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Airline stocks descend on wage proposal from American

Airline stocks were grounded on Thursday after American Airlines unexpectedly offered to raise wages for its crew members, exacerbating investor concerns over industry costs.

American Airlines fell the most in 10 months, dropping 8.6 per cent to a two-week low of $42.41, after the company proposed giving its pilots and flight attendants an average pay bump of 8 per cent and 5 per cent, respectively.

The pay action was unexpected given that America’s current contracts with its pilots are not due for renewal until 2020 while those for its attendants do not expire until 2019. Jamie Baker, an analyst at JPMorgan said the move could set “a worrying precedent . . . both for American and the industry”.

The raises, which could go into effect as early as May if unions for both groups approve the deal, is expected to cost American $230m in 2017 and $350m in 2018 and 2019, the company said in a regulatory filing.

While American is expected to offset some of this cost through fare increases, Mr Baker, the JPMorgan analyst, reckoned the move could cut American’s earnings by 29 cents per share this year and shave another 46 cents off in 2018. He lowered his view on the stock to neutral from overweight.

Jim Corridore, an equity analyst at CFRA Research, also lowered his forecasts for American’s full-year earnings per share this year to $4.40 from $4.71 and cut his view on next year’s EPS to $5 from $5.34.

The step-up in compensation is yet another reminder of the challenges facing the US airline industry this year following a couple of bumper years.

Having been buoyed by the sharp drop in fuel costs the past three years, rising fuel and labour costs are once again eating into the profits of airlines.

The industry is also under pressure to improve customer services following a series of high-profile clashes with flyers, notably the one in which a passenger was forcibly dragged off a flight operated by United Continental.

Worries that other carriers might also be pressured to raise wages knocked the wider airline sector. Shares in Southwest Airlines fell 3.5 per cent to $54.96, Delta Air Lines shed 2.9 per cent to $45.05 and United Continental dropped 3.1 per cent to $69.14.

The NYSE Arca Airline index fell 1.4 per cent by midday, paring its gains for the year to just 0.9 per cent, compared to the S&P 500′s 6.7 per cent advance.

Elsewhere, PayPal rallied to a record high after the electronic payment group delivered expectation-beating first-quarter sales and earnings growth, boosted guidance and announced plans for a new $5bn share-buyback programme.

Shares in the company, which was spun off from eBay in 2015, rose as much as 8.3 per cent to $48.10, a new intraday record. The stock has risen more than 20 per cent since the start of the year and boasts a market value of $56.6bn, compared to eBay’s $36bn.

The broad market struggled for momentum as the euphoria that surrounded Donald Trump’s tax reforms faded after White House announcements unveiled yesterday provided scant details.

Both the Dow Jones Industrial Average and the S&P 500 were flat. The Nasdaq Composite was up 0.3 per cent.

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