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Why American Airlines Stock Sank 7%

By Rich Smith - Apr 27, 2017 at 11:54AM

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The airline gives its pilots and flight attendants a pay raise and suffers for its good deed.

What happened

American Airlines ( AAL 1.90% ) stock crashed after the company reported earnings this morning. It was down 7.3% as of 11 a.m. EDT.

So what

Don't blame "earnings" per se for the collapsing stock price, though. Fact is, American's $0.46 earnings per share ($0.61 per share, pro forma) and $9.6 billion in revenue partially beat and matched expectations for the quarter. Analysts had expected American to report only $0.55 in pro forma profits on expected sales of $9.6 billion.

Rather, it seems that investors are reacting to American's announcement that it is offering its pilots and flight attendants an unnegotiated pay raise -- outside of ordinary contract renewal negotiations -- in an attempt to keep pace with pay hikes at rival airlines.

Stock chart falling through floor.

Why is American Airlines stock crashing? Image source: Getty Images.

Now what

American Airlines described the pay move as "an unprecedented step to increase hourly base pay for the airline's crew members outside of contract negotiations, bringing those workgroups' base pay levels to the top of the industry." CEO Doug Parker says he's "excited about the long-term prospects for American Airlines." He characterized the pay move in particular as an investment in American's team that will both fulfill the company's promise to ensure that American employees are paid "as much as their industry peers" and help to "retain... customers' loyalty."

That all sounds pretty good. On Wall Street, however, investment bank JPMorgan blasted the move as a "wealth transfer of nearly $1 billion to [American's] labor groups," and immediately downgraded American Airlines stock to neutral.

With American Airlines stock now down 7% in just a few hours, you don't need three guesses to figure out which assessment investors are agreeing with today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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