Apr 27, 2015 - Judging from the April earnings calls by the three major U.S. airlines, Wall Street has its hand firmly on the controls of the U.S. airline industry.
Date: April 27, 2015
Source: The Street
Author: Ted Reed
Judging from the April earnings calls by the three major U.S. airlines, Wall Street has its hand firmly on the controls of the U.S. airline industry.
During their conference calls last week, American (AAL - Get Report) , Delta (DAL - Get Report) and United (UAL) seemed determined to kowtow to Wall Street's every wish. One after another, they talked about reduced capacity, share buybacks, and various other metrics that showed how all they do is geared to shareholder return.
The week ended with American CEO Doug Parker declaring that he won't accept any salary at all. Rather, he will take his compensation entirely in American stock. "I believe this is the right way for my compensation to be set -- at risk, based entirely on the results achieved, and in the same currency that our shareholders receive," Parker wrote in a letter to employees.
Like Bill Clinton, Parker was blessed with a good personality. He has always been an empathetic leader who can share a joke or speak convincingly of shared pain. He occasionally displays human frailties; he explains complex topics in understandable terms and he often takes a sincere interest in those who cross his path. He is obviously a gifted leader.
So it is tempting to view this gesture in terms of Parker's sophisticated leadership style, with all the favorable optics of a leader who is willing to bet big on the future of his company. But even more than that, it looks like a tribute to Wall Street.
What does it really say that someone is willing to link his ultimate compensation to the rise and fall of the stock market? Is that how people live now? Perhaps it is simply a sign of a very frothy market.
In reality, the stock market is no more an indicator of management capabilities than it is of geopolitics, investor hunches, institutional aberrations and money-making schemes and strategies.
The day before Parker's plan was announced, the FBI charged a stock trader in England with causing a brief 2010 "flash crash" by using illegal trading techniques that brought him millions of dollars until he got caught. In this entrepreneur's defense, please note: He linked his compensation to the stock market.
We should mention here that the big three airlines all seem to love Wall Street's embrace. Did anyone notice that all three of them "beat estimates," stimulating share price gains? It's hard to believe that anyone still gets taken in by this game. Guide toward less than actual earnings so that exuberance will greet your earnings report. Why is that even legal?
Let's not forget that Delta skirmished with Wall Street in October 2014 during the carrier's third-quarter earnings call, when CEO Richard Anderson snapped at analysts questioning capacity growth, declaring "it is not appropriate for the analyst community to be engaging in what forward capacity and pricing decisions are at Delta." It seemed as if Delta was telling the analysts: "Don't tell us how to run our airline."
So on the April 15 call, Delta announced aggressive, specific cuts in international service. Imperial Capital analyst Bob McAdoo suggested the carrier may have sought to compensate for analyst perception that it has added too much capacity in the recent past. Delta sought "to get people to understand that they are disciplined and rational," McAdoo said.
The last time an airline truly fell out of favor, it was JetBlue (JBLU - Get Report). During the early stages of the current round of historic airline industry profits, JetBlue did not keep pace, a failure that was blamed largely on its eschewal of bag fees and premium class service.
In September 2014, under pressure from Wall Street, CEO Dave Barger announced he would step down in February. The carrier has introduced a premium seat strategy and planned pricing changes.
Now JetBlue is the airline industry's star. Year to date, shares are up 25%. This shows that Wall Street can be forgiving: Just do what we want and nobody gets hurt.
I bet JetBlue even beats estimates on Tuesday.
