American Airlines hit by wages
American Airlines shares slumped by the biggest margin in five months on Friday as higher labour costs are set to hinder profit.
American is paying more for labour, its biggest expense, after agreeing to higher wages for flight attendants, mechanics and baggage handlers. That's pressuring the bottom line, even as slower growth in flights and seats enables the Texas-based carrier to regain some pricing power over airfares.
Rising expenses are already taking a toll on American's pre-tax gross margin, which fell to 7.9pc in the fourth quarter from 13pc a year earlier. First-quarter costs for each seat flown per mile are likely to rise between 8pc and 9pc, primarily due to new union contracts. The airline said growth in the cost measure would slow through the rest of 2017.
While profit pressures are increasing, American is also regaining more control over air fares after slowing capacity growth last year to bring supply in line with demand. A pick- up in travel in late 2016 is fuelling sales of last-minute tickets.
Total revenue for each seat flown per mile, a proxy for pricing power known as unit revenue, rose 1.3pc in the fourth quarter, the first increase since late 2014. That made American the first major US carrier to halt a slide triggered mainly by a fare war that erupted in early 2015. The measure will climb 2.5pc to 4.5pc this quarter and increase in each subsequent quarter, the company said.
Delta Air Lines and United have also been paring expansion plans in an effort to achieve the same turnaround in unit revenue.