Shares of airlines fell Thursday after poor earnings and a big pay raise for pilots and flight attendants raised concern on Wall Street that the sector was returning to the days when the stocks rarely made good investments.
American Airlines shares closed down more than 5 percent Thursday after its earnings and a downgrade from JPMorgan. Other airline stocks such as United Continental closed down almost 1 percent, while Delta Airlines, closed over 1 percent lower.
Even though American Airlines posted first quarter earnings per share of 61 cents versus the 57 cents Street average estimate, investors focused on the implications of the company’s new pay raises for its employees.
JPMorgan airline analyst Jamie Baker downgraded American to neutral from overweight on the new labor deal.
“We are troubled by AAL’s wealth transfer of nearly $1 billion to its labor groups. In addition to raising fixed costs, American’s agreement with its labor stakeholders establishes a worrying precedent, in our view, both for American and the industry,” Baker wrote in a note to clients Thursday. “In our minds, this is a seminal event, and represents the first, credible potential blow to our long-held ‘it’s different this time’ investment thesis.”
The analyst cited how the new agreement raised flight attendant and pilot pay by 5 percent and 8 percent, respectively.
“Unfortunately the American move today has emboldened unions probably across the entire space. It’s led them to believe you can come back mid-contract [and] ask for whatever you want,” Baker said on CNBC’s “Halftime Report” Tuesday. “And that in turn makes that march toward higher multiples, not impossible, but a little bit more challenging.”
As a result, he lowered his price target for American Airlines to $52 from $59, representing 18 percent upside from Thursday’s close of $43.98 per share.
Last November, Warren Buffett’s Berkshire Hathaway bought stakes in American, United and Delta in a big reversal for the value investing legend, who like most investors had sworn off the sector for decades. The stocks are still higher since that Buffett investment, but his profit is being reduced quickly after Thursday’s decline.
United Airlines also announced on Thursday it will offer up to $10,000 to customers who will give up their seat on an overbooked flight. The airline industry is under increased scrutiny due to the bloody confrontation earlier this month, when an airline passenger was dragged off an overbooked flight.
“If overbooking were legislated out, if it was regulated away, revenue trends will initially go…