What's wrong with giving out pay raises? Plenty, according to some Wall Street analysts

Joe Taschler | Milwaukee Journal Sentinel

What's wrong with giving out raises? Plenty, if you're a Wall Street analyst covering the airline industry.

On Thursday, American Airlines, in announcing net earnings of $234 million in the first quarter, also said it was giving pilots and flight attendants pay raises. The airline's stock got hammered, with shares falling more than 8% from Wednesday to Friday.

Analysts for a couple of large investment banks downgraded the stock and left no doubt about their viewpoints about the raises.

“This is frustrating. Labor is being paid first … again. Shareholders get leftovers,” wrote Citi analyst Kevin Crissey in a note to clients.

Jamie Baker of Morgan Stanley downgraded American shares to “neutral” from “overweight,” saying the pay decision “establishes a worrying precedent, in our view, both for American and the industry.”

The pay raises and the ensuing reactions are a snapshot of larger issues about pay and wealth inequality as well as the long-term well-being of companies and their employees being debated in the U.S. and around the world. Such issues have given rise to economic populism that propelled Donald Trump to the U.S. presidency and prompted Britain to leave the European Union, academics and investment pros say.

"There’s always this tension between what companies would want for the long term and what Wall Street wants for the short term," said John Cotton, professor of management and director of the Executive MBA Program in the College of Business Administration at Marquette University. "As far as Wall Street is concerned, if you could pay minimum wage to everybody on every job, that would be great because that would leave more money for stockholders."

American Airlines CEO Doug Parker defended the raises.

"As a service organization, investments in our team are investments in our product," Parker said during a conference call with analysts. "We think it's precisely this kind of investment in our people that is going to make the difference in our service. And while this won't happen overnight, we also think it's the kind of investment that will continue to drive revenue (growth) for American. And as that happens, all of you will be the beneficiaries of those returns."

Wall Street's attention span isn't that long.

"Wall Street, they don’t care so much long term," Cotton said. "They would rather have the company buy back stock than, say, invest in making their business more effective over the long term, because that’s not going to pay off in the next 90 days.

"It is short-sighted, but then Wall Street almost by definition is short-sighted," he added. "If you could do something to jack up your stock price 5%, the fact that it’s going to hurt your company over the next 10 years is irrelevant."

What happened at American has happened before.

"Wal-Mart went through the same thing two years ago," said Duane Roberts, director of equities at Dana Investment Advisors in Waukesha. "Their stock suffered when they announced they were increasing wages."

Airline industry analysts have been burned in the past. The American Airlines pay raise rekindles memories of spiraling labor costs that contributed significantly to airlines going bankrupt and sometimes disappearing altogether. It's no wonder they would be cautious about the raises.

Still, the overall situation on Wall Street has given rise to ESG — environment, social and (corporate) governance — factors being included as part of investment decisions.

Among those factors is the long-term sustainability of a company.

"I do believe as investors and the analyst community, we’ve been too focused on the short-term bottom-line numbers," Roberts said. Dana uses ESG in its investment strategies.

"Unfortunately, there are a lot of people in the market who are traders and not investors," Roberts added. "There is an element of short-termism that exists in the markets that I think is unhealthy.

"Ultimately, if we are investors, we want our managers to make long-term decisions and not be driven completely by the next quarter’s bottom line."

In terms of numbers, a typical American Airlines flight attendant's salary is $40,184, according to employment and recruiting website Glassdoor.com. Flight attendant salaries at the airline range from $17,058 to $68,480, according to Glassdoor.com.

A typical American Airlines pilot's salary is $86,449, according to Glassdoor.com. Pilot salaries at American Airlines can range from $27,375 to $159,787, Glassdoor says.

American flight attendants and pilots have been complaining loudly that they are paid less than their counterparts at Delta and United. American pilots now stand to get 8% more pay, and its flight attendants will get another 5%. American estimates the raises will cost the company $230 million this year and $350 million in 2018 and 2019.

"You do have to pay your people," Roberts said. "You do have to keep them happy. They are the face of the business. They have a huge impact on how people perceive the service they are getting."