholders anyway.
Unfortunately, those miserly Wall Street analysts had a point. Not only has paying more not made American more profitable, it hasn’t even improved American’s customer satisfaction relative to its competitors.
It’s not that a “nice company” strategy can never work. It’s that American hasn’t truly implemented one.
Higher pay was only one of several things American needed to do to be nicer. It’s not clear whether the airline has the rest of the necessary steps in it.