Why American Airlines Stock Sank 7%

By Rich Smith Markets Fool.com

What happened

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American Airlines (NASDAQ: AAL) 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.

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

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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.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.